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Historical Foundations of
Behavioral Economics
Andrei Florin Sora
florinandrei.sora@istorie.unibuc.ro
Economic behavior in the
Antiquity
In the Antiquity there are fascinating
civilizations, we may say even sophisticated
ones:
- Mesopotamia;
- Egypt;
- India;
- Phoenicians;
the Greek World;
- The Romans.
Economic ideas and/or incentives
for the economy
- Legislation (the Code of
Hammurabi): economic practices
- Hierarchy & social structures
The organizational cohesion
Specialization
Division of labour
Comand-directed production
and distribution: Egypt
(Mehari, p. 21)
The Old Testament
• The dignity of labour & the worth of human
labour;
• Morality of money making
• Lending money at an interest rate to a poor or
a brother is not acceptable;
• How to behave in every day life;
• Financial advices;
• People can learn from past mistakes;
• Besides money, there are other incentives.
Genesis 37-50
https://www.biblegateway.com/passage/?search=Genesis+37-50&version=NLT
•47 As predicted, for seven years the land produced bumper

crops.48 During those years, Joseph gathered all the crops
grown in Egypt and stored the grain from the surrounding
fields in the cities. 49 He piled up huge amounts of grain like
sand on the seashore. Finally, he stopped keeping records
because there was too much to measure.
•50 During this time, before the first of the famine years, two
sons were born to Joseph and his wife, Asenath, the
daughter of Potiphera, the priest of On. 51 Joseph named his
older son Manasseh,[l] for he said, “God has made me forget
all my troubles and everyone in my father’s family.”52 Joseph
named his second son Ephraim,[m] for he said, “God has
made me fruitful in this land of my grief.”
Genesis 37-50
• 53 At last the seven years of bumper crops
throughout the land of Egypt came to an
end. 54 Then the seven years of famine began, just as
Joseph had predicted. The famine also struck all the
surrounding countries, but throughout Egypt there
was plenty of food. 55 Eventually, however, the
famine spread throughout the land of Egypt as well.
And when the people cried out to Pharaoh for food,
he told them, “Go to Joseph, and do whatever he
tells you.” 56 So with severe famine everywhere,
Joseph opened up the storehouses and distributed
grain to the Egyptians, for the famine was severe
throughout the land of Egypt. 57 And people from all
around came to Egypt to buy grain from Joseph
because the famine was severe throughout the
world.
Genesis 37-50
• 47
• ….
• 13 Meanwhile, the famine became so severe that all the
food was used up, and people were starving throughout
the lands of Egypt and Canaan.14 By selling grain to the
people, Joseph eventually collected all the money in
Egypt and Canaan, and he put the money in Pharaoh’s
treasury. 15 When the people of Egypt and Canaan ran
out of money, all the Egyptians came to Joseph. “Our
money is gone!” they cried. “But please give us food, or
we will die before your very eyes!”
Genesis 37-50
• ….
• 20 SoJoseph bought all the land of Egypt for Pharaoh. All

the Egyptians sold him their fields because the famine
was so severe, and soon all the land belonged to
Pharaoh. 21 As for the people, he made them all
slaves,[af] from one end of Egypt to the other. 22 The only
land he did not buy was the land belonging to the
priests. They received an allotment of food directly from
Pharaoh, so they didn’t need to sell their land.
• 23 Then Joseph said to the people, “Look, today I have
bought you and your land for Pharaoh. I will provide you
with seed so you can plant the fields. 24 Then when you
harvest it, one-fifth of your crop will belong to Pharaoh.
You may keep the remaining four-fifths as seed for your
fields and as food for you, your households, and your
little ones.”
• ….
The Old Testament account of Joseph
7 years of plenty, 7 years of famine
Public regulations
Inventory
The role of economic advisors
The storage of surplus of grain
 The economic forecast
The Greek word Oikonomia:
it means to manage your
household/household
management.
Hesiod (8th-7th century BC):
- the first economist?
- a Greek poet … and farmer; in the Greek world, his ideas
were presented orally
- author of Works and days, a didactic poem about daily life
and work on a farm. This text gives some agricultural
instructions and depicts the socio-economic system in
mainland Greece;
- the poem is against the lazy people; the honest labor is
praised;
- for Hesiod the wealth acquired justly was not see as a bad
thing (Lewis, p. 38)
Hesiod also wrote about the scarcity of products and

resources.
„To keep competition just and harmonious, Hesiod
vigorously excludes such unjust methods of
acquiring wealth as robbery, and advocates a rule of
law and a respect for justice to establish order and
harmony within society, and to allow competition to
develop within a matrix of harmony and justice. It
should already be clear that Hesiod had a far more
sanguine view of economic growth, of labour and of
vigorous competition, than did the far more
philosophically sophisticated Plato and Aristotle
three and a half centuries later.”
http://centerforeconomicliberty.blogspot.ro/2013/03/the-
first-economist-hesiod-and-problem.html
Plato
(born between 428 and 423-424 or 423 B.C. – 347 B.C.)
https://en.wikipedia.org/wiki/Plato
- philosopher, mathematician
- a disciple of Socrates;
- the founder of the Academy in Athens;
- the author of Republic, Nomoi (Laws);
- a teacher of Aristotle
- in the Republic, he imagined an ideal city-state,
where there are only two classes: the rulers and
the ruled; he advocated for an honest ruling
class (Mehari, p. 26), dedicated only to govern.
Plato didn’t believe in a free market.
He highlighted the importance of
specialization (of skills) and division of labor
(the city-state, Athens, for instance, arose
because of that).
He made the distinction between things

that are necessary and things that are
considered a luxury.
Aristotle (384-322 B.C.)
• - philosopher, scientist; one of Plato’s students; tutor
of Alexander the Great;
- in his writings, we can observe the depiction of the
economic activities;
- Economics is concerned with the household and the
city;
• - he rejected the labour as a source of wealth;
- he defended the private property;
- he believed that people have basic needs for a living
but a limitless amount of wants;
- he argued that the use-value and the exchange value
are two different things.
For the Aristotle, the uses of money were:
• a medium of exchange and unit of measure;

• a store of value for future purchases/a way of
providing relative value.
• (See: S. Todd Lowry, “Ancient and Medieval Economics”, in

Warren J. Samuels, Jeff E. Biddle, John B. Davis (ed.), A
Companion to the history of Economic thought, Blackwell,
2003, p. 22)
Aristotle gave an early formulation of the
law of supply and demand: the price needs
to be agreed upon by buyer and seller.
He condemned the purchase of a product

and then resold it for a higher price.
He has an o ethical attitude regarding
enrichment.
For Aristotle oikonomia and
chremastiké (the pursuit of money)
were different concepts.
!!!
The use of coins (from VII
Century BC) helped Greek
society to progress.
The concept of
Eudaimonia
This term is translated today as
welfare or happiness.
In Aristotle's writings, it means
“doing and living well” – to arrive
at that, we must try to be more
virtuous (kind, brave) – is more
than an emotion: it is a constant
state of being.
Xenophon (420/430-354 BC):
- a disciple of Socrates (470-399 BC);

- philosopher, historian, mercenary;
- born Athenian, but an admirer of
Sparta;
- influenced by Persian thought.
Xenophon, Oeconomicus
(written in the mid-fourth century B.C.)
- a book about household management and agriculture;

“a systematic treatment of the organization and
administration of the agricultural estate, emphasizing
human capital and organizational efficiency”
(Lowry, p. 13)
- translated by Cicero into Latin.

Xenophon, Cyropaedia,
(written in the mid-fourth century B.C.)
Long before Adam Smith
discusses the pin factory,
Xenophon points out the
benefits of the division of labor.
“… Nor should that surprise us; for if we remember to what a pitch of
perfection the other crafts are brought in great communities, we
ought to expect the royal dishes to be wonders of finished art. In a
small city the same man must make beds and chairs and ploughs and
tables, and often build houses as well; and indeed he will be only too
glad if he can find enough employers in all trades to keep him. Now it
is impossible that a single man working at a dozen crafts can do them
all well; but in the great cities, owing to the wide demand for each
particular thing, a single craft will suffice for a means of livelihood,
and often enough even a single department of that; there are shoe-
makers who will only make sandals for men and others only for
women. Or one artisan will get his living merely by stitching shoes,
another by cutting them out, a third by shaping the upper leathers,
and a fourth will do nothing but fit the parts together. Necessarily the
man who spends all his time and trouble on the smallest task will do
that task the best.
The arts of the household must follow the same law. If one
and the same servant makes the bed, spreads the table,
kneads the dough, and cooks the various dishes, the
master must take things as they come, there is no help for
it. But when there is work enough for one man to boil the
pot, and another to roast the meat, and a third to stew the
fish, and a fourth to fry it, while some one else must bake
the bread, and not all of it either, for the loaves must be of
different kinds, and it will be quite enough if the baker can
serve up one kind to perfection—it is obvious, I think, that
in this way a far higher standard of excellence will be
attained in every branch of the work….”
Xenophon, Cyropaedia, VIII.2.5-6
http://www.gutenberg.org/files/2085/2085-h/2085-h.htm#2H_4_0011
In Cyropaedia (Book III.2.17-23),
Xenophon presents that the
exchange could assure a mutual
advantage describing an exchange
of lands between Cyrus and the
Armenians and the Chaldeans.
The Roman civilization
Rome appropriated or inherited
the Hellenistic economic
achievements and institutions.
(Rondo Cameron, A concise economic history of the world:
from Palaeolithic times to the present, second edition, Oxford
University Press, 1993 (1989), p. 35)
A great advantage for the Romans was
their legal system, which allowed
considerable freedom of enterprise and
did not penalize commercial activities.
The Roman Law – a great achievement.

The Roman law
- the contract –
- the respectability of the
merchant
In the conquered territories by Roman
legions, Roman law provided a uniform
and coherent legal framework.
Other factors to stimulate the commerce were:
- the urbanization of the Roman Empire;
- the demographic growth: Pax romana helped the

population growth.
Bibliography
Rondo Cameron, A concise economic history of the world: from Palaeolithic times to
the present, second edition, Oxford University Press, 1993 (1989).
E. Ray. Canterbery, A Brief History of Economics. Artful Approaches to the dismal
science, World Scientific Publishing, 2001.
Gregory Clark, A Farewell to Alms. A brief economic history of the world ,
Princeton and Oxford, Princeton University Press, 2007.
The Economics Book, New York, DK Publishing, 2012
Yuval Noah Harari, Sapiens. A Brief History of Humankind, London, Vintage, 2015.
David Lewis, Behavioural Economics and Economic Behaviour in Classical Athens, in
B. Gray, M. Canevaro, A. Erskine, J. Ober (eds.), Ancient Greek history and contemporary
social science, Edinburgh University Press, 2018, p. 15-46.
S. Todd Lowry, “Ancient and Medieval Economics”, in Warren J. Samuels, Jeff E.
Biddle, John B. Davis (ed.), A Companion to the history of Economic thought, Blackwell,
2003, p. 11-27.
Angus Madison, Contours of the World Economy, 1-2030 AD. Essays in Macro-
Economic History, Oxford, Oxford University Press, 2007.
Tesfa Yesus Mehari, A Short History of Economic Thought, University of Groningen,
2002.
Andrei Florin Sora
Economic behavior in the
Antiquity and the Middle Ages
02_02
Medieval economies: continuity
and change
The abolition of the Western
Roman Empire in 476 AD did not
have a real economic
signification.
The Roman Empire “did not die giving
birth to the Middle Ages. A great deal
of Roman civilization survived in one
form or another” (Canterbery, p. 17).
The “Dark Ages”
- from the 4th century through about the
end of 9th century.
Characterized in Western Europe by:
- political instability and insecurity;
- the disappearance of urban civilization;
predominance of the self-sufficient rural communities;
- illiteracy;
- a fall in per capita income;
- few trading links.
This image is primarily available for Western
Europe, but period was not so dark:
• A new political and intellectual force: the Church;
• the invention of the heavy plough + improvements in
the use of horsepower (the collar placed around the
horse’s neck); .
• warming, particularly in northern Europe
• the construction of new buildings (castles, churches,
monasteries, etc.)
• The monasteries – centers of learning!
THE WAR
- was a “common form of
economic activity” –
(Canterbery, p. 18)
Feudalism
“Feudalism, also called feudal system or feudality,
French féodalité, historiographic construct
designating the social, economic, and political
conditions in western Europe during the
earlyMiddle Ages, the long stretch of time between
the 5th and 12th centuries. Feudalism and the
related term feudal system are labels invented long
after the period to which they were applied. They
refer to what those who invented them perceived as
the most significant and distinctive characteristics of
the early and central Middle Ages.”
https://www.britannica.com/topic/feudalism
Susan Reynolds, Fiefs and Vassals: The
Medieval Evidence Reinterpreted, Oxford
University Press, 1994.
Reynolds, Susan, The Middle Ages without

Feudalism. Essays in Criticism and Comparison
on the Medieval West, London-New York,
Routledge, 2012.
Susan Reynolds demonstrates that
the concepts of feudal and
feudalism do not have an analytical
utility.
“The expressions féodalité and feudal system were coined
by the beginning of the 17th century, and the English
words feudality and feudalism (as well as feudal pyramid)
were in use by the end of the 18th century. They were
derived from the Latin words feudum (“fief”)
and feodalitas (services connected with the fief), both of
which were used during the Middle Ages and later to refer
to a form of property holding. Use of the terms associated
with feudum to denote the essential characteristics of the
early Middle Ages has invested the fief with exaggerated
prominence and placed undue emphasis on the importance
of a special mode of land tenure to the detriment of other,
more significant aspects of social, economic, and political
life.”
https://www.britannica.com/topic/feudalism
“In a stage theory of history, feudalism is the intermediate
regime between slavery, which was typical of the ancient
world, and capitalism, which prevailed in the modern era …
Feudalism is the system appropriate to a natural economy:
land is almost the only source and embodiment of wealth,
agriculture is by far the dominant sector, goods are not
commodities, and labor is provided not by wage contract but
by compulsory service; there is a concentration of both wealth
and power in the hands of large landowners, to whom the
bulk of the working population is subjugated, particularly by
serfdom; and large estates are the typical form of economic
organization, though small units of production are dominant.”
François Crouzet, A history of the European Economy, 1000-2000, University Press

of Virginia, Charlottesville and London, 2001, p. 35.
The feudal system assured the
survival of the fief
(a territory held in fee)
A social pyramid
The relation between master
and vassal or serf: based upon
mutual duties and obligations.
Master – serf relation
“… In the work they did, the serfs were like the slaves in the Roman
economy, but the property rights system had changed: A “contractual” set
of obligations had been substituted for slavery. The sparseness of the
population and the joint defense needs of the serfs and the nobles were
forces making serfdom mutually irresistible in the nearly Middle Ages …
Thus, we can see that the feudal ties that bound the serf to the land
had obvious advantages over slavery. The tenant-in-chef did not have to
worry that his slaves would be stolen or taken from him as long as he
remained loyal to his lord. And the serf enjoyed at least some of the
benefits of his own labor as well as a degree of protection from the
pillaging barbarians.
Even if the land changed lordships, the serf was tied to the land by his
unwritten contract and fulfilled his obligations to the next lord. The manor
often was passed to the next lord by inheritance. Thus, an individual’s
relationship to his fellows was decided mostly by custom, which evolved
into common law, rather than by economic efficiency.”
(E. Ray. Canterbery, A Brief History of Economics. Artful Approaches to the
dismal science, World Scientific Publishing, 2001, p. 20)
Starting with the 10th century we assist at the
beginning of a period of change in Europe that
will last until the 14th century:
- demographic expansion: European population
grew faster than in other continents, especially the
northern countries;
- a warming up of the climate;
- economic progress;
- a “kind” of security, given even by the building of
numerous fortified castles and monasteries;
- more improvements in technology: new tools or
the improvement of others; increased use of water
and wind (mills);
- new techniques: the three-field system (a regime
of crop rotation who reduced the incidence of
famine);
- a higher productivity;
- institutional innovations;
- urbanization: first in northern Italy and Flanders….
(from 0 to 6 per cent, between 1000 and 1500 in
terms of towns with more than 10.000
inhabitants);
- we observe also a kind of regional specialization
in food production or industry.
There were improvements in
mining, metallurgy, shipping, and
navigation techniques.
!!! By 1200, the Islamic world had
lost its primacy in technology and
innovations.
Changes/Innovations
 literacy, schooling (including the creation of the
universities in Europe – the first European university
was created in Bologna in 1088);
 the introduction of Arabic numerals (at the
beginning of the 13th century);
 the invention of the first weight-driven clocks;
 a better spread of the new technologies.
But…
there was a long road to market
economies
Medieval economic thinking
In the 12th century the
Cistercian monasteries
developed an efficient
managed agrarian estate.
The Cistercian order was

!!!
dedicated to prayer and work
St. Augustine of Hippo (354-430)
- Bishop of Hippo;
- One of the Latin fathers of the
Church;
- Influenced by Greek philosophy,
especially by Plato.
Works:
- Confessions
- City of Good (written between 413
and 426)
In the City of Good, Saint Augustine

argues that people need government;
the society is governed by human
laws, as well as God’s laws.
Saint Augustine, oil on canvas by Philippe de
Champaigne, c. 1645–1650; in the Los Angeles County
Museum of Art,
https://www.britannica.com/biography/Saint-
Augustine/media/42902/232524
Thomas Aquinas/Saint Thomas
Aquinas
(1225-1274)
He is considered the Catholic Church's greatest

theologian and philosopher.
Saint Thomas Aquinas disapproved lending
money for interest (as Aristotle wrote 1600
years before) and trading for profit. (For
Aquinas, usury was the worst economic sin).
Picture, https://en.wikipedia.org/wiki/Quinque_viae
On the other hand, Aquinas economic thinking
was not only influenced by religion but also by
Saint Augustine and Aristotle:
For Aquinas, important were the ideas of
justice and fairness:
Nothing we have is really ours
Money is a consumable, is not an end but a
means of buying what we need.
He also believed in private property;
Aquinas insisted on the just price for all
exchanges.
Written works
• Summa theologica (Theology Digest)
• Summa contra Gentiles (Liber de veritate
catholicae fidei contra errores infidelium - On
the Truth of the Catholic Faith)
Like Aristotle, Thomas Aquinas believed
that people would take better care of their
goods and properties, much more than in
the case of shared property.
He highlighted that we didn’t need to be
greedy either to be jealous of someone’s
fortune.
Aquinas tried to answer some
difficult questions for that time:
Is it correct to lend money?
What is the just price for a
commodity?
In the mid-14th century
- The Black Death –
The bubonic plague
“the most devastating pandemic
in world history”
http://blogs.biomedcentral.com/bugbitten/wp-
content/uploads/sites/11/2015/03/the-spread-of-the-black-death.png
https://thirdplaguepandemic.wikispaces.com/The+Black+Death
Peter Brueghel the Elder
http://science.nationalgeographic.com/science/health-and-human-body/human-
diseases/plague-article/
Negative Shocks and Mass
Persecutions - Evidence from the
Black Death
Mark Koyama, Remi Jebwab, Noel D. Johnson
Paper presented at the 18th World Economic History

Congress (Boston, 2018); the panel Ethno-linguistic
diversity and economic development in history
“We study the Black Death pogroms to shed light on the factors determining
when a minority group will face persecution. In theory, negative shocks
increase the likelihood that minorities are persecuted. But, as shocks become
more severe, the persecution probability decreases if there are economic
complementarities between majority and minority groups. The effects of
shocks on persecutions are thus ambiguous. We compile city-level data on
Black Death mortality and Jewish persecutions. At an aggregate level,
scapegoating increases the probability of a persecution. However, cities which
experienced higher plague mortality rates were less likely to persecute.
Furthermore, for a given mortality shock, persecutions were less likely in
cities where Jews played an important economic role and more likely in cities
where people were more inclined to believe conspiracy theories that blamed
the Jews for the plague. Our results have contemporary relevance given
interest in the impact of economic, environmental and epidemiological
shocks on conflict.”
See: http://wehc2018.org/ethno-linguistic-diversity-and-economic-development-in-
history/
“From 1000 to 1820, investment in machinery, equipment,
and human capital was also modest, but its quality was
transformed by the invention of printing, advances in science,
and the spread of secular university education for the elites.
Technical progress was slower than now, and much less capital-
intensive. Some of it derived from trial-and-error, but
institutional support for scientific research had a very direct
impact on technology, particularly in shipping and navigation. I
have spelled out the changes in this domain in considerable
detail below, and explained how they were diffused between the
major merchant capitalist empires. Technical
progress in this period was not energy-intensive. It relied on
more effective wind power, improvements in the efficacy of
horsepower, and an increase in hours worked per capita”.
(Angus Madison, Contours of the World Economy, 1-2030 AD. Essays in Macro-
Economic History, Oxford, Oxford University Press, 2007, p.78)
Important innovations concerned
especially the commerce
- banking (Genoa, 1150);
- the developing of an insurance system;
- the bill of exchange (in the late 13th century);
- the double-entry bookkeeping (in the 14th century);
- the opening of the first modern stock exchange, in
Antwerp, in 1531: “a permanent market open daily at
fixed hours, where merchants met and did business –
trading in bills of exchange and in various public
instruments or securities issued by governments,
institutions, or companies” (Crouzet, p. 46)
!!! In 1571 the Royal Exchange
opened in London
Emanuel de
Witte
(1617-1692)
The
Courtyard
of the Old
Stock
Exchange in
Amsterdam
http://www.wga.hu/html_m/
w/witte/exchange.html
A new category of merchants and
manufacturers emerged:
the entrepreneur
The emergence of banknotes
(Sweden - 1661);
The discovery of new routes to
China and India and the discovery of
new continents
Nevertheless, the 16th century was a
period of inflation in Europe, with an
increase in prices by a factor of three or
four – the price revolution (Crouzet,
2001, p. 51)
Answers could be found in:

- population growth?
- the great discoveries?
The great discoveries
“The intercontinental trade, the colonies
created an important market for England, France,
the Netherlands, and an inflow of gold, silver …. in
Europe, but it seems that the stock of Europe’s
precious metals increased moderately in the 16th
century – especially during its first half – while
there was a stronger influx of treasure during the
17th century, when prices were falling or stagnating
most of the time…”
(Crouzet, 2001, p. 52)
In the Middle Ages and the
Modern period, an important
feature was the priority of
agriculture, observed in the
percentage of the population
living in rural areas and engaged
in agriculture.
“From the 13th century to the early
1700s, there was no large increase
in industrial labor productivity...
despite a number of innovations”
(Crouzet, p. 61)
The role played by the “discovery”
of the “new world”
- could we talk about a first

globalization?
Before the great discoveries
13th century world system
https://en.wikipedia.org/wiki/History_of_globalization#/media/File:Archaic_globalization.svg
The “first globalization” began with
the voyages of Columbus,
Magellan, Vespucci, Cortez, Pizarro,
and the other great explorers.
Globalization
• a multidimensional process;
• the intensification of relations and exchanges
between major regions;
• a growing awareness of the others, durability
and frequency of interaction, it generates a
deep impact on others.
!!!
Institutions and institutional changes are more
related to globalization.
The geographical explorations
https://en.wikipedia.org/wiki/Age_of_Discovery#/media/File:Explorations_english.png
The 17thcentury scientific
revolution
We can’t ignore that we can speak
about a scientific revolution in the 17th
century, but many of these discoveries
will be applied by the inventors of the
18th century.
“The advance in per capita income was a
slow crawl – the world average increased
only by half over a period of eight
centuries [from the year 1000 to 1820]”,
Madison, 2007, p. 69.
Bibliography
Rondo Cameron, A concise economic history of the world: from Palaeolithic times to the
present, second edition, Oxford University Press, 1993 (1989).
Gregory Clark, A Farewell to Alms. A brief economic history of the world , Princeton
and Oxford, Princeton University Press, 2007.
François Crouzet, A history of the European Economy, 1000-2000, University Press of
Virginia, Charlottesville and London, 2001.
The Economics Book, New York, DK Publishing, 2012
Yuval Noah Harari, Sapiens. A Brief History of Humankind, London, Vintage, 2015.
S. Todd Lowry, “Ancient and Medieval Economics”, in Warren J. Samuels, Jeff E. Biddle,
John B. Davis (ed.), A Companion to the history of Economic thought, Blackwell, 2003, p.
11-27.
Angus Madison, Contours of the World Economy, 1-2030 AD. Essays in Macro-Economic
History, Oxford, Oxford University Press, 2007.
Tesfa Yesus Mehari, A Short History of Economic Thought, University of Groningen,
2002.
Webography
• https://www.britannica.com/topic/feudalism
• https://www.lrb.co.uk/the-
paper/v17/n04/rosemary-horrox/no-more-
feudalism
Andrei Florin Sora
03-04
The rise of a modern thought.

Bullionism, Mercantilism, Phisiocracy.
Adam Smith
In the 15th and 16 th centuries, there were fewer
significant breakthroughs than in the Middle Ages. In
Western Europe, we observe a more rapid:
- urbanization (varied a lot);
- the development of the trade;
- a protoindustrialization (in the 17th century);
- a more rapid spread, an increased specialization,
increases in the scale of production.
“... From 1000 to 1820, investment in machinery, equipment,
and human capital was also modest, but its quality was
transformed by the invention of printing, advances in science,
and the spread of secular university education for the elites.
Technical progress was slower than now, and much less capital-
intensive. Some of it derived from trial-and-error, but
institutional support for scientific research had a very direct
impact on technology, particularly in shipping and navigation ...
Technical progress in this period was not energy-intensive. It
relied on more effective wind power, improvements in the
efficacy of horsepower, and an increase in hours worked per
capita ...”.
(Angus Madison, Contours of the World Economy, 1-2030 AD. Essays in Macro-
Economic History, Oxford, Oxford University Press, 2007, p. 78)
Important inventions/discoveries:
- the invention of the printing press;
- the introduction in Europe of gunpowder from
China;
- the making of scientific instruments;
- innovation in shipbuilding and in navigation
(magnetic compass, the improvement of rudders,
maps), which influenced the growth of seaborne
trade.
Important innovations concerned
especially the commerce
- banking (Genoa, 1150);
- the developing of an insurance system;
- the bill of exchange (in the late 13th century);
- the double-entry bookkeeping (in the 14th century);
- the opening of the first modern burse, in Antwerp, in 1531:
“a permanent market open daily at fixed hours, where
merchants met and did business – trading in bills of exchange
and in various public instruments or securities issued by
governments, institutions, or companies” (Crouzet, p. 46)
- the emergence of banknotes;
- the discovery of new routes to China and India and
the discovery of new continents.
The role played by the “discovery”
of the “new world”
- could we talk about a first

globalization?
The “first globalization” began with
the voyages of Columbus,
Magellan, Vespucci, Cortez, Pizarro,
and the other great explorers.
13th century world system
https://en.wikipedia.org/wiki/History_of_globalization#/media/File:Archaic_globalization.svg
Globalization
• a multidimensional process;
• the intensification of relations and exchanges
between major regions;
• a growing awareness of the others, durability
and frequency of interaction, it generates a
deep impact on others.
!!!
Institutions and institutional changes are more
related to globalization.
The geographical explorations
https://en.wikipedia.org/wiki/Age_of_Discovery#/media/File:Explorations_english.png
But
“From the 13th century to the early
1700s, there was no large increase
in industrial labor productivity...
despite a number of innovations”
(Crouzet, p. 61)
!!!
According to Paul Bairoch (1997), in
the 18th century only 12% of Europe’s
population (Russia excluded) lived in
towns of 5,000 inhabitants or more.
!!!
The rate of urbanization varied a lot
We can’t ignore that we can speak
about a scientific revolution in the
17th century, but a lot of these
discoveries will be applied by the
inventors of the 18th century.
Reasons for the rise of the
Western Europe
- the geography?
- cultural arguments?
- the importance of political and
legal institutions?
The Economic thought in Early
Modern Period
Bullionism
- an economic theory that circulated in
Europe in the 16th and 17th centuries;
- is considered an early form of
mercantilism.
- defines wealth by the amount of precious metals owned: the
principle of a state was to accumulate precious metal (especially
gold bullion in their treasuries);
- the main idea was to restrict gold from leaving the country;
- the outflow of money could be controlled by the use of
currency exchange rate manipulation;
- they were for the State intervention in foreign trade (regarding
imports).
See: http://political-economy.com/bullionism-gold/
!!!
At that time the currency was directly convertible to gold or silver.

Mercantilism
The term derives from the Latin
word for the merchant (mercator)
and was first used by French
Physiocrats in the 18 century and
th
also by Adam Smith.

Mercantilism reflects the problems of the
16th, 17th and 18th centuries:
Mercantilism could be considered the
principal economic policy of the European
states in times of Absolutism.
(Blaich, Merkantilismus, Kameralismus, Physiokratie, 1988, p. 35, apud Peukert, p. 93)
It is not a coherent system of economic principles or a fully

developed economic theory.
Mercantilism was an economic doctrine and also an epoch
of economic history.
Mercantilism
“was an alliance between
government and business”.
(Canterbery, p. 33)
Incentives:
- the strong gold and silver imports to Europe;
- the quantitative increase and geographical
enlargement of trade with the colonies;
- the wars in Europe (the financial needs of
the States);
- the birth of a national economy;
- the scientific revolution;
- the self-interest.
How to gain (more) power?
- as State;
- as producer (of something).
How to make more money?
– Buy local (minimize imports, but
also maximize exports);
- controlling who is allowed to
sell/trade – meant more money for
local producers and for the State
(from taxes)
Trade regulations
Mercantilism implies/Growth factors:
- the control and the intervention of the State in the
economy, especially in foreign trade: protectionism
and economic nationalism;
- bullionism;
- the surplus of money (gold, silver) allows the price
of money (the purchasing power) to fall: a low cost
of investments.
Some of the mercantilist thinkers (Jean
Bodin) argued that the increasing
amount of currency in circulation was
responsible for a general rise in prices.
(it is false)
For what reasons were
mercantilist ideas put into
practice?
- in the Middle Ages, gold and silver were very
important: the mercantilists measured the
fortune of a country/person in the quantity of
gold owned;
- some of the mercantilists were economic
advisors of the kings/emperors
- They wanted to increase the State's wealth to
defend their country better, based on the assumption
that the national wealth consists primarily of
possessing precious metals.
Conditions/Needs for a successful mercantilist
policy
foreign colonies (raw materials, precious

metals, markets);
military power;
protectionism;
the rise of population: cheap workforce, large
number of people who need to work;
 internal free trade;
 The State needs to promote industrial
manufacturing and encourage exports;
 a positive balance between exports and
imports: foreign trade was essential to obtain
and preserve precious metals, and in that case,
exports needed to be bigger than exports;
the export of manufactured goods;
The profit is good
State protectionism helped merchants and

business people get rich.
“Because power and wealth were equated with gold
and silver, the government should (1) stimulate the
output of domestic goods, (2) limit domestic
consumption, (3) put tariffs on imports and (4) try to
create a favorable balance of trade (more exports than
imports). The exports were paid for with gold and
silver, which in turn could be used to build a strong
army. The limits on consumption were aimed not only
at the masses. Since imports tended to be luxuries, the
sumptuary laws designed to regulate extravagance and
luxury hit the wealthy hard even as thy improved the
balance of trade. ”
(Canterbery, p. 33)
The English Mercantilism
Famous mercantilists
Thomas Mun
(1571-1641)
England’s Treasure by
Foreign Trade (1664)
English East India Company

– founded in 1600 (Royal
Charter of Elizabeth I)
formed to trade in Indian
Ocean
Governor and Company of Merchants of
London Trading into the East-Indies
Jean-Baptiste Colbert
(1619-1683)
• chief (ministry) of Finance in
France, from 1661 until 1683,
under Louis XIV;
•he tried to bring every
aspect of economic
production under
government control: French
industry and commerce
became matters of official
concern;
•for Colbert, war was also an
instrument of economic
policy.
Colbert about taxation:
‘The art of taxation consists in so

plucking the goose as to obtain the
largest amount of feathers with the
least possible amount of hissing.’
Luis Ortiz
John Hales
Thomas Mun
Jean Bodin
Jean Baptiste Colbert
Josiah Child
“…Our point here is simply that mercantilism was the expression in the
sphere of political economy – a particularly striking expression – of the
rationality principle and the Faustian spirit of mastery. This is why it could
generate a continuing flow of knowledge and outgrow the political
circumstances that gave it birth. Because it was built on the same cognitive
basis as natural science, because it accepted the criterion of performance, it
was the initial stimulus to the collection of economic and social statistics and
the forerunner of the whole range of economic theory, from laissez-faire to
socialism.
All of this gave Europe a tremendous advantage in the invention and adoption
of new technology. The will to mastery, the rational approach to problems
that we call the scientific method, the competition for wealth and power –
together these broke down the resistance of inherited ways and made of
change a positive good. Nothing – not pride, nor honor, nor authority, nor
credulity – could stand in the face of these new values… ”
David S. Landes, The Unbound Prometheus. Technological Change and Industrial Development in
Western Europe from 1750 to the Present, Cambridge, Cambridge University Press, 1988 [1969],
p. 32-33.
Study Case
- The Tulipmania
Silvia Ji, The true value of flowers
and their effect on the Dutch
economy. An interdisciplinary
relationship between Art and
Economics, in Research in
Economics, 74 (2020), p. 228-232.
(https://ideas.repec.org/a/eee/ree
con/v74y2020i3p228-232.html)
Abstract
“This study will examine the introduction, development and popularity of
flower still lives as well as of Dutch horticulture, along with Holland’s early
flower trade and its effect on Tulipmania, which took place during the
Baroque era in Europe from 1636 to 1637. The highest-ranked genres,
including history paintings, portraits, and altarpieces were slowly replaced by
formerly less-regarded genres, such as genre paintings, landscape paintings,
and still-lives found a new audience in seventeenth-century Holland. Artists
such as Ambrosius Bosschaert and Jan Brueghel the Elder specialized in
flower still lifes, depicting elegant vases holding large varieties of perfect
flowers. Focusing on Ambrosius Bosschaert’s Flower Still Life , created in 1614
using oil on copper, this paper will examine the relationship between the
popularity of horticulture and flower still lives in regard to their effects on the
contemporary Dutch economy. First, the painting’s formal elements will be
analyzed, followed by a brief biography of Ambrosius Bosschaert, specifically
discussing the influences on his art and his role as a pioneer in the genre of
flower still lives. It will also study the interdisciplinary relationship between
Art and Economics and implement past problems to identify similar market
issues in the 21st century.”
„… Tulipmania proves that extreme crowd behavior can
result in overvaluation of certain goods, often followed
by a crash of the market …” (p. 231)
“… The Dutch tulip market collapsed almost 400 years ago. However, similar patterns can still be
seen in today’s markets, for example when many people pay large amounts of money to invest in
specific equity. According to economist Mark Hirschey, the economic market hypothesis “‘is a
working hypothesis’: investors are primarily rational and typically price securities in a rational
fashion, but outbreaks of crowd behavior, typified by ‘extraordinary popular delusions and
madness’, are a possibility.”37 Such crowd behavior is still a common phenomenon today, for
example when many investors paid absurd prices to invest in bitcoin, without knowing if it will be
profitable or not. If some of them decide to sell their stocks, more might follow and another
market crash could occur. Valuation is always difficult because of uncertainties in sectors and the
inability to accurately predict the future, which is why it is important to carefully invest in a
diversified portfolio. But by altering social frameworks and cultural values, and turning
harmonious citizens into backstabbing competitors, tulipmania changed the way the value of
flowers was assessed. Tulips represented greed and capitalism, and challenged values like trust.
Thus, Tulipmania was not only a financial catastrophe, but represented a “bold rejection of
wholesome, celebrated values for the competitive, backstabbing, profit-driven values of the
market”. 38 Although societies have evolved since the seventeenth century, such unethical
behavior can still be seen on today’s financial world. In 2016, hedge fund manager Martin Shkreli
increased the price of an AIDS drug from $13.50 to $750 a pill by more than 50 0 0%, solely in
order to increase his personal profits. Thus, past issues in economic markets, such as uncertain
valuations and unethical behavior, are still relevant as they still exist in the stock market today ... ”
Ambrosius Bosschaert the Elder (1573-1621)
https://www.getty.edu/art/collection/objects/723/ambrosius-bosschaert-the-elder-
flower-still-life-dutch-1614/
Still life
Still life of flowers
Jan Brueghel the Elder (1568-1625)
Flower Garland Around the Virgin and Child (Milan)
https://www.janbrueghel.net/object/flower-garland-around-the-virgin-and-child-milan
Jan Brueghel the Elder (1568-1625)
The economic thought of the
Enlightenment
Pioneers of the economics in
17 century
th
William Petty (1623-1687)
English political economist, philosopher,
statistician, inventor;
he examined the role of the State in the
economy, and also he discussed the labor
theory of value (the economic value of a good
or service is determined by the total amount of
socially necessary labor required to produce it);
 to him it is attributed the philosophy of
laissez-faire in relation to government activity;
 he aggregates accounts of property and
labor income, population, labor input, and
capital stock for England and Wales (Madison,
2007, p. 249); he applied estimation methods.
Works:
Treatise of Taxes and Contributions (1662); Verbum Sapienti
(1664), Quantulumcunque concerning money (1682)
See: http://www.britannica.com/biography/William-Petty;
https://en.wikipedia.org/wiki/William_Petty#/media/File:Sir_Willia
m_Petty.jpg
William Petty, pioneer of the macro-
measurement was “the first who presented the
first estimates of income, expenditure, stock of
land, other physical assets, and human capital in
an integrated set of accounts for the whole
economy of England and Wales. They provided
a quantitative framework for effective
implementation of fiscal policy and
mobilization of resources in time of war.”
Madison, 2007, p. 5.
John Graunt (1620-1674)
• Writings:
he is considered one of the • Natural and Political
first demographers; Observations mentioned in a
he worked on statistics following index, and made upon
the Bills of Mortality With
about the population of
reference to the Government,
London by processing and Religion, Trade, Growth, Ayre,
analyzing christenings and diseases, and the several
burials recorded in the bills of Changes of the said City.
mortality from 1603 to 1662;
a close friend of William
Petty;
Gregory King
(1648-1712)
 English statistician
 he continued the
work of Petty and
Graunt;
 he offered a more
accurate estimation Gregory King is best known for:
of income and
expenditure for Natural and Political Observations and
England and Wales. Conclusions upon the State and
 he estimated the Condition of England, 1696, first
world population by published in 1801
major regions
(Madison, p. 5).
The Enlightenment
 an intellectual movement influenced by the rise of
modern science;
 demanded a rational society, who defended the
ousting of the religious dogmas;
 Reasoning, rationalism, and empiricism;
 The liberty is an absolute right;
The Physiocracy
Government of nature in old Greek – the rule of
nature – the law of natural order
It is an economic theory developed in 18th century in

France.
The Physiocrats have been viewed as the founders of

the modern discipline of economics.
.
The physiocrats were influenced by the latest
discoveries in physics and astronomy, especially by
Isaac Newton
In Economics, they introduced the

idea that natural laws govern the
world; they believed in the concept of
order as the basis of their philosophy.
The productive work was seen as source of
national wealth, the only real wealth.
The physiocrats believed that the wealth of

nations was derived solely from the value of
land development (land and natural resources).
For them, agriculture was the primary human
activity.
The physiocrats’ motto:
Laissez faire et laissez passer

(Let do and let pass/Let things be the
way they will!)
a hands-off economic policy by the government
- they defended a free market competition,
without a government control –
!!!
"Let do and let pass, the world goes on by itself" is attributed to Vincent de
Gournay
The physiocrats argued that “the land enabled
the agriculture to produce a positive net product
in excess of its production costs” and … all land
should be taxed.
(E. Ray. Canterbery, A Brief History of Economics. Artful

Approaches to the dismal science, World Scientific
Publishing, 2001 p. 43)
François Quesnay
(1694-1774)
- surgeon; the doctor of

Madame de
Pompadour;
- the leading figure of the
Physiocrats;
Victor de Riqueti, Marquis
de Mirabeau
(1715-1789)
The Friend of Man,
or Treatise on Population
The Theory of Taxation

The
Economic table
Tableau économique
an economic model/ a
simplified picture of the
economy first described by
French economist François
Quesnay in 1758.
He applied the scientific
principles of medicine.
Zig-Zag-s = the circulation of
resources.
Divergences and different views in
the second half of the 18th
century on growth performance
Adam Smith
and the classical
economics
Adam Smith
(1723-1790)
- born in Kirkcaldy,
Scotland
https://en.wikipedia.org/wiki/Adam_S
mith#/media/File:Adam_Smith_The_
Muir_portrait.jpg
He studied (Snell Scholarship) and graduated from
Balliol College of Oxford;
Professor of Logic and afterward professor of moral
philosophy at Glasgow (1751-1764). After 13 years as
professor of Glasgow, he departed from this academic
position and became the tutor of Henry, the future
Duke of Buccleuch
As young duke’s tutor, Adam Smith
traveled on the continent – in France,
Switzerland, and he met a lot of influential
intellectuals like Voltaire, Rousseau,
Quesnay.
He was a friend of David Hume.
He moved to London in 1776, where he published
The Wealth of Nations.
In 1778, Smith was appointed commissioner of

customs in Edinburgh.
In 1783, he became a founding member of the Royal

Society of Edinburgh.
In 1787, Adam Smith was elected Rector of the

University of Glasgow.
He was influenced by:
- the physiocrats;
- Isaac Newton’s system: he applied
“to social and economic phenomena
the idea of the universe as a perfectly
ordered mechanism operating
according to natural laws”.
(E. Ray. Canterbery, A Brief History of Economics. Artful
Approaches to the dismal science, World Scientific Publishing,
2001, p. 45).
As the physiocrats, Adam Smith was an
antimercantilist
and also … he had

antifeudalist
antimonopolistic
antigovernment
views
Major works
The Theory of
Moral Sentiments
1759
a book on moral philosophy:

(philosophy, jurisprudence,
ethical framework,
theology)
An Inquiry into
the Nature and
Causes of the
Wealth of
Nations
(abridged title:
The Wealth of
Nations)
1776
(the same year as the American
Declaration of Independence)
Why this title of Smith’s famous book
from 1776?
In 1767, James Steuart (also a
Scottish, from Edinburgh) published
An Inquiry into the Principles of
Political Economy, one of the first
treatises of political economy.
Steuart’s views differed a lot from
Adam Smith vision.
Steuart:
- was a moderate mercantilist;
- sustained the power of the state;
- did not believe in a free market.
The book An Inquiry into the
Nature and Causes of the Wealth
of Nations is considered the
centerpiece for the first school in
economics (classical economics).
It is supposed to mark the
beginning of classical economics.
The Wealth of Nations
written in a decade;
It is considered a foundational text in
economic theory;
It has influenced the most important
economists and economic views;
 The book is focused a lot on the market
system.
In this book, the author rejects the
mercantilism.
For Adam Smith:
- gold was a wheel of circulation, and the product
was the real wealth; a country could be wealthy
without the accumulation of gold and silver;
- the commerce was crucial for the prosperity: the
expansion of markets would enable the economy to
grow;
- he believed in the advantages of free-market
competition and free trade: they increase efficiency
and prosperity.
Adam Smith (1776) thought that discovering a
southern route to Asia and of America “opened up
new and significant opportunities for economies of
scale and specialization through international trade.
Though these possibilities were not fully exploited
because of mutually hostile trade restrictions, Smith
was mildly euphoric about achieved progress”.
(Angus Madison, Contours of the World Economy, 1-
2030 AD. Essays in Macro-Economic History, Oxford,
Oxford University Press, 2007,p. 307)
Bibliography
Robert Allen, Global Economic History. A Very Short Introduction, Oxford
Rondo Cameron, A Concise Economic History of the World: from Palaeolithic times
to the present, second edition, Oxford University Press, 1993 (1989).
François Crouzet, A history of the European Economy, 1000-2000, University Press
of Virginia, Charlottesville and London, 2001.
Peter J. Dougherty, Who’s Afraid of Adam Smith. How the Market Got its Soul?,
Hoboken, New Jersey, John Wiley & Sons, 2002.
David S. Landes, The Unbound Prometheus. Technological Change and Industrial
Development in Western Europe from 1750 to the Present, Cambridge, Cambridge
University Press, 1988 [1969].
Angus Madison, Contours of the World Economy, 1-2030 AD. Essays in Macro-
Economic History, Oxford, Oxford University Press, 2007.
Murray Rothbard, An Austrian Perspective on the History of Economic Thought,
vol. 1 Economic thought before Adam Smith, Ludwig von Mises Institute, Edward
Elgar Publishing Ltd., 2006 [1995]
Webography
• https://en.wikipedia.org/wiki/Physiocracy
• http://www.thehistoryconnection.com/Enlighten
ment-And-Economics.htm
• http://political-economy.com/bullionism-gold/
• https://mises.org/library/who-were-cameralists
• http://economictimes.indiatimes.com/definition/
invisible-hand
• http://www.gla.ac.uk/researchinstitutes/adamsm
ith/people/adamsmith/
Andrei Florin Sora
05.
Adam Smith and the

Adam Smith – the father of economics
We can identify some of his ideas in the writings

of other previous authors; Smith had a brilliant
mind, and he knew to explain it.
Adam Smith was in favor of free-market
economies
- a natural market system of balances;
- a system in which the prices of goods and
services are self-regulated by the open
market and consumers;
- all people will benefit from it.
Adam Smith has laid the foundations
of the classical free-market economic
theory - a network of markets.
Mutual benefit from trade.
The supply and demand need to be free from

the intervention of the government.
The government should intervene/interfere less.
!!! These ideas are opposite to that of mercantilists.

Protectionism did not assure a real
protection.
The state intervention meant sometimes
unsatisfactory allocation of resources by the
State.
Smith:
- was against (excessive) government regulation.
- was in favor of greater decentralization.
Protectionism did not assure a real
protection – he was against
(excessive) government regulation.
He was in favor of greater

decentralization.
But, Adam Smith didn’t imagine a
world without governments.
Duties of the State:
• Protect the society from external and internal
enemies;
• Effectiveness and fairness of judicial system;
• The institutions ...
The sanctity of private
property
Capital accumulation
- consumer capitalism -
Smith “opposed
monopolization of the
production of a commodity by
one producer.”
(E. Ray. Canterbery, A Brief History of Economics.
Artful Approaches to the dismal science, World
Scientific Publishing, 2001, p. 58)
Smith’s ideas have been put
into service by commercial
interest.
(E. Ray. Canterbery, A Brief History of Economics.
Artful Approaches to the dismal science, World
Scientific Publishing, 2001 p. 48)
The division of labor
- The specialization of work.
the separation of tasks in an organization or
economic system so that the participants
work more efficiently and specialize.
a social innovation.
The division of labor is presented
in the first chapter of The Wealth
of Nations, and it is a vital
contribution and insight into
capitalism.
The first paragraph of the chapter I:
“The greatest improvement in the productive

powers of labour, and the greatest part of skill,
dexterity, and judgment with which it is anywhere
directed, or applied, seems to have been the effects
of the division of labour”
The Wealth of Nations, p. 8
The Pin Factory
„… The effects of the division of labour, in the general business of society, will be more easily
understood by considering in what manner it operates in some particular manufactures. It is
commonly supposed to be carried furthest in some very trifling ones; not perhaps that it really
is carried further in them than in others of more importance: but in those trifling manufactures
which are destined to supply the small wants of but a small number of people, the whole number
of workmen must necessarily be small; and those employed in every different branch of the
work can often be collected into the same workhouse, and placed at once under the view of
the spectator. In those great manufactures, on the contrary, which are destined to supply the
great wants of the great body of the people, every different branch of the work employs so great
a number of workmen that it is impossible to collect them all into the same workhouse. We
can seldom see more, at one time, than those employed in one single branch. Though in such
manufactures, therefore, the work may really be divided into a much greater number of parts
than in those of a more trifling nature, the division is not near so obvious, and has accordingly
been much less observed.
To take an example, therefore, from a very trifling manufacture; but one in which the division
of labour has been very often taken notice of, the trade of the pin-maker; a workman
not educated to this business (which the division of labour has rendered a distinct trade), nor
acquainted with the use of the machinery employed in it (to the invention of which the same
division of labour has probably given occasion), could scarce, perhaps, with his utmost industry,
make one pin in a day, and certainly could not make twenty. But in the way in which this
business is now carried on, not only the whole work is a peculiar trade, but it is divided into
a number of branches, of which the greater part are likewise peculiar trades. One man draws
out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for
receiving, the head; to make the head requires two or three distinct operations; to put it on is a
peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the
paper; and the important business of making a pin is, in this manner, divided into about eighteen
distinct operations, which, in some manufactories, are all performed by distinct hands, though
in others the same man will sometimes perform two or three of them. I have seen a small
manufactory of this kind where ten men only were employed, and where some of them
consequently performed two or three distinct operations. But though they were very poor, and
therefore but indifferently accommodated with the necessary machinery, they could, when they
exerted themselves, make among them about twelve pounds of pins in a day.
There are in a pound upwards of four thousand pins of a middling size. Those ten persons,
therefore, could make among them upwards of forty-eight thousand pins in a day. Each person,
therefore, making a tenth part of forty-eight thousand pins, might be considered as making four
thousand eight hundred pins in a day. But if they had all wrought separately and independently,
and without any of them having been educated to this peculiar business, they certainly could not
each of them have made twenty, perhaps not one pin in a day; that is, certainly, not the two
hundred and fortieth, perhaps not the four thousand eight hundredth part of what they are at
present capable of performing, in consequence of a proper division and combination of their
different operations…”
(The Wealth of Nations, I.1., p. 8-9)
Specialization:
- productivity;
- prosperity (cause and
consequence);
- more free time?
Adam Smith “explained that a score of workers, each
specializing in some small aspect of the pin-making
process, could make more pins in a given time period
than one …” and after that selling it.
(Peter J. Dougherty, Who’s Afraid of Adam Smith. How

the Market Got its Soul?, Hoboken, New Jersey, John
Wiley & Sons, 2002, p. 38)
“The garages and offices and labs that incubate today’s wealth
of nations, and upon which our society must depend for a
continued expansion of prosperity, have evolved from a
seemingly archaic and exceedingly humble exercise – namely,
Adam Smith’s discussion of how to make pins, of all things! A
quick tour of Smith’s pin factory provides us with a point of
entry for connecting the central insight of his economic
system with his discussion of the contagious effects of good
company, his civic sociology”
(Peter J. Dougherty, Who’s Afraid of Adam Smith. How the Market Got its
Soul?, Hoboken, New Jersey, John Wiley & Sons, 2002, p. 37)
The dual character
of the division of labour
However, the division of labour is not always
good: doing only a few simple operations, that
could damage the mental health and the
physical condition.
For Smith, the general cause of
increasing wealth is productivity.
“The caracteristics of human beings are fundamental
for Smith’s view of how the economy works. Inherited
character can, according to Smith, be modified to some
extent by education, but must in the main be accepted
as it is.”
(Sandelin, Trautwein, Wundrach, p. 18)

“It is the great multiplication of the
productions of all the different arts, in
consequence of the division of labour,
which occasions, in a well-governed
society, that universal opulence which
extends itself to the lowest ranks of the
people.”
(The Wealth of Nations, p. 8)
Adam Smith:
The humans tries to get more.
They have the propensity to truck, barter, and
exchange one thing for another (The Wealth of
Nations, I.2, p. 13) – an unique feature
The consequence of this are the division of
labour, the specialization …
The humans are selfish.
(before Adam Smith, Thomas Hobbes presented
and explained why people are innately selfish
and cruel).
The role of self-interest
“... It is not from the benevolence (kindness) of the
butcher, the brewer, or the baker that we expect our
dinner, but from their regard to their own interest.
We address ourselves, not to their humanity but to
their self-love, and never talk to them of our own
necessities but of their advantages. Nobody but a
beggar chooses to depend chiefly upon the
benevolence of his fellow-citizens ....”
(Adam Smith, The Wealth of Nations, I.2, p. 13-14)
An economy can work well in a
free-market scenario where
everyone will work for his/her own
interest.
The invisible hand:
- a metaphor;
- a part of laissez-faire approach;
- pursuing personal interest would cause markets to adjust and allow the
common good/the public interest;
- it is a correspondence between self interest and the public interest.
!!! A competitive market place
The unobservable market force that helps the demand and

supply of goods in a free-market to reach equilibrium
automatically is the invisible hand. Conditions: a free-
market, suply and demand, competition, self interest,
“How selfish soever man may be supposed,
there are evidently some principles in his
nature, which interest him in the fortune of
others, and render their happiness necessary to
him, though he derives nothing from it except
the pleasure of seeing it.”
(Adam Smith, The Theory of Moral Sentiments,
I.i.1, p. 4)
“ ... They are led by an invisible hand to make nearly the same
distribution of the necessaries of life, which would have been
made, had the earth been divided into equal portions among all
its inhabitants, and thus without intending it, without knowing it,
advance the interest of the society, and afford means to the
multiplication of the species. When Providence divided the earth
among a few lordly masters, it neither forgot nor abandoned
those who seemed to have been left out in the partition. These
last too enjoy their share of all that it produces. In what
constitutes the real happiness of human life, they are in no
respect inferior to those who would seem so much above them.
In ease of body and peace of mind, all the different ranks of life
are nearly upon a level, and the beggar, who suns himself by the
side of the highway, possesses that security which kings are
fighting for...”
(Adam Smith, The Theory of Moral Sentiments, IV, 1, p. 165)
The self-interest can lead to
benefits for others?
The allocation of resources is more
efficient
The term ‘absolute advantage.’
-the ability of an individual,
country, etc. to produce a good or
service more efficiently than its
competitors.
The reputation (of a business
man) is vital
For Adam Smith, trust was essential.
He believed in virtuous behavior,
and that civilizing institutions could
improve the moral conduct of all
ranks of society.
“In Smith’s thinking, the market was the institution that not only converted
the pursuit of self-interest into the wealth of nations, but, by disciplining its
participants, promoted positive social behavior, including economy, industry,
discretion, attention, and application of thought. For example’s, a carpenter’s
livelihood depends on the reputation he establishes through information
shared by his customers, who, collectively, comprise the market. Knowing
that his business is founded on the reputation he has established for himself
in the market, the carpenter is far as likely to show up on jobs drunk than if
there was no market to test his reputation and penalize him for his
indulgence.”
(Peter J. Dougherty, Who’s Afraid of Adam Smith. How the Market Got its
Soul?, Hoboken, New Jersey, John Wiley & Sons, 2002, p. 58)
How does self-interest lead to
pursuing the common good?
“All the members of human society stand in need
of each other’s assistance, and are likewise
exposed to mutual injuries. Where necessary
assistance is reciprocally afforded from love, from
gratitude, from friendship, and esteem, the
society flourishes and is happy. All the different
members of it are bound by the agreeable hands
of love and affection, and are, as it were, drawn to
one common center of mutual good offices.”
(Adam Smith, The Theory of Moral Sentiments, II.ii.3.1)

The Prudence of The Theory of
Moral Sentiments is the Self
Interest (self-love) of the Wealth of
Nations?
See: Michael Emmett Brady
https://papers.ssrn.com/sol3/papers.cfm?abstra
ct_id=3073785
Questions/Remarks
Contemporary misperceptions
about Adam Smith’s work and
ideas.
Was Adam Smith a
“spokesman of manufacturing
interests”?
It is false that he wasn’t
concerned about the fact that
the manufacturers could
become very powerful:
“A landlord, a farmer, a master manufacturer, or
merchant, though they did not employ a single
workman, could generally live a year or two
upon [their] stock … Many workmen could not
subsist a week, few could subsist a month, and
scarcely any a year without employment ….the
workman may be as necessary to his master as
his master is to him, but the necessity is not so
immediate.”
Adam Smith, The Wealth of Nations, chapter VIII, Of the Wages of Labour, p. 45.
He was against monopolies.
Was Adam Smith the prophet of
the Industrial Revolution?
He suggested very clearly and
explicitly about the coming of
the Industrial Revolution, but
he did not see most of the
features that came to be called
the Industrial Revolution.
Adam Smith was not the partisan
for the unlimited liberties.
Was Adam Smith a libertarian?
It is true that,
Adam Smith was for lack of intervention in the
market mechanism and a decentralized policy,
but he didn’t oppose government provision of
military security or the administration of justice.
He advocated for maintaining the governmental
role/attributions in protecting private property
and the regulation of monopolies.
‟… There is a lively debate over how much Adam Smith supported free markets
and opposed government intervention. The traditional view claims that Smith
was an advocate of liberty and an opponent of government encroachment into
social affairs. The revisionist view, advocated by Left Smithians, argues that,
although Smith saw markets as productive, he was worried about their moral,
cultural, and political effects. They claim that he sought to remove privilege and
help the marginalized, and that he did not maintain a principled opposition
towards government.
Left Smithians also argue that Smith thought that benevolent government
intervention could correct people’s mistakes and restrain their corrupt moral
sentiments. Besides checking people’s folly, it could also ameliorate some of the
worst effects of commercial society by providing the poor with public education.
Many of them argue that Smith would view unemployment insurance, health
insurance, retirement pensions, etc. in a similarly favorable light today. Left
Smithians often caricature the traditional view, as though the traditional view
sees Smith as a dogmatic advocate of laissez-faire. They portray those who
believe Smith advocated free market ideas as being either unaware of the
exceptions he made to natural liberty or naive about the need for government to
promote the rule of law …”
Paul Muller, The Orthodox Classical Liberal Interpretation of Smith, April 1 2015
https://www.libertarianism.org/columns/orthodox-classical-liberal-interpretation-smith
The labour theory of value/ the theory of prices
based on costs of production.
59
Adam Smith observed that prices were
determined by supply and demand.
He established that:
a good has a value in use and a value in
exchange (he gave as examples: water and
diamonds).
But, the relative price of a good needs to reflect the
ratio of labour inputs in their production.
60
„… For Smith the long-run value of a commodity
equaled its cost of production: the natural price
of a commodity was the sum of the necessary
payments for labour, capital, and land. A rise in
the price of one of these factors, and in
particular a rise in wages, would lead to a rise in
the prices of commodities in which the factor
entered …”
(Stigler, 1958, p. 358-359)
61
The concept of values in use and values in exchange
(The paradox of value)
Diamonds Water
• We pay a lot for them, but • We drink/buy water every
we buy few diamonds in a day;
lifetime; • Is cheap – but probably the
• Is a scarce product; water consumed in a life
• We can survive without time will cost more than a
them; small diamond ring;
• We don’t survive without
water, but in general it’s
easy to find it.
62
Adam Smith legacy
Nava Ashraf, Colin F. Camerer;
George Loewenstein, Adam Smith,
Behavioral Economist, in Journal of
Economic Perspectives 19 (3),
2005, p. 131-145.
(https://www.researchgate.net/pu
blication/4981727_Adam_Smith_B
ehavioral_Economist)
Bibliography
Nava Ashraf, Colin F. Camerer; George Loewenstein, Adam Smith, Behavioral Economist, in Journal of Economic
Perspectives 19 (3), 2005, p. 131-145.
(https://www.researchgate.net/publication/4981727_Adam_Smith_Behavioral_Economist)
Robert Allen, Global Economic History. A Very Short Introduction, Oxford University Press, 2011.
Rondo Cameron, A Concise Economic History of the World: from Palaeolithic times to the present, second
edition, Oxford University Press, 1993 (1989).
E. Ray. Canterbery, A Brief History of Economics. Artful Approaches to the dismal science, World Scientific
Publishing, 2001.
François Crouzet, A history of the European Economy, 1000-2000, University Press of Virginia, Charlottesville
and London, 2001.
Peter J. Dougherty, Who’s Afraid of Adam Smith. How the Market Got its Soul?, Hoboken, New Jersey, John
Wiley & Sons, 2002.
David S. Landes, The Unbound Prometheus. Technological Change and Industrial Development in Western
Europe from 1750 to the Present, Cambridge, Cambridge University Press, 1988 [1969].
Angus Madison, Contours of the World Economy, 1-2030 AD. Essays in Macro-Economic History, Oxford, Oxford
Murray Rothbard, An Austrian Perspective on the History of Economic Thought, vol. 1 Economic thought before
Adam Smith, Ludwig von Mises Institute, Edward Elgar Publishing Ltd., 2006 [1995].
Bo Sandelin, Hans-Michael Trautwein, Richard Wundrak, A Short History of Economic Thought. Routledge,
2014.
Adam Smith, The Theory of Moral Sentiments, Sao Paolo, Metal Libri, 2006 [1759]
(https://www.ibiblio.org/ml/libri/s/SmithA_MoralSentiments_p.pdf)
Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Chicago, University of
Chicago Press, 1976 [1776] (http://www.ifaarchive.com/pdf/smith_-
_an_inquiry_into_the_nature_and_causes_of_the_wealth_of_nations[1].pdf#
George T. Stigler, Ricardo and the 93% Labor Theory of Value, in The American Economic Review, vol .
48, no. 3, June 1958, p. 357-367.
Webography
• https://en.wikipedia.org/wiki/Physiocracy
• http://www.thehistoryconnection.com/Enlighten
ment-And-Economics.htm
• http://political-economy.com/bullionism-gold/
• https://mises.org/library/who-were-cameralists
• http://economictimes.indiatimes.com/definition/
invisible-hand
• http://www.gla.ac.uk/researchinstitutes/adamsm
ith/people/adamsmith/
Andrei Florin Sora
The Classical
School of Economic Thought
- from the second half of the 18th Century until 1870s;
- it is regarded as the first school of Economic thought.
• „The founder”: Adam Smith (1723-1790)

• Thomas Robert Malthus (1766-1834)
• Jean Baptiste Say (1767-1832)
• David Ricardo (1772-1823)
• James Mill (1773-1836)
• Frederic Bastiat (1801-1850)
• John Stuart Mill (1806-1873)
2
The term classical economics was coined
by Karl Marx, an opponent of the classical
economists. For Marx, classical economists
were Adam Smith, David Ricardo and even
the physiocrats, but not Thomas Robert
Malthus or J.B. Say, perceived by him as
vulgar economists.
3
Jean Baptiste Say
(1767-1832)
4
French economist, businessman.
He spread widely in Europe a lot

of Smith’s concepts.
5
Major work
A Treatise on Political Economy

(1803)
• https://mises.org/sites/default/files/A%20Tre
atise%20on%20Political%20Economy_5.pdf
6
He was in favor of competition
and free trade, he was against
economic restraints.
7
Say’s law on markets:
“It is worthwhile to remark that a product is no
sooner created than it, from that instant, affords
a market for other products to the full extent of
its own value.”
(J. B. Say, A Treatise on Political Economy, 1803)
(A treatise on political economy, 1803, Book I, Chapter
xv
https://oll.libertyfund.org/titles/say-a-treatise-on-
political-economy)
production is the source of
demand
(not money)
9
“it is production which opens a
demand for products”,
“… Thus the mere circumstance of
the creation of one product
immediately opens a vent for other
products.”
(A treatise on political economy, 1803, Book I, Chapter xv
https://oll.libertyfund.org/titles/say-a-treatise-on-political-
economy)
10
Assumptions:
The product offers a market for other goods.
Supply generates demand.
You produce a product or a service, and

you receive a sum of money for that. With
this payment, you can also pay for other
goods and services.
11
This economic theory (Say’s law of
markets) was considered valid until
1929.
John Maynard Keynes’ Law:
demand creates its own supply.
12
Supply could generate demand, but do we
get rich just by producing what we want?
13
In fact, supply doesn’t create it’s own
demand.
The simple act of supplying some

good or service on the market isn’t
sufficient to demand that product.
14
J.B Say pointed out how value is
created. He disagreed with Adam
Smith that the role of labour is
crucial. Instead, he observed the
part of machines.
15
Before Say,
Adam Smith observed that prices were
determined by supply and demand.
He established that:
a good has a value in use and a value in
exchange (he gave as examples: water and
diamonds).
But, the relative price of a good needs to reflect the
ratio of labour inputs in their production.
16
The labour theory of value/ the theory of prices
based on costs of production.
17
„… For Smith the long-run value of a commodity
equaled its cost of production: the natural price
of a commodity was the sum of the necessary
payments for labour, capital, and land. A rise in
the price of one of these factors, and in
particular a rise in wages, would lead to a rise in
the prices of commodities in which the factor
entered …”
(Stigler, 1958, p. 358-359)
18
The concept of values in use and values in
exchange (The paradox of value)
Diamonds Water
• We pay a lot for them, but • We drink/buy water every
we buy few diamonds in a day;
lifetime; • Is cheap – but probably the
• a scarce product; water consumed in a life
• We can survive without time will cost more than a
them; small diamond ring;
• We don’t survive without
water, but in general it’s
easy to find it.
19
Jean Baptiste Say believed that „price
measures value, and value measures
utility”: utility determines the price --- the
value of goods is determined by their
utility.
20
Marginal utility
(how useful is a commodity)
In economics, the additional satisfaction or benefit
(utility) that a consumer derives from buying an
additional unit of a commodity or service. The concept
implies that the utility or benefit to a consumer of an
additional unit of a product is inversely related to the
number of units of that product he already owns.
… the marginal utility to a buyer of a product decreases as
he purchases more and more of that product, until the
point is reached at which he has no need at all of
additional units. The marginal utility is then zero.
https://www.britannica.com/topic/marginal-utility
21
Lidl sneakers
22
https://www.archyde.com/why-do-lidl-sneakers-at-13-euros-sell-for-more-
than-1000-euros-on-the-internet/
Why do Lidl sneakers at 13 euros sell for more than 1000 euros on the Internet?
July 4, 2020 by archyde
1255 euros. This is not the price of the latest Nike Supreme sneakers, but rather
that reached by Lidl sneakers on eBay. Or almost a hundred times their original price:
12.99 euros. The tri-color sneakers, sporting the red-yellow-blue garish emblematic of
the discount brand, are part of a limited edition offered on July 1 on the Belgian
website of the brand.
Sneakers, socks, clappers and T-shirts, whose prices vary between 99 cents and 13
euros, were out of stock in just a few hours. Before the pair of sneakers from the
German chain exceeds the amount of the minimum wage on eBay auctions.
A record for the brand which owes nothing to chance, but to a marketing strategy
widespread in the world of streetwear fashion: the “drop culture”. It consists in
marketing exclusive products in small quantities, almost without advertising, in
localized points of sale.
“If the strategy comes from luxury brands in the United States and goes back a
decade, Lidl has made a drop culture in a very short time,” said Eric Briones, curator of
the Salon du Luxe Paris. And to quote the unbeatable price of 95 euros displayed for
the PS4 – against 299 euros in normal times – at the inauguration on June 17 of Lidl
d’Orgeval, in the Yvelines.
23
As Adam Smith, Jean Batiste Say
believed that:
savings were a sufficient condition for
economic growth.
24
For Say, three factors of production were
creating value:
- the labour;
- the capital (machinery, tools, buildings);
- the land and natural resources.
+
the entrepreneur
25
Say made a lot of observations
about the entrepreneur's
character, emphasizing his role in
creating value.
26
J.B. Say does not distinguish
between value, natural (realistic)
price, or the price of a good on the
market. Using the utility theory of
value, he neglected the labour
theory of value.
27
David
Ricardo
1772-1823
28
- a Dutch-born London businessman;
- at the age of 14, he started to work in the stock market;
– he made a fortune as a stockbroker and loan broker;
- he bet on the outcome of the Battle of Waterloo in 1815 (he
lent money to the British government for fighting against
France);
- an abolitionist;
- after reading Adam Smith's The Wealth of Nations, he became
interested in writing economic texts;
- an opponent of protectionism, he was in favor of free trade;
- Ricardo turned Smith's thoughts into o coherent, clear, and
more rigorous theory;
- he developed the theories of rent, wages, and profits.
29
Adam Smith introduced the rudiments of a
labor theory of value (cost-of-production
theory), Ricardo developed this concept.
Ricardo agreed the Say’s law on markets.
30
The Labour Theory of Value (LTV):
• this economic concept is also found in Adam Smith’s writings,

but it is analyzed and defined by David Ricardo and especially
by Karl Marx;
• it tries to explain what is a natural price of a commodity: the
price of a commodity is determined by the hours of labour
expended to produce it (the total amount of socially
necessary labour);
• Ricardo’s analysis is limited to useful goods delivered in free
competition (the element of rent is not included).
31
In the long run, then, the price of a
commodity is determined solely by
production costs. The price of every
commodity resolves itself into the sum
of the natural rates of wages, profit,
and rent
(Canterbery 1980, p. 54).
32
“… Ricardo begins with the simplest case: the commodities are produced by one
type of labor alone, working perhaps on free land (I, 12 ff.) In this simplest case the
relative values of commodities will clearly equal the relative quantities of labor
necessary to produce them, and will be wholly unaffected by the absolute level of
wages (no matter in what unit they are measured). Consider next, with Ricardo, the
case in which only labor is required to produce the commodities, but different types
of labor are used in differing proportions (I, 20 ff.). The market will establish wage
differentials corresponding to the differences in skill and training of the
occupations, and “the scale, when once formed, is liable to little variation.” Hence a
rise of wages will affect the money costs of all commodities in equal proportion,
and leave relative values unaffected. Ricardo did not consider the possibility that
the relative amounts of skilled and unskilled labor employed to produce a
commodity might change and hence its relative value would change; he could have
asserted, however, that the relative value of the commodity will change only if the
“common labor” equivalent of the original labor input changed.
George T. Stigler, Ricardo and the 93% Labor Theory of Value, in The American Economic
Review, vol . 48, no. 3, June 1958, p. 359.
For Ricardo the price (value) of goods produced
and sold under competitive conditions tends to
be proportionate to the labor costs implied in
producing them.
34
Ricardian distribution theory:
national income is distributed among three
social classes:
- wages for laborers;
- profits for owners;
- rents for landlords.
Ricardo believed that a social class could obtain a

larger share of the total product only at the
expense of the other one.
35
As Thomas Malthus, David Ricardo
aimed to offer an analytical sight
on the classical problem: the
distribution between different
social classes. Ricardo was in a
long debate with Malthus about
policy issues such as the Corn
Laws.
36
The Corn Laws:
- banned Great Britain from importing cereal grains
(wheat, barley, etc.): these imports were much cheaper.
The Corn-laws: 1815-1846 (also before 1815, there
were protectionist policies regarding food importing
and exporting).
!!! The import or the export of the grains was possible
only at a certain price level.
The results of the Corn Laws:
- higher prices;
- impoverishment of the workers.
37
Malthus was in favor of the Corn Laws, but David
Ricardo was one of the members of the English
Parliament who tried to convince his colleagues that
this policy does not help the economy.
„If then the prosperity of the commercial classes,
will most certainly lead to accumulation of capital,
and the encouragement of productive industry;
these can by no means be so surely obtained as by
a fall in the price of corn.”
(An Essay on the Influence of a Low Price of Corn on the
Profits of Stock..., second edition, London, 1815, in
Ricardo, 2013, p. 249)
38
The comparative advantage
„is an economic term that refers to an economy's ability
to produce goods and services at a lower opportunity
cost than that of trade partners. A comparative
advantage gives a company the ability to sell goods and
services at a lower price than its competitors and realize
stronger sales margins …
… is a fundamental tenet of the argument that all actors,
at all times, can mutually benefit from cooperation and
voluntary trade. It is also a foundational principle in the
theory of international trade.”
https://www.investopedia.com/terms/c/comparativeadva
ntage.asp
39
The concept of comparative
advantage appears in the book On
the Principles of Political Economy
and Taxation, 1817.
40
Opportunity cost
„Opportunity cost is the idea that gaining one item means
we have to give up something else … With limited
resources, we have to make choices – we face
opportunity costs.”
(Pettinger, p. 44).
Opportunity Cost Formula and Calculation:

Opportunity Cost=FO−CO
FO = Return on best foregone option;
CO = Return on chosen option.
https://www.investopedia.com/terms/o/opportunitycost.asp
41
Example:
Without the protectionist Corn
Laws the price of the food would
have felt >>>
If a country can produce something
more cheaply (grain, for example),
another nation could import and
export other goods.
42
Ricardo’s views about international trade
Ricardian trade theory
(On the Principles of Political Economy and Taxation, 1817)
• this theory is based on comparative

advantage and specialization: a country
should produce the goods with the
lowest opportunity cost;
• Ricardo offered as an example the trade
between England and Portugal (traded goods:
cloths vs. wine);
• Both countries would benefit from the trade;
43
+
the Ricardian law of diminishing
marginal returns.
44
Thomas Malthus
1766-1834
45
Malthus went on to Cambridge University.
In 1793 he was made a fellow of Jesus College Cambridge. In
1805 he became the first professor of History and Political
Economy at the East India Company’s college in Haileybury,
Hertfordshire.
He was an Anglican pastor.
He was a fellow of the Royal Society (1819).
He was a member of the Statistical Society of London (1834).
46
Malthus was famous in Great
Britain in the first half of the 19th
Century, but nowadays he is known
more for his vision about the
problem of population growth:
47
An Essay on the Principle of
Population (1798)
(http://www.esp.org/books/malth
us/population/malthus.pdf)
48
Other books:
An Inquiry into the Nature and
Progress of Rent (1815);
Principles of Political Economy (1820).
49
Thomas Malthus:
- rejected Say’s law on markets (supply generates
demand)
– he looked at the lack of demand (under
consumption + over saving).
He observed in England periods of overproduction.
He argued that savings are not always enough to
generate economic growth.
For him, the demand was essential in the economic
growth process.
50
The Malthusian theory of
population
51
Malthus claimed that more people
meant more poverty, and trying to
help the poor is not a good
solution.
52
The population is growing faster
than the resources.
53
Malthus believed that the population
tends to double every generation.
Population growth is geometrical, but the
food supply increases at a arithmetical
ratio:
Arithmetic progression: 1, 2, 3, 4, 5, 6, 7 …
Geometric progression: 1, 2, 4, 8, 16, 32,
64 …
54
If the world population continues to
increase, food production will not be
enough to feed all people.
The Malthusian theory:

this outcome could be avoided if the
population stops growing.
55
The Malthusian scenario:
56
‟… the power of population is indefinitely greater than the
power in the earth to produce subsistence for men.
Population, when unchecked, increases in a geometrical ratio.
Subsistence increase in an arithmetical ratio. A slight
acquaintance with numbers will shew the immensity of the
first power in comparison of the second.
By that law of our nature which makes food necessary to the
life of man, the effects of these two unequal powers must be
kept equal.
This implies a strong and constantly operating check on
population from the difficulty of subsistence. This difficulty
must fall somewhere and must necessarily be severely felt by
a large portion of mankind…”
(An Essay on the Principle of Population, 1798)
http://www.esp.org/books/malthus/population/malthus.pdf, p. 4)
57
To keep-off this scenario, Malthus
imagined two possibilities:
- preventive checks (drops in the birth rate
by abstinence, delayed marriage >>>
smaller/fewer families).
- positive checks – any cause that leads to

the limitation of the population growth:
diseases, famine, wars, poor living and
working conditions.
58
Malthus:
the population increase could be limited by misery
and vice.
!!!
He was against charity.
He even believed in the „moral inferiority of the poor.”

(https://economistsview.typepad.com/economistsvie
w/2006/10/blaming_the_poo.html)
59
The evolution of incomes, Clark, p. 2
60
The Malthusian model/
The Malthusian Trap
• For the most of human history, income was

largely stagnant because technological
advances and discoveries only resulted in
more people.
61
Malthusian catastrophe
https://en.wikipedia.org/wiki/Malthusianism
62
The Malthusian model relies on two main
assumptions:
1. first, the population growth responds positively to
per capita income growth (on the contrary, if income
fell – fertility declines and death rates increases);
2. the second assumption is that income per capita is
negatively related to population size due to the
diminishing returns to labor: the wage rate will be
forced down to the subsistence level.
63
The increase of population would
exceed agricultural production
!!!
The economist Ester Boserup (1910-1999)
proved that population levels determined
agricultural methods, rather than agricultural
methods determining population.
64
Malthus analyzed humans as a group, studied human
behavior; he pointed out that the main forces that
shaped the human race – fertility and starvation –are
the same for animals and insects).
His ideas influenced the theory of natural selection of

Charles Darwin.
65
“… If there is a positive message to be found in Malthus’s work – and they are
not so easy to find – it is the dismal science predicts that, because
populations do not always live on the edge of starvation, this must mean that
they make decisions to avoid this outcome. For example, people may choose
to marry late, use contraception, emigrate, tolerate poor living conditions,
engage in infanticide and, even, wage war – a somewhat dismal means to
avoid out-come! The important thing to bear in mind is that we are not
merely passive recipients of the terrible fate of nature which enacts the
immutable laws of economics …
But, the Malthusian view of the world is not without hope, although it is
often without expectation. His interest in the sensitivity of people to
incentives is something that dominates neoclassical economics. From this
tradition, we get the notion that people are capable of making the correct
choices, if sufficiently incentivized to do so.”
Philip Corr, Anke Plagnol, Behavioral Economics: the Basics, London/New York,
Routledge, 2019, p. 44-45.
66
Contemporary ideas about poverty
67
Malthus:
“helping the poor would increase
their numbers and hence their
misery.”
68
Margaret Thatcher (1978)
“Nowadays there really is no primary poverty left in this
country. In Western countries we are left with the
problems which aren't poverty. All right, there may be
poverty because people don't know how to budget,
don't know how to spend their earnings, but now you
are left with the really hard fundamental character—
personality defect.”
https://www.margaretthatcher.org/document/103793
69
Eldar Shafir, Sendhil Mullainathan, Scarcity: Why
Having too Little Means so Much, Times Book, 2013.
70
“The Silver Lining
The poor stay poor, the lonely stay lonely, the busy stay busy, and diets fail.
Scarcity creates a mindset that perpetuates scarcity. If all this seems bleak,
consider the alternative viewpoint: The poor are poor because they lack skills.
The lonely are lonely because they are unlikable; dieters lack will power; and
the busy are busy because they lack the capacity to organize their lives. In this
alternative view, scarcity is the consequence of deep personal problems, very
difficult to change. The scarcity mindset, in contrast, is a contextual outcome,
more open to remedies. Rather than a personal trait, it is the outcome of
environmental conditions brought on by scarcity itself, conditions that can
often be managed. The more we understand the dynamics of how scarcity
works upon the human mind, the more likely we can find ways to avoid or at
least alleviate the scarcity trap.
Adapted from Scarcity: Why Having Too Little Means So Much. Copyright ©
2013 by Sendhil Mullainathan and Eldar Shafir. Reprinted by arrangement
with Times Books, an imprint of Henry Holt and Company LLC.”
71
Rutger Bregman, Utopia for
Realists: How We Can Build the
Ideal World, Little, Brown and
Company/Hachette Book Group,
2017 [2016].
72
John Stuart Mill
(1806-1873)
73
He received an outstanding education.
His father: James Mill (1773-1836), a political
philosopher, economist, historian, legal reformer;
tutored him.
J.S. Mill is considered the last great

economist of the classical school.
He is one of the most influential English
philosophers of the 19th Century.
74
John Stuart Mill
was for thirty-five years an official of the
East India Company (from 17 years old),
1823-1858, ultimately rising as a high
official.
75
Writings:
On the Definition of Political Economy; and on the Method of
Investigation Proper to It (1844)
Principles of Political Economy (1848)

a survey of the ideas of Smith, Malthus and Ricardo
Essay on Liberty (1859)

Mill credited his wife Harriet as co-author.
Utilitarianism
(1861 – three articles in a Magazine/1863 - book)
76
John Stuart Mill’s concepts:
• Humanitarianism, sympathy for the poor;
• He emphasized the importance of an equal distribution of
income;
• He rejected the Malthusian scenario as inevitable;
• His most important works rely on the concept of utility,
aiming to maximize the personal liberties of all citizens;
• Mill considered that there must be a separation of
distribution from production;
• He disagreed with the theory that the labor was productive
only when it produced material objects – for example,
regarding the transmission of skills and qualification;
• He was more in favor of the state intervention in economic
life: „he emphasized the economic importance of the state as
civilizer.” (Barber, p. 104).
77
Mill’s definition of Economics:
“The science which traces the laws of such of the phenomena of
society as arise from the combined operations of mankind for
the production of wealth, in so far as those phenomena are not
modified by the pursuit of any other object.”
(On the Definition of Political Economy; and on the Method of

Investigation Proper to It, 1844)
78
For Mill the economics was an empirical science, but “it was not
possible to conduct experiments in economics as it was in
physical sciences, because we cannot try forms of government
and systems of national policy on a diminutive scale in our
laboratories ....” -
He thought that the discipline of economics “had an
epistemology similar to that of mathematics.”
Floris Heukelom, Behavioral Economics: A History, New York,
Cambridge University Press, 2014, p. 12.
79
The book On the Definition
of Political Economy; and on the Method of Investigation Proper
to It (1844) contains many examples of the relation between
economics and human behavior, as:
- the pursuit of wealth;
- the aversion to labor
80
Utilitarianism
An ethical philosophy in which the happiness of the
people in the society is considered the greatest good -
we should seek to maximize it.
Read more:
http://www.businessdictionary.com/definition/utilitari
anism.html
It maximizes utility
The founder of Utilitarianism was Jeremy Bentham
81
J.S. Mill: “the Utility of a society is maximized by
allowing people to make their own choices.
According to this view, we should only interfere
with the liberty of others in self-protection – this
is one major role for government in establishing
effective national defense ...”
- a dominant theme in neoclassical economics.
Philip Corr; Anke Plagnol, Behavioral Economics:

the Basics, London/New York, Routledge, 2019,
p. 48.
82
J.S. Mill developed the concept of
opportunity cost – a cost benefit
analysis.
A contemporary question: how we

maximize utility?
83
The stationary state
Classical economists considered that there were three
possible economic situations:
• a progressive or advancing state (capital
accumulation, economic growth, high profits and high
wages);
• and a declining state.
• a stationary state (before Mill – the stationary state
was not desired for an economy);
A stationary state = growth is neither positive nor
negative: profits rates decline to zero.
84
!!!
J.S. Mill (Principles of Political
Economy) argues that a stationary
state could be desirable.
85
Opportunity cost
„Opportunity cost is the idea that gaining one item means
we have to give up something else … With limited
resources, we have to make choices – we face
opportunity costs.”
(Pettinger, p. 44).
Opportunity Cost Formula and Calculation:

Opportunity Cost=FO−CO
FO = Return on best foregone option;
CO = Return on chosen option.
https://www.investopedia.com/terms/o/opportunitycost.asp
86
„It must always have been seen, more or less distinctly, by
political economists, that the increase of wealth is not
boundless: that at the end of what they term the progressive
state lies the stationary state, that all progress in wealth is but a
postponement of this, and that each step in advance is an
approach to it. We have now been led to recognise that this
ultimate goal is at all times near enough to be fully in view; that
we are always on the verge of it, and that if we have not reached
it long ago, it is because the goal itself flies before us. The richest
and most prosperous countries would very soon attain the
stationary state, if no further improvements were made in the
productive arts, and if there were a suspension of the overflow
of capital from those countries into the un- cultivated or ill-
cultivated regions of the earth.”
1848 - John Stuart Mill on the Stationary State, p. 318
87
J.S. Mill introduced the idea of the
economic man.
88
Conclusions
The main ideas of the Classical School:
• Natural law applies to the economic system.
• The markets work best when they are left alone (free markets & free
trade): laissez-faire principle plus the efficiency of the free-markets
economies;
• The less the government is involved in the economy, the better for
business (including less government regulations). But, we need a
legislative framework (laws & jurisprudence).The price mechanism acts as
a mighty invisible hand to allocate resources to where they are best
employed;
• Classical economists considered that trade and competition led to
prosperity;
• The role of self interest – the individual liberty is fundamental
• Division of labor --- efficient production
89
Before Karl Marx there are some socialist and
utopian thinkers
• Charles Fourier (1772-1837): The Theory of the Four Movements
and of the General Destinies – he proposed a new society (people
living and working together in phalansteries – small communities)
• Robert Owen (1771-1858): A New View of Society
• Henri de Saint Simon (1760-1825): The Industry, 1816-1817,
Industrial system, 1822, The New Christianity 1825.
• Pierre Joseph Proudhon (1809-1865), ‟the father of anarchism”:
What is Property? An Inquiry into the Principle of Right and of
Government (https://theanarchistlibrary.org/library/pierre-joseph-proudhon-what-
is-property-an-inquiry-into-the-principle-of-right-and-of-governmen)
• Louis Blanc (1811-1882): The Organization of Labour
What is an utopia?
91
A utopia:
- coined by Thomas Morus in the book Utopia in

1516
- describes an imaginary society
- “an ideal commonwealth whose inhabitants
exists under seemingly perfect conditions.”
(https://www.britannica.com/topic/utopia)
92
Charles Fourier
(1772-1837)
He proposed a new society:
people living and working
together in small communities
(phalansteries), organized on his
plans, with living divided
hierarchically and higher pay for
those carrying unpopular tasks).
In these communities the
cooperation was vital.
!!! Fourier is credited with
having originated the word
feminism (1837).
A phalanstère (or phalanstery) was a type of building designed for a self-contained
community, ideally consisting of 500–2000 people working together for mutual
benefit, and developed in the early 19th century by Charles Fourier.
Fourier chose the name by combining the French word phalange (phalanx, the
basic military unit in ancient Greece), with the word monastère. The phalanstery
included also private apartments.
Fourier was a critic of capitalism:
poverty, injustice, etc. He believed
that society was not interested in
easing the standard of living of
workers.
The division of labour was
abandoned in a phalanstery: every
one could have in a single day
different tasks.
Robert Owen
(1771-1858)
Businessman, a textile factory owner in
Scotland, later moved to the United States.
In Scotland, he set up a model village and a
community at New Harmony in Indiana
(1825-1827).
He developed a model textile factory (and
village) at New Lanark in Scotland. He
improved the working conditions of his
employees, including children.
He encouraged the development of
cooperatives.
Owen believed “that people’s characters
were the product of their environments.
People were bad because they came from
bad conditions.”, See Kishtainy, p. 45).
New Harmony envisioned by Owen
https://en.wikipedia.org/wiki/New_Harmony,_Indiana#/media/File:New_harmony_vision.jpg
Henri de Saint-Simon
(1760-1825)
Businessman, politician, economic
theorist.
He criticized the intervention of
government in economy, he believed that the
industrial revolution and scientific discoveries
would have profound changes.
Saint-Simon highlighted the needs of the
working class (where he included not only
manual laborers, but also all people engaged in
productive work that contributed to a better
society). He was for the recognition always of
the individual merit.
In his utopian society the hierarchy was
mentioned, but he was against social
privileges (as aristocratic titles).
These utopian philosophers thought that
capitalism was wrong, the society was inhuman,
and one reason for this were the markets and
the competition.
They proposed a society with shared resources,
collective ownership, equity, workers’ self-
management of the means of production.
They are perceived as (pre)socialist thinkers.
Socialism:
a political and an economic system in
which the majority of resources are the
property of the State, the production
and the distribution of goods and
services are administrated by the State
and where there is not a free market.
Modern utopian thinking?
Rutger Bregman, Utopia for Realists: How We

Can Build the Ideal World. Little, Brown and
Company/Hachette Book Group, 2017 [2016],
alternative title: Utopia for Realists: The Case
for a Universal Basic Income, Open Borders, and
a 15-hour Workweek.
Rutger Bregman, is a Dutch historian, born in

1988.
Other books: Humankind: A Hopeful History
102
He suggests a 15-hour workweek.
Like other economists and public
figures, he believes that a Universal
Basic income is not a utopian
proposal.
103
Leisure - the biggest challenge of
this century.
104
Bergman offers examples of
economists who have already
observed the significance of leisure
for the (future) society.
105
For example, John Stuart Mill mentioned that the best
use of more wealth was more leisure.
In 1930, John Maynard Keynes wrote a short essay
(from a lecture gave in Madrid): Economic Possibilities
for our Grandchildren. Keynes imagined that in one
century (in 2030), the Western standard of living would
have multiplied at least eight times
(http://www.econ.yale.edu/smith/econ116a/keynes1.p
df).
106
“We are suffering just now from a bad attack of economic pessimism. It is
common to hear people say that the epoch of enormous economic progress
which characterised the nineteenth century is over; that the rapid
improvement in the standard of life is now going to slow down-at any rate in
Great Britain; that a decline in· prosperity is more likely than an improvement
in the decade which lies ahead of us …
… My purpose in this essay, however, is not to examine the present or the
near future, but to disembarrass myself of short views and take wings into the
future. What can we reasonably expect the level of our economic life to be a
hundred years hence? What are the economic possibilities for our
grandchildren? …
… Thus for the first time since his creation man will be faced with his real, his
permanent problem-how to use his freedom from pressing economic cares,
how to occupy the leisure, which science and compound interest will have
won for him, to live wisely and agreeably and well …
107
I draw the conclusion that, assuming no important wars and no important increase in
population, the economic problem may be solved, or be at least within sight of
solution, within a hundred years. This means that the economic problem is not-if we
look into the future-the permanent problem of the human race.
Why, you may ask, is this so startling? It is startling because-if, instead of looking into
the future, we look into the past-we find that the economic problem, the struggle for
subsistence, always has been hitherto the primary, most pressing problem of the
human race-not only of the human race, but of the whole of the biological kingdom
from the beginnings of life in its most primitive forms. Thus we have been expressly
evolved by nature-with all our impulses and deepest instincts-for the purpose of
solving the economic problem. If the economic problem is solved, mankind will be
deprived of its traditional purpose
…
Thus for the first time since his creation man will be faced with his real, his permanent
problem-how to use his freedom from pressing economic cares, how to occupy the
leisure, which science and compound interest will have won for him, to live wisely and
agreeably and well.”
http://www.econ.yale.edu/smith/econ116a/keynes1.pdf
108
Bibliography
William J. Barber, A History of Economic Thought, Harmondsworth, Baltimore, Ringwood, Penguin Books, 1967.
(http://www.eatonak.org/EC402/downloads-3/files/Barber.pdf)
Rutger Bregman, Utopia for Realists: How We Can Build the Ideal World. Little, Brown and Company/Hachette Book Group, 2017 [2016],
Rondo Cameron, A Concise Economic History of the World: from Palaeolithic times to the present, second edition, Oxford University
Press, 1993 (1989).
E. Ray. Canterbery, A Brief History of Economics. Artful Approaches to the dismal science, World Scientific Publishing, 2001.
Philip Corr; Anke Plagnol, Behavioral Economics: the Basics, London/New York, Routledge, 2019.
Peter J. Dougherty, Who’s Afraid of Adam Smith. How the Market Got its Soul?, Hoboken, New Jersey, John Wiley & Sons, 2002.
Floris Heukelom, Behavioral Economics: A History, New York, Cambridge University Press, 2014.
John Maynard Keynes, Economic Possibilities for our Grandchildren, 1930, http://www.econ.yale.edu/smith/econ116a/keynes1.pdf
Niall Kishtainy, A little History of Economics, Yale University Press, 2017.
Thomas Robert Malthus, An Essay on the Principle of Population, 1798 (http://www.esp.org/books/malthus/population/malthus.pdf)
Thomas Robert Malthus, Principles of Political Economy, 1820 (https://oll.libertyfund.org/titles/malthus-principles-of-political-economy)
Angus Madison, Contours of the World Economy, 1-2030 AD. Essays in Macro-Economic History, Oxford, Oxford University Press, 2007.
John Stuart Mill, John Stuart Mill on the Stationary State, in Population and Development Review, vol. 12, no. 2, June 1986, p. 317-322.
https://www.jstor.org/stable/1973114?seq=1#page_scan_tab_contents
David Ricardo, Economic Essays, edited by, E.C.K. Gonner, Routledge, 2013 (1923)
Tejvan Pettinger, Cracking Economics, You, this book and 3000 years of financial theories, London, 2017.
Jean Baptiste Say, A treatise on political economy, or the Production, Distribution, and Consumption of Wealth, 1803
(https://oll.libertyfund.org/titles/say-a-treatise-on-political-economy)
Mark G. Spencer, Introduction in Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Wordsworth Classics of
World Literature, 2013.
George T. Stigler, Ricardo and the 93% Labor Theory of Value, in The American Economic Review, vol . 48, no. 3, June 1958, pp. 357-367.
Michel S. Zouboulakis, On the social nature of rationality in Adam Smith and John Stuart Mill, in Cahiers d’économie politique, 2/2005
(no. 49), 51-63.
109
Webography
• http://www.economics-
reloaded.com/1_classical_theory/1_classical_theory.htm
• www.mises.org
• http://www.businessdictionary.com
• https://www.investopedia.com/
110
Andrei Florin Sora
Industrialization.
Marxian Economics
The Industrial Revolution
(18th -19th Centuries)
a turning point in world history;
the start of a period of sustained economic

growth (from 1760)
3
The first Industrial
Revolution began in Great
Britain after 1750-1760, and it
was the result of the
transformations of the early
modern economy and society
4
Why England?
5
By the middle of the 18th Century, England:
- was the most rapidly urbanized country in
Europe;
- fewer people worked in agriculture (45%);
- urban and rural manufacturing increased the
demand for labor and also for more efficient
agriculture;
6
England was a stable country: with
a stable government.
England had:
- natural resources (rivers, waterways, coal, and
iron ore)
- a large coal-mining industry that meant cheap
energy;
- an improved allocation of resources and capital
accumulation;
- abundance of labors;
- money to invest;
8
- a functional transportation system:
infrastructure investments;
- a long-distance trade;
- a better level of literacy (but a stagnant
one);
- a good level of numeracy and skill
formation;
- higher wages in the industry.
9
The government did not interfere
in business practices.
For that reasons too, in Great Britain (not
only in England) the
inventions and especially the use of the
breakthrough technologies
were implemented by entrepreneurs and
firms/companies.
11
Great Britain’s advantages
• The independence of the judicial system;
• A constitutional monarchy;
• The security of property;
• The English political system “guaranteed” fewer arbitrary
interventions by the authorities and the property rights … that
generated the capital accumulation and the capital
expenditure.
•
12
The taxation system:
The English Parliament introduced a land
tax in 1693 that was imposed on peers as
well as commoners (Allen, 2011, p. 28)
On the other hand, the State could

better redistribute income.
13
The formal and informal social
networks facilitate the operation of
markets, for example, acting as a
reputational mechanism.
(See Mokyr and Voth, 2010,p. 27)
14
!!!
In Great Britain,
the Agricultural Revolution preceded the
Industrial Revolution:
- new crops and methods of crop rotation;
- the development of tools;
- the intensive use of water power;
- the enclosure system (the use of land only by
the owner; the land ceased to be for the use of
commoners).
15
The technological evolution
Western Europe shared the

scientific discoveries and the
opening to culture.
Why was the revolutionary
technology invented in
England rather than the
Netherlands or France?
17
Famous inventions:
18
- steam engines;
- machines to spin and weave cotton;
- processes to smelt and refine iron

and steel, using coal instead of wood.
19
Significant changes brought by (First) Industrial
Revolution:
- the invention of machines;
- the use of steam and other kinds of power (the steam engine);
- the factory system – the Industrial Revolution was a shift from
the home to the factory, from the country to the city, from
human or animal power to engines powered by fossil fuels;
(http://webs.bcp.org/sites/vcleary/ModernWorldHistoryTextboo
k/IndustrialRevolution/Introduction.html);
- mechanization;
- specialization;
- the division of labor became more intense (the division of
labor increased labor efficiency).
The Industrial Revolution came
gradually.
From Great Britain, the Industrial
Revolution spread in France (especially
after 1815) and other countries in Western
Europe.
Effects of the First Industrial Revolution
• The beginning of an era of modern economic growth;
• Newer technologies;
• Better productivity;
• Superior transportation system;
• Population started to grow faster;
• Urbanization;
• an emerging middle class;
• The impact of the Industrial Revolution on the lives of women: the role of
women (the changing role of women/women’s part in industrialization);
• Literacy, a better school enrollment;
• Modern communication;
• The spread of globalization (Globalization accelerated in the 19th Century
with the Industrial Revolution);
• Improved medicine and living conditions, especially in the second half of
the 19th Century.
Negative effects
• Poor working and living conditions;
• The exploitation of children;
• Public health challenges.
The beginning of industrialization in Great
Britain - new inventions, new machines,
new techniques - determined better
productivity, but dismissed many workers,
and diminished wage rate, especially in the
textile industry.
The production became faster and cheaper,
products with the same quality.
The spread of the Industrial
Revolution
In France: after Napoleonic wars, especially from
the 1820s
(English manufacturers with capital and English
artisans came to mechanize French industry).
!!!
Great Britain reached its peak of industrial
supremacy in the 1850s-1870s.
Between 1870 and 1913, continental Europe

and North America surpassed Britain in
industrial production.
The industrialization meant
• Labor productivity
(the United Kingdom was the lead country in terms
of labor productivity until the 1890s)
• High rates of investment in human capital.
• High rates of investment in physical capital.
• Technical progress, especially in producing energy.
Communications Revolution:
- railways;
- maritime transport;
- electrical telegraph;
- the phone.
The increase of the international trade
A fast, improved and cheap

transportation
(who also facilitated the migration of
population)
!!!
The construction of railways was one of the key new
technologies of the Industrial Revolution
Changes in the pattern of the
consumer demand:
the invention of the
Department Stores
Changes in the role of
government (new and/or
better policies).
A high literacy level.
Transformation of the
conditions of life and work.
The Industrial Revolutions
(we can distinguish at least three phases)
The first phase (the 1760s to 1860s) started with Britain and then
spread to other countries in Northern and Western Europe and the
United States.
!!! – division of labour, specialization, mechanization, factories, steam engine.
The second phase (the 1860s to 1950s) brought also in Russia,
Japan, other parts of Eastern and Southern Europe, Australia, and New
Zealand.
!!! + the scale was bigger, we observe the development of electricity and the use of
petroleum, better working and living conditions, greater specialization, mass production,
a consumer society.
The third phase (from the 1950s)
!!! + nuclear energy, electronics, automation, communication technologies,
biotechnology, IT systems …
+ a fourth Industrial Revolution?
!!! - technology advances: artificial intelligence, robotics, 3D printing,
genome engineering
Especially in the second phase of the Industrial
Revolution/or the Technological Revolution
we observe
- more rapid industrialization;

- the growth of the stock machinery and equipment;
- changes and evolutions in the system of mass
production;
- new and even more important technological
discoveries;
- new energy sources: petroleum, electricity.
Technological competence.
Is it the Industrial Revolution the
key to economic development?
How is it possible to escape

poverty?
- free trade;
- access to technological
knowledge;
-education.
… but the imports could make it

difficult for some non or less
industrialized countries to realise an
industrial take-off.
Driving forces:
key internal forces (such as knowledge and
competence of management and
workforce) and external forces such as
economy, competitors, technology that
shape the future of an organization
http://www.businessdictionary.com/definition/driving-
forces.html#ixzz43FDcIuJs
Critics of capitalism
Karl Marx (1818-1883):
economic major concepts
Marx sees history as a succession of
economic systems or means of
production, each organized to satisfy
human material needs, but giving rise
to antagonism between classes of
people.
http://www.sparknotes.com/philosophy/marx/themes.
html
Modes of production
(progressive historical stages):
• Tribal mode of production (primitive communism);
• Neolithic mode of production (primitive
communism);
• Asian mode of production;
• Ancient mode of production (slave society);
• Feudal mode of production;
• Capitalist mode of production;
• Socialist mode of production;
• Communist mode of production.
Marx was a critic of capitalism:
“fundamentally distinct from other
modes of production”.
Marx believd that: “the archetype of

capitalism is anarchy of production,
and capitalist exploitation is a
derivative feature”.
See: Elias L. Khalil, p. 19, 29
Marx main concepts about capitalism:
“- a mode of production based on private ownership of
the means of production.
Capitalists produce commodities for the exchange market

and to stay competitive must extract as much labor from
the workers as possible at the lowest possible cost.
The economic interest of the capitalist is to pay the

worker as little as possible, in fact just enough to keep him
alive and productive.
The workers, in turn, come to understand that their
economic interest lies in preventing the capitalist from
exploiting them in this way.”
http://www.sparknotes.com/philosophy/marx/themes.html
Human labor -
The Labour Theory of Value
The Labour Theory of Value:
- the rudiments of the LTV were introduced by Adam Smith
and developed by David Ricardo.
- the economic value of a good or service is determined by
the total amount of "socially necessary labor" required to
produce it, rather than by the use or pleasure its owner
gets from it.
Value - the amount of labor necessary to produce a

marketable commodity.
For David Ricardo, the price (Value) of goods produced and
sold under competitive conditions tends to be
proportionate to the labor costs implied in producing them.
Marx used Ricardo’s theory of value
Human labor is seen as the source of social
wealth.
For Marx the value of a good is the
amount of labor used to make it (The
Labor Theory of Value – LTV – see
before Marx, Ricardo and Smith LTV).
To produce value, the labour must
be socially necessary, its product
must be of value to somebody
(Mehari, p. 174)
“The labor theory of value states that the amount of
labor that went into producing it determines the value
of a commodity (and not, for instance, by the
fluctuating supply and demand).”
“Commodities have a use-value that consists of their capacity to
satisfy such wants and needs. For the purposes of economic
exchange, they have an exchange-value, their value in relation
to other commodities on the market, which is measured in terms
of money.”
http://www.sparknotes.com/philosophy/marx/themes.html
Marx:
The value of a product comes from
the amount of labour embodied in
that product.
“If the labourer wants all his time to produce the
necessary means of subsistence for himself and his
race, he has no time left in which to work gratis for
others. Without a certain degree of productiveness in
his labour, he has no such superfluous time at his
disposal; without such superfluous time, no surplus-
labour, and therefore no capitalists, no slave-owners,
no feudal lords, in one word, no class of large
proprietors.”
Marx, The Capital, vol 1., chapter 16 Absolute and
Relative Surplus Value
https://www.marxists.org/archive/marx/works/1867-c1/ch16.htm
The labor
Necessary labor Surplus labor
The amount of labor producing wealth above what
essential to live – to earn is necessary to support you
and your family
a subsistence wage (to pay
= the money earned by the
for food, clothing, etc.)
capitalist from selling the
products.
This surplus allows an owner
to buy more machines.
The commodity
• an economic good or service;
• something that you buy or sell: a basic good
that is interchangeable with other
commodities.
The circuit of exchange: C – M – C
C = Commodity (labor power)
M = Money
C = Another Commodity
!!! – Money is the intermediary
“The circuit C-M-C starts with one commodity, and

finishes with another, which falls out of circulation and
into consumption. Consumption, the satisfaction of
wants, in one word, use value, is its end and aim”.
Marx, The Capital, vol. 1
According to Marx there is a
second process in the circulation of
money:
M-C-M’
- purchasing a commodity with the
aim of selling it for money> for a
surplus value – purchasing articles
not for use, but for resale (the
exchange value is determinant).
“In order that a man may be able to sell
commodities other than labor power,
he must of course have the means of
production, such as raw materials,
implements, etc. No boots can be made
without leather.”
— Marx, The Capital
Marx:
The human history was largely
determined by a class struggle
between the ruling classes and the
workers.
“The history of all hitherto existing
society is the history of the class
struggle”.
(Karl Marx, The Communist Manifesto)
!!!
Competition between workers
keeps wages down.
On the other hand, the capitalists
want to capture more profits.
(Kishtainy, p. 45)
Class exploitation:
The capitalists exploit workers.
Society is divided:
with or without property
Marx and Engels believed that
there was a class
consciousness
Marx preached the overthrow
of the bourgeoisie by the
proletariat (workers).
The proletariat will replace the capitalist
mode of production with a mode of
production based on the collective
ownership of the means of production,
called Communism.
“… all economic systems generate
opposing forces and then undergo
radical transformation”
(Pressman, p.70-71)
Marx and Engels highlighted
that greed motivates capitalists
to accumulate more money.
“… Capital is dead labour, that, vampire-like, only lives by sucking
living labour, and lives the more, the more labour it sucks. The
time during which the labourer works, is the time during which
the capitalist consumes the labour-power he has purchased of
him.
If the labourer consumes his disposable time for himself, he robs
the capitalist.
The capitalist then takes his stand on the law of the exchange of
commodities. He, like all other buyers, seeks to get the greatest
possible benefit out of the use-value of his commodity
…”
Marx, Das Kapital, vol. 1, chapter 10, The limits of the Working
Day
https://www.marxists.org/archive/marx/works/1867-c1/ch10.htm
Marx:
The productive forces are the
driving forces of world history.
Other examples of negative
features of capitalism given by
Marx:
For Marx, the specialization was not good
for workers (loss of creativity and loss of
satisfaction).
Overproduction (more work, more
than we can consume).
Marx believed that capitalism
brought poverty, starvation,
inequality, but he was not
always a critic of capitalism.
Marx appreciated capitalism for its
technological dynamism,
development in human
technology, and cultural creativity.
(Helge Peukert, The Legacy of Karl
Marx…., p. 324)
“While the extraction of surplus
labor is essential for capital
growth, it is not essential for the
definition of capital”.
(Elias L. Khalil, p. 19)
Marx imagined the socialist society as a
place where:
- there is no private property;
- there is no free market; the State sets the
prices;
- there are no banks and no financial markets;
- a standardization of consumer products;
- he preached about the permanent revolution.
Marxism after Marx:
- a neo-Marxist tendency;
- the orthodox Marxism.
!!! Classical Marxism – the theories

presented and analyzed by K. Marx
and F. Engels
!!!
The critics of Marx draw attention
to the failure of communist
regimes.
But Marx emphasized that to
establish a successful communist
system, a society needs to have a
well-developed economy.
In the last one hundred years the
living standards of the average
worker improved.
Karl Marx at 200: German
philosopher's ideas still divide, stir
opinion more than century on
https://www.youtube.com/watch?
v=2uPfw2S_LZc
Bibliography
Rondo Cameron, A Concise Economic History of the World: from Palaeolithic times to the present, second edition, Oxford University
Press, 1993 (1989).
E. Ray Canterbery, A Brief History of Economics. Artful Approaches to the dismal science, World Scientific Publishing, 2001.
François Crouzet, A history of the European Economy, 1000-2000, University Press of Virginia, Charlottesville and London, 2001.
Elias Khalil, Marx’s Understanding of the Essence of Capitalism in History of Economics Review, vol. 17, 1992, issue 1, p. 19-32.
Niall Kishtainy, A little History of Economics, Yale University Press, 2017.
Angus Madison, Contours of the World Economy, 1-2030 AD. Essays in Macro-Economic History, Oxford, Oxford University Press,
2007.
Karl Marx, The Capital, vol. 1, 1887 [1867], https://www.marxists.org/archive/marx/works/1867-c1/
Karl Marx, Friedrich Engels, The Communist Manifesto, 2004 [1848],
https://www.marxists.org/archive/marx/works/download/pdf/Manifesto.pdf
Tesfa Yesus Mehari, A Short History of Economic Thought, University of Groningen, 2002.
Joel Mokyr and Hans-Joachim Voth, Understanding growth in Europe, 1700-1870: theory and evidence, in The Cambridge Economic
History of Modern Europe, vol. 1, 1700-1870, edited by Stephen Broadberry and Kevin O’Rourke, Cambridge, New York, Melbourne,
Cambridge University Press, 2010, p. 7-42.
Helge Peukert, The Legacy of Karl Marx, in Jürgen Georg Backhaus (editor), Handbook of the History of Economic Thought. Insights
on the Founders of Modern Economics, New York, Dordrecht, Heidelberg, London, Springer, 2012.
Steven Pressman, Fifty Major Economists, Routledge, 2006.
Michael Wayne, illustrations by Sungyoon Choi, Marx’s Das Kapital for beginners, Documentary Comic Book, 2012.
Webography
• http://www.sparknotes.com/philosophy/marx/themes.html
• www.marxists.org
• https://ut01001306.schoolwires.net/cms/lib/UT01001306/Centricity/Domain/379/Gov.%20T
erm%201/Ch%201%20sec%204%20Capitalism%20Socialism%20Communism%20reading.pdf
• www.britannica.com
Andrei Florin Sora
andrei.sora@unibuc.ro
Neoclassical economics.
Thorstein Veblen
Homo Economicus
In 1870s, it became visible a new economic school of
thought.
The founders of this school wrote independently, not knowing
about the others.
• William Stanley Jevons (1835-1882), professor of Political Economy at the

Victoria University of Manchester
1871: The Theory of Political Economy
• Carl Menger (1840-1921), professor of Political Economy at the University

of Vienna (the most influential of the three economists)
1871: Grundsätze der Volkswirthschaftslehre [Principles of Economics]
• Léon Walras (1834-1910), professor of Political Economy at the University

of Lausanne
1874: Éléments d'économie politique pure, ou théorie de la richesse sociale
[Elements of Pure Economics: Or, The Theory of Social Wealth]
Léon Walras’ research encompasses three fields:
- pure economics;
- social economics;
and applied economics.
„Pure economics seeks truth in theory, while applied,

and social economics seeks utility and justice,
respectively, in real life. While Walras succeeded in
theorizing his concept of pure economics with a
general equilibrium analysis ...”.
(Kayoko Misaki, The Concept of Labor Market in Léon Walras’
Pure, Social, and Applied Economics, p. 419
https://journals.openedition.org/oeconomia/3116)
Walras: Lausanne School of
economics/Mathematical School (Vilfredo
Pareto) – general equilibrium theory
Stanley Jevons influenced a lot the economist

Alfred Marshall (Cambridge School of
Economics)
Menger: the Austrian School of Economics

(Friedrich von Wieser, Eugen Böhm-Bawerk)
“ … The price and output of good are
Alfred Marshall determined by both supply and
(1842-1924) demand: the two curves are like
scissor blades that intersect at
equilibrium. …
- English economist. … To Marshall also goes credit for the
- the economy= concept of price elasticity of demand,
evolutionary process which quantifies buyers’ sensitivity to
Book: price”
Principles of https://www.econlib.org/library/Enc/
Economics bios/Marshall.html
(1890)
Main features
The neoclassical economists are in favor of
the economic liberalism (they preach its
superiority).
The neoclassical approach is linked a
lot with mathematics
• Stanley Jevons: 1862. A General Mathematical Theory

of Political Economy – „the start of the mathematical
method in economics” (Irving Fisher).
For the neoclassical economists
the central economic problem of the
society is the organization and the
allocation of scarce resources: we need an
optimal allocation of resources.
For the neoclassical thinkers
Economics is:
“the science which studies human
behavior as a relationship between ends
and scarce means which have alternative
uses.”
Lionel Robbins
(Essay on the Nature and Significance of Economic
Science, 1932)
For the neoclassical economists
there are not social groups or
social classes.
They study society – formed by
individuals, who act rationally.
Neoclassical economics „focuses on supply
and demand as the driving forces behind
the production, pricing, and consumption
of goods and services.”
https://www.investopedia.com/terms/n/n
eoclassical.asp
The markets:
- transactions/changes between rational agents;
- supply and demand: the prices and wages are
flexible and will adjust without state
intervention: there is an equilibrium.
(see: General equilibrium theory, developed by
Walras -... That explains the functioning of
macroeconomics)
The markets need to be free.
The competition is good.
The neoclassical economists refuted
the LTV of David Ricardo.
They agreed more with J.B. Say theory,
that the value of goods is determined
by their utility, adding a very
interesting concept: the marginal
utility.
The Labour Theory of Value (LTV):
• this economic concept is found also in the Adam Smith’s
writings, but it is analyzed and defined by David Ricardo and
especially by Karl Marx;
• tries to explain what is a natural price of a commodity: the
price of a commodity is determined by the hours of labour
expended to produce it (the total amount of social necessary
labour);
• Ricardo’s analysis is limited to useful goods, produced in a free
competition (the element of rent is not included).
In the long run, then, the price of a commodity is determined
solely by costs of production. The price of every commodity
resolves itself into the sum of the natural rates of wages,
profit and rent (Canterbery 1980, p. 54).
16
The theory of utility
• the German economist Hermann Heinrich

Gossen (1810-1858) is credited to be the first
one who elaborated a general theory of
marginal utility in a book, published in 1854,
translated into English in 1983.
The neoclassical approach use a lot
marginal concepts:
- marginal utility;
- marginal cost;
- marginal revenue.
Marginal utility
• Utility: is the benefit or satisfaction derived
by consuming a product (the presumption
that a human being seek to maximize his
personal utility)
• Tries to explain the relative prices;
Jevons, Menger, Walras are viewed
as independent codiscoverers of
the marginal utility.
Marginal utility (how useful it is a
commodity)
In economics, the additional satisfaction or benefit
(utility) that a consumer derives from buying an
additional unit of a commodity or service. The concept
implies that the utility or benefit to a consumer of an
additional unit of a product is inversely related to the
number of units of that product he already owns.
… the marginal utility to a buyer of a product decreases as
he purchases more and more of that product, until the
point is reached at which he has no need at all of
additional units. The marginal utility is then zero.
https://www.britannica.com/topic/marginal-utility
21
Walras: the price of a good is
influenced by its scarcity.
Marginal satisfaction
„Does the second piece of cake make you happy?”
„An important concept is that we make decisions at the margin. Or

put another way – does the second piece of cake make you happy?
One piece of cake may give you a lot of satisfaction (have a high
marginal utility), and you may be willing to pay $ 5 for a single piece.
But just because you like cake, it doesn’t mean you will gain as much
satisfaction from a second piece on the same visit to the café. The
marginal utility of a second piece of cake is much less than that of the
first. If a second piece of cake costs $ 5, but you think it will give you
only $ 1 of utility, you’re likely to leave for another, hungrier day.
In theory, consumers will evaluate the marginal utility of (the
satisfaction they think they will derive from) each unit of consumption.
If the utility is equal to or greater than cost of that unit – then they will
buy.”
(Tejvan Pettinger, Cracking economics…, p. 34).
Marginal cost
• “In economics, the marginal cost of production is the

change in total production cost that comes from making or
producing one additional unit. To calculate marginal cost,
divide the change in production costs by the change in
quantity. The purpose of analyzing marginal cost is to
determine at what point an organization can
achieve economies of scale to optimize production and
overall operations. If the marginal cost of producing one
additional unit is lower than the per-unit price, the
producer has the potential to gain a profit.”
https://www.investopedia.com/terms/m/marginalcostofpr
oduction.asp
Marginal revenue
“Marginal revenue is the increase in revenue that results
from the sale of one additional unit of output. While marginal
revenue can remain constant over a certain level of output, it
follows the law of diminishing returns and will eventually slow
down as the output level increases. Perfectly competitive firms
continue producing output until marginal revenue equals
marginal cost.”
https://www.investopedia.com/terms/m/marginal-revenue-
mr.asp
As J.B. Say before them, the
neoclassical economists
highlighted the role of the
entrepreneur in the economy.
Other concepts/ideas
Selfishness
If individuals maximize utility, firms
maximize profits
(Roy Weintraub).
Savings determine investment?
(true or false?)
The forces of supply and demand
lead to an efficient allocation of
resources? (true or false?)
The economic growth generate
better living conditions.
Thorstein Veblen and the human
behavior
Leisure class = members of the upper

class exempted from productive work
Conspicuous consumption = excessive
consumption, to show social status.
The term neoclassical economics was
coined by Thorstein Veblen in 1900.
Thorstein Veblen
(1857-1929)
- a Norwegian-American sociologist and social scientist;
- Ph.D. in philosophy from Yale (1884); he studied Economics
at Cornel (1891-1892)
- 1892-1906: professor of Economics at a new university:
Chicago;
- 1906-1926: Stanford University, University of Missouri
Veblen:
- influenced by Darwinism, anthropology, psychology
-he was a critic of marginalism
-he was a source of inspiration for the institutional approach
(which emphasizes the significance of institutions in
economic life – they change; how they affect/influence the
individuals).
-He highlighted the role of new technologies and knowledge
in economic growth
He linked the economy with the psychology
Source: https://www.mnopedia.org/person/veblen-thorstein-
bunde-1857-1929
Books
• The Theory of the Leisure Class: An Economic
Study of Institutions (1899)
• The Theory of Business Enterprise (1904)
“In his economic writings Veblen drew a sharp distinction
between workmanship and predation, the former associated
with the technicians and engineers who contributed to efficient
production and the latter benefiting the unproductive financiers
and absentee owners who profited from it. But he was also
highly critical of Marxian socialism, believing that emulation of
one’s social superiors was a stronger source of motivation than
class solidarity. Veblen was equally hostile to neoclassical
economics – a term that he invented – and argued that rational
calculation was less important than habit and custom in
motivating economic behavior, and that economics should base
itself on evolutionary biology, than on mechanics ...”
J.E. King, United States of America, in Vincent Barnett (ed.),
Routledge Handbook of the History of Global Economic Thought,
London and New York, 2015, p. 116.
“Introductory
The institution of a leisure class is found in its best development at the higher
stages of the barbarian culture; as, for instance, in feudal Europe or feudal
Japan. In such communities the distinction between classes is very rigorously
observed; and the feature of most striking economic significance in these
class differences is the distinction maintained between the employments
proper to the several classes. The upper classes are by custom exempt or
excluded from industrial occupations, and are reserved for certain
employments to which a degree of honour attaches. Chief among the
honourable employments in any feudal community is warfare; and priestly
service is commonly second to warfare. If the barbarian community is not
notably warlike, the priestly office may take the precedence, with that of the
warrior second. But the rule holds with but slight exceptions that, whether
warriors or priests, the upper classes are exempt from industrial
employments, and this exemption is the economic expression of their
superior rank…”
Thorstein Veblen, The Theory of the Leisure Class. An Economic Study in the
Evolution of Institutions, 1899,
(http://moglen.law.columbia.edu/LCS/theoryleisureclass.pdf), p. 2
“ … Conspicuous consumption of valuable goods is a means of reputability to the
gentleman of leisure. As wealth accumulates on his hands, his own unaided effort will
not avail to sufficiently put his opulence in evidence by this method. The aid of friends
and competitors is therefore brought in by resorting to the giving of valuable presents
and expensive feasts and entertainments. Presents and feasts had probably another
origin than that of naive ostentation, but they required their utility for this purpose
very early, and they have retained that character to the present; so that their utility in
this respect has now long been the substantial ground on which these usages rest.
Costly entertainments, such as the potlatch or the ball, are peculiarly adapted to serve
this end. The competitor with whom the entertainer wishes to institute a comparison
is, by this method, made to serve as a means to the end. He consumes vicariously for
his host at the same time that he is witness to the consumption of that excess of good
things which his host is unable to dispose of single-handed, and he is also made to
witness his host's facility in etiquette ...”
Thorstein Veblen, The Theory of the Leisure Class. An Economic Study in the Evolution
of Institutions, 1899, (http://moglen.law.columbia.edu/LCS/theoryleisureclass.pdf), p.
36
... spending money to impress the
others people and to ensure that
they are aware of the spender’s
socioeconomic status.
The Theory of the Leisure Class:
An Economic Study of Institutions (1899)
http://moglen.law.columbia.edu/L
CS/theoryleisureclass.pdf
Contents
1. Introductory
2. Pecuniary Emulation
3. Conspicuous Leisure
4. Conspicuous Consumption
5. The Pecuniary Standard of Living
6. Pecuniary Canons of Taste
7. Dress as an Expression of the Pecuniary Culture
8. Industrial Exemption and Conservatism
9. The Conservation of Archaic Traits
10. Modern Survivals of Prowess
11. The Belief in Luck
12. Devout Observances
13. Survivals of the Non-Invidious Interests
14. The Higher Learning as an Expression of the Pecuniary
Culture
„… At the most basic level, the most important element
in the institutionalist approach is the conception of the
economic system as a set of evolving social institutions.
In this, institutions are seen as much more than
constraints on individual action. Social norms,
conventions, laws, and common practices embody
generally accepted ways of thinking and behaving, and
they work to mold the preferences and values of
individuals brought up under their sway …”
Malcolm Rutherford, 2003, p. 362
Homo economicus
(The Economic man)
The term economic man is attributed to
John Stuart Mill: he never used it, but “the
term did emerge in reaction to Mill’s
work.” (Persky, p. 222)
“What is now commonly understood by the term Political Economy is not the
science of speculative politics, but a branch of that science. It does not treat
of the whole of man's nature as modified by the social state, nor of the whole
conduct of man in society. It is concerned with him solely as a being who
desires to possess wealth, and who is capable of judging of the comparative
efficacy of means for obtaining that end. It predicts only such of the
phenomena of the social state as take place in consequence of the pursuit of
wealth. It makes entire abstraction of every other human passion or motive;
except those which may be regarded as perpetually antagonizing principles to
the desire of wealth, namely, aversion to labour, and desire of the present
enjoyment of costly indulgences. These it takes, to a certain extent, into its
calculations, because these do not merely, like other desires, occasionally
conflict with the pursuit of wealth, but accompany it always as a drag, or
impediment, and are therefore inseparably mixed up in the consideration of
it.”
John Stuart Mill, On the definition of Political Economy, and on the Method of
Investigation Proper to It (1836)
https://www.marxists.org/reference/archive/mill-john-stuart/1844/unsettled.htm
Mill’s economic man
“has four distinct interests: accumulation,
leisure, luxury and procreation; more than
his critics maintained, but less than they
might have desired.” (Persky, 223)
Mill wanted to prove that institutions did
matter (Persky, 224).
At the end of the19 thcentury the
economic man had a pejorative
connotation, perceived as
imaginary, selfish, whose main
objective was to became/be
wealth.
The economic man
• Is an economic model, based on the behavior of a single
individual (the representative agent).
• Is an abstraction (of the economists for the average
person).
• Is able to predict the consequences for his choices.
• Is an approach used by many economists.
• Is a caricature of economic theory.
(https://en.wikipedia.org/wiki/Homo_economicus)
• ‟A model of human agency in which the individual actor
maximizes his own well-being given the constraints he
faces.″ (Rodriguez-Sickert, p. 223)
• There is in this model a gender neutral behavior?
Homo economicus is a model in which:
1. people are rational (even hyper-rational), they
are driven by reason (it results that homo
economicus is predictable);
2. people are focused in obtaining
money/wealth, for their own self-interest (they
are selfish);
3. people have full information about their
decisions;
4. people take optimal decisions;
5. people know what they want, their desires don’t
change very often. (https://www.ecnmy.org/learn/you/choices-
behavior/rational-choice-theory-homo-economicus/)
The economic man avoids
unnecessary work by using rational
judgement.
He is seen as rational.
The economic man is in the pursuit
of wealth, but also leisure, luxury
and procreation.
Rational choice theory uses
the economic man – a
representative person.
Rational choice theory, also
called rational action theory or choice
theory is an economic principle (and a
school of thought) that assumes that
individuals always make prudent and
logical decisions that provide them
with the highest amount of personal
utility.
https://www.investopedia.com/terms/r/rational-choice-theory.asp
‟Rational choice theory tries to understand the
economy by thinking about the actions of one individual
and adding up what would happen if everyone acted
like them. To do this, rational choice theorists need to
settle on what the average, or representative person
looks like, and how he or she acts. One of the oldest, and
most popular versions of a representative person, and
the one typically used in rational choice theory, is called
‘economic man’, or homo economicus.”
https://www.ecnmy.org/learn/you/choices-behavior/rational-choice-theory-homo-
economicus/
A good example of homo economicus is
Robinson Crusoe (from the Daniel Defoe’s
novel, 1719) who lived on an island, where
there are no laws.
–
a model economic system (used by
economists – even to develop growth
models -, by professors etc.)
Criticisms of the economic man
model
We are driven by social norms
The anthropologists (Marshal
Sahlins, Marcel Mauss) observed
that traditional societies follow the
patterns of reciprocity (gift
economies)
The humans did not behave in the
same manner.
This model is improbable in the
real life.
People act irrationally
(see: Daniel Kahneman, Amos Tversky.
“Prospect Theory: An Analysis of
Decision Under Risk.”
Econometrica, 47, 1979, p. 263-292)
Homo economicus and Behavioral game
theory
Behavioral game theory
tries to determine how people actually behave in strategic situations
by using experimental settings.
(http://www.siue.edu/~evailat/gt-behavior.htm).
Behavioral game theory is a mathematical approach to modeling
behavior by analyzing the strategic decisions made by interacting
players. Game theory in standard experimental economics operates
under the assumption of the rational homo economicus, while
behavioral game theory extends standard (analytical) game theory by
taking into account how players feel about the payoffs other players
receive, limits in strategic thinking, as well as the effects of learning.
https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-
be/behavioral-game-theory/
Irene C. L. Ng and Lu-Ming Tseng,
"Learning to be sociable: The
evolution of Homo Economicus", in
"Journal of Economics and
Sociology", 67 (2), p. 265-286.
Bibliography
Edward J. O’Boyle, The Origins of Homo Economicus. A note, in Storia del Pensiero Economico, vol. 1,
issue 1, 2009. I used a revised edition (2010) http://mayoresearch.org/wp-
content/uploads/2018/01/ORIGINS-HOMO-ECONOMICUS-mar102010.pdf
Vincent Barnett (ed.), Routledge Handbook of the History of Global Economic Thought, London and
New York, 2015.
E. Ray. Canterbery, A Brief History of Economics. Artful Approaches to the dismal science, World
Scientific Publishing, 2001.
Katrine Marçal, Who cooked Adam Smith’s dinner. A story about women and economics, Pegasus
Books, 2017
Kayoko Misaki, The Concept of Labor Market in Léon Walras’ Pure, Social, and Applied Economics, in
Œconomia – Histoire/Epistémologie/Philosophie, 8-4, 2018, p. 419-438.
Irene C. L. Ng, Lu-Ming Tseng, Learning to be sociable: The evolution of Homo Economicus, in Journal
of Economics and Sociology, 67 (2), p. 265-286,
https://www.researchgate.net/publication/4750978_Evolution_of_Homo_Economicus.
Joseph Persky, The ethology of Homo Economicus, in Journal of Economic Perspectives, vol. 9,
number 2, spring 1995, p. 221-231.
Tejvan Pettinger, Cracking economics. You, this book and 3,000 years of financial theories, Octopus
Publishing Book, 2017.
Carlos Rodriguez-Sickert, Homo economicus, in Jan Peil, Irene van Staveren, Handbook of Economics
and Ethics, Cheltenham/Northampton, Edward Elgar, 2009, p. 223-229.
Malcolm Rutherford, American Institutional Economics in the Interwar Period, in Warren J. Samuels,
Jeff Biddle, John B. Davis, A Companion to the History of Economic Thought, Blackwell Publishing Ltd, 2003,
p. 360-376.
Thorstein Veblen, The Theory of the Leisure Class. An Economic Study in the Evolution of Institutions,
1899 (http://moglen.law.columbia.edu/LCS/theoryleisureclass.pdf)
Webography
• https://www.econlib.org/library/Enc/bios/Marshall.html
• https://www.britannica.com/topic/marginal-utility
• https://www.exploring-
economics.org/en/orientation/neoclassical-economics/
• www.investopedia.com
• https://www.libertarianism.org/encyclopedia/menger-carl-
1840-1921
• https://www.mnopedia.org/person/veblen-thorstein-bunde-
1857-1929
See discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/4981727
Adam Smith, Behavioral Economist
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Journal of Economic Perspectives—Volume 19, Number 3—Summer 2005—Pages 000 – 000
Adam Smith, Behavioral Economist
Nava Ashraf, Colin F. Camerer and

George Loewenstein
I n The Wealth of Nations, published in 1776, Adam Smith famously argued that
economic behavior was motivated by self-interest. But 17 years earlier in 1759,
Smith had proposed a theory of human behavior that looks anything but self-
interested. In his first book, The Theory of Moral Sentiments, Smith argued that behavior
was determined by the struggle between what Smith termed the “passions” and the
“impartial spectator.” The passions included drives such as hunger and sex, emotions
such as fear and anger, and motivational feeling states such as pain. Smith viewed
behavior as under the direct control of the passions, but believed that people could
override passion-driven behavior by viewing their own behavior from the perspective of
an outsider—the impartial spectator—a “moral hector who, looking over the shoulder
Fn1 of the economic man, scrutinizes every move he makes” (Grampp, 1948, p. 317).1
1
A long-standing dispute has raged over whether Adam Smith’s view of human motivation as expressed
in The Theory of Moral Sentiments complements or contradicts the view of human motivation expressed in
The Wealth of Nations. Although much has been written about “das Adam Smith problem” of reconciling
these texts, most modern Smith scholarship asserts that there is no essential contradiction between the
texts. As the editors of the Glasgow Edition of the Works and Correspondence of Adam Smith edition
of The Theory of Moral Sentiments write, “the so called ‘Adam Smith problem’ was a pseudo-problem based
on ignorance and misunderstanding. Anybody who reads The Theory of Moral Sentiments, first in one of
the earlier editions and then in edition six, will not have the slightest inclination to be puzzled that the
same man wrote this book and The Wealth of Nations, nor to suppose that he underwent any radical
change of view about human conduct.”
y Nava Ashraf is Assistant Professor in the Negotiation, Organizations and Markets Group at
Harvard Business School, Cambridge, Massachusetts. Colin Camerer is Rea A. and Lela G.
Axline Professor of Business Economics, California Institute of Technology, Pasadena, California.
George Loewenstein is Professor of Economics and Psychology, Department of Social and Decision
Sciences, Carnegie-Mellon University, Pittsburgh, Pennsylvania. Their e-mail addresses are
具ashraf@fas.harvard.edu典, 具camerer@hss.caltech.edu典 and 具gl20@andrew.cmu.edu典, respectively.
2 Journal of Economic Perspectives
The “impartial spectator” plays many roles in The Theory of Moral Sentiments.
When it comes to choices that involve short-term gratification but long-term costs,
the impartial spectator serves as the source of “self-denial, of self-government, of
that command of the passions which subjects all the movements of our nature to
what our own dignity and honour, and the propriety of our own conduct, require”
(Smith, 1759 [1981], I, i, v, 26), much like a farsighted “planner” entering into
conflict with short-sighted “doers” (Shefrin and Thaler, 1981). In social situations,
the impartial spectator plays the role of a conscience, dispassionately weighing the
conflicting needs of different persons. Smith (I, i, v, 29) recognized, however, that
the impartial spectator could be led astray or rendered impotent by sufficiently
intense passions: “There are some situations which bear so hard upon human
nature that the greatest degree of self-government . . . is not able to stifle, alto-
gether, the voice of human weakness, or reduce the violence of the passions to that
pitch of moderation, in which the impartial spectator can entirely enter into them.”
Adam Smith’s psychological perspective in The Theory of Moral Sentiments is
remarkably similar to “dual-process” frameworks advanced by psychologists (for
example, Kirkpatrick and Epstein, 1992; Sloman, 1996; Metcalfe and Mischel,
1999), neuroscientists (Damasio, 1994; LeDoux, 1996; Panksepp, 1998) and more
recently by behavioral economists, based on behavioral data and detailed observa-
tions of brain functioning (Bernheim and Rangel, 2004; Benhabib and Bisin, 2004;
Fudenberg and Levine, 2004; Loewenstein and O’Donoghue, 2004). It also antic-
ipates a wide range of insights regarding phenomena such as loss aversion, will-
power and fairness (V. Smith, 1998) that have been the focus of modern behavioral
economics (see Camerer and Loewenstein, 2004, for a recent review). The purpose
of this essay is to draw attention to some of these connections. Indeed, as we
propose at the end of the paper, The Theory of Moral Sentiments suggests promising
directions for economic research that have not yet been exploited.
Preferences and the Dual-Process Perspective
The Theory of Moral Sentiments is packed with insights about preferences, using
the dual-process framework of the passions and the impartial spectator. Some of
the discussion relates to aspects of individual preference and judgment: what we
would today call loss aversion, intertemporal choice and overconfidence. Other
parts of the discussion focus on preferences that arise in social contexts: altruism,
fairness and how they together generate trust in markets.
Loss Aversion
Approximately 200 years before Kahneman and Tversky (1979) identified the
regularity in choices that has come to be known as “loss aversion,” Adam Smith
(1759, III, ii, 176 –177) displayed an acute awareness of loss-aversion as an experi-
ential phenomenon: “Pain . . . is, in almost all cases, a more pungent sensation than
the opposite and correspondent pleasure. The one almost always depresses us
much more below the ordinary, or what may be called the natural state of our
Ashraf, Camerer and Loewenstein 3
happiness, than the other ever raises us above it.” Smith also drew attention to what
behavioral economists would now refer to as the underweighting of opportunity costs
relative to out-of-pocket costs. Smith (II, ii, ii, 121) notes that “breach of property,
therefore, theft and robbery, which take from us what we are possessed of, are
greater crimes than breach of contract, which only disappoints us of what we
Fn2 expected.”2
Modern research has not only produced a wealth of evidence supporting both
of these effects, but brain imaging technology has shown that that losses and gains
are processed in different regions of the brain (O’Doherty, Kringelback, Rolls,
Hornak and Andrews, 2001), suggesting that gains and losses may be processed in
qualitatively different ways. Moreover, a body of literature has shown that when loss
aversion is combined with narrow bracketing of decisions—the tendency to take
decisions one at a time without considering the big picture—its effects are evident
in asset returns (Benartzi and Thaler, 1997), labor supply (Camerer, Babcock,
Loewenstein and Thaler, 1997), the reluctance to sell losing stocks and houses
(Odean, 1998; Genesove and Mayer, 2001) and large gaps between buying and
selling prices (Kahneman, Knetsch and Thaler, 1990).
Intertemporal Choice and Self-Control

Intertemporal choice offers a straightforward application of Smith’s dual
process model. Smith (1759, IV, ii, 273) viewed the passions as largely myopic: “The
pleasure which we are to enjoy ten years hence, interests us so little in comparison
with that which we may enjoy to-day, the passion which the first excites, is naturally
so weak in comparison with that violent emotion which the second is apt to give
occasion to, that the one could never be any balance to the other, unless it was
supported by the sense of propriety.” “The spectator,” in contrast, “does not feel the
solicitations of our present appetites. To him the pleasure which we are to enjoy a
week hence, or a year hence, is just as interesting as that which we are to enjoy this
moment” (IV, ii, 272).
The struggle between the myopic passions and farsighted impartial spectator
appears later in behavioral economics in the form of a “doer” and “planner” in
Shefrin and Thaler (1981; see also Benabou and Pyciak, 2002; Bernheim and
Rangel, 2002). What are now called “quasi-hyperbolic discounting models” (Laib-
son, 1997), in a similar spirit, have also been used by Angeletos, Laibson, Tobac-
man, Repetto and Weinberg (2001) to study life cycle saving, by O’Donoghue and
Rabin (1999) to study life cycle temptation and by Ashraf, Karlan and Yin (2004) to
Fn3 study demand for committed savings in the Philippines.3 Moreover, recent research
2
Thaler (1980), who first drew attention to the underweighting of opportunity costs relative to
out-of-pocket costs, attributes it to loss aversion; opportunity costs are treated as foregone gains, rather
than as losses.
3
Using the terms of Laibson (1997), these are sometimes called ␤ – ␦ discounting models. Mapped
roughly onto Smith’s terms, ␤ is the weight on all future outcomes, so that 1/␤ represents the relative
strength of the passions that prefer immediate rewards, and ␦ is a conventional discount rate. Smith’s
passage above suggests that the impartial spectator uses ␦ ⫽ 1.
in which decision-makers’ brains were scanned while they made intertemporal

choices vindicates Smith’s view that decisions that provide the potential for plea-
sures which we may enjoy today activate emotional regions of the brain in a way that
decisions involving only delayed outcomes do not (McClure, Laibson, Loewenstein
and Cohen, 2004).
Overconfidence
Adam Smith (1776, I, x, 1) wrote about the “over-weening conceit which the
greater part of men have of their own abilities,” a pattern of judgment that
influences preferences over risky choices. According to Smith, “the chance of gain
is by every man more or less over-valued, and the chance of loss is by most men
under-valued, and by scarce any man, who is in tolerable health and spirits, valued
more than it is worth.”
Smith’s “overweening conceit” reappears in modern behavioral economics in
the form of executive “hubris” that motivates the failure of so many mergers (Roll,
1986) and other business failures (Camerer and Lovallo, 1999) and can be derived
theoretically from evolutionary considerations (Waldman, 1993; Compte and Pos-
telwaite, 2005). Moreover, Smith’s caveat that overconfidence only applies to those
in “tolerable health and spirits” anticipates modern studies showing that people
who are not in tolerable health and spirits—specifically, the clinically depressed—
are the exceptional ones among us who are not optimistic wishful thinkers (for
example, Taylor and Brown, 1994).
Altruism
Judging from the extensive treatment that Adam Smith gave to sympathy in The
Moral Sentiments, he viewed it as one of the more important passions. However, he
also viewed sympathy as an extremely unreliable guide to moral behavior, some-
times falling short and sometimes exceeding what is morally required.
Smith argued that natural sympathy often falls short of what is morally justified
by mass misery. In one evocative passage he noted the striking lack of sympathy that
a resident of Europe would be likely to have of an earthquake that eliminated the
population of China. After expressing “very strongly his sorrow for the misfortune
of that unhappy people,” Smith (1759, III, iii, 192–193) commented, such an
individual would likely “pursue his business or his pleasure, take his repose or his
diversion, with the same ease and tranquility as if no such accident had hap-
pened . . . . If he was to lose his little finger to morrow, he would not sleep to-night;
but, provided he never saw them, he will snore with the most profound security over
the ruin of a hundred millions of his brethren.” Although modern media may help
to bring vivid images of distant tragedies into people’s homes (like the 2004 Indian
Ocean tsunami), thus reducing social distance, such imagery does so in a highly
selective fashion that only amplifies Smith’s concerns. Recent incidents caught on
videotape capture the public’s sympathies, but more serious problems that society
may have adapted to, or that don’t lend themselves to vivid imagery, are as likely as
they were in Smith’s time to elicit a paucity of sympathy.
Adam Smith, Behavioral Economist 5
In other cases, Smith believed that people experience sympathy that is com-
pletely out of proportion to the plight of the individual one feels sympathetic
toward. “We sometimes feel for another, a passion of which he himself seems to be
altogether incapable,” Smith (1759, I, i, i, 7– 8) wrote. “What are the pangs of a
mother, when she hears the moanings of her infant, that, during the agony of
disease, cannot express what it feels? In her idea of what it suffers, she joins, to its
real helplessness, her own consciousness of that helplessness, and her own terrors
for the unknown consequences of its disorder; and out of all these, forms, for her
own sorrow, the most complete image of misery and distress. The infant, however, feels
only the uneasiness of the present instant, which can never be great.” Smith adds dryly
that “we sympathize even with the dead,” who themselves experience nothing.
If humans were under the control of their passions, one could expect to
observe extreme callousness alternating with remarkable generosity, with little logic
or consistency governing the transitions. This tendency is manifested in the “iden-
tifiable victim effect,” in which people sympathize more with a known victim than
with a statistical likelihood that a not-yet-known person who is likely to be victimized
(Schelling, 1984; Small and Loewenstein, 2003). In the political economy, fluctu-
ations in sympathy probably influence public policies, creating huge inconsisten-
cies in the implicit value that different policies place on saving a human life (Tengs
and Graham, 1996).
Controlled economics experiments show some fluctuations in expressed sym-
pathy, too. For example, in “dictator game” experiments, people simply divide a
known sum of money between themselves and another person. Absent any knowl-
edge about the target recipient, people offer an average of 20 percent (offers of
nothing and half are most common; Camerer, 2003, chapter 2). When dictators
know the recipient is the Red Cross, rather than a fellow student, the average
allocation doubles (Eckel and Grossman, 1996). When the recipient stands up and
gives a few facts about him- or herself, the average amount given goes up to half and
the variance increases—as if dictator givers generally sympathize when they know a
little about somebody, but also make snap character judgments of who is deserving
and who is not (Bohnet and Frey, 1999).
These fluctuations in sympathy are moderated, according to Smith, by the
impartial spectator. Returning to the case of devastation in China, Smith (1759, III,
iii, 192) asks whether his representative European would be willing to “sacrifice the
lives of a hundred millions of his brethren” to save the injury to his little finger.
Smith concludes that the answer is “No”: “Human nature startles with horror at the
thought, and the world, in its greatest depravity and corruption, never produced
such a villain as could be capable of entertaining it.” The impartial spectator
recognizes (194) that “we are but one of the multitude, in no respect better than
any other in it.”
Fairness
Although Smith viewed altruism as a somewhat erratic force, he believed that
other motivations played a more reliable civilizing role. Chief among these other
motivations was fairness. Smith (1759, II, ii, iii, 125) writes: “Nature has implanted
in the human breast, that consciousness of ill-desert, those terrors of merited
punishment which attend upon its violation, as the great safe-guards of the associ-
ation of mankind, to protect the weak, to curb the violent, and to chastise the
guilty.” Smith believed this natural sentiment toward fairness was the source of the
virtue of justice, which he saw as the “main pillar that upholds the whole edifice. If
it is removed, the great, the immense fabric of human society . . . must in a moment
crumble to atoms.” Moreover, Smith (129) viewed the desire for justice as some-
thing primal: “All men, even the most stupid and unthinking, abhor fraud, perfidy,
and injustice, and delight to see them punished. But few men have reflected upon
the necessity of justice to the existence of society, how obvious soever that necessity
may appear to be.”
Modern research suggests that an innate concern for fairness extends even
beyond humans to other primates. Capuchin monkeys will reject small rewards
when they see other monkeys they perceive as undeserving getting more than they
do (Brosnan and de Waal, 2002). Cotton-top tamarins will pull a lever to give
marshmallows (which tamarins love) to other tamirins who have altruistically
rewarded them with marshmallows in earlier lever-pulls more often then they will
pull levers to tamarins who were not previously altruistic (Hauser, Chen, Chen and
Chang, 2003).
The impartial spectator plays an essential role in fairness, by causing individ-
uals to internalize other people’s sense of fairness by viewing their own actions
through the eyes of an objective observer. Smith (1759, III, iii, 195) argues: “There
is no commonly honest man who does not dread the inward disgrace of such an
action.”
Altruism, Fairness and Market Interactions

Market interactions require, as Boulding (1969, p. 5) points out, “a minimum
degree of benevolence even in exchange without which it cannot be legitimated
and cannot operate as a social organizer.” Arrow (1974) also notes the importance
of trust as a lubricant of exchange, economizing on the costs of gathering infor-
mation about trading partners. For Adam Smith, a mixture of the concerns over
fairness (enforced by the fear of negative appraisal by the impartial spectator) and
altruism played an essential role in market interactions, allowing trust, repeated
transactions and material gains to occur.
Smith described the beginnings of market exchange thus: “in a nation of
hunters, if any one has a talent for making bows and arrows better than his
neighbours he will at first make presents of them, and in return get presents of their
game. By continuing this practice he will live better than before and will have no
occasion to provide for himself, as the surplus of his own labor does it more
effectually” (Smith, 1762–1763, 220).
As Jeffrey Young (1997, p. 62) remarks, “[T]he other regarding principles of
human nature which bind people together in society are a necessary condition for
the emergence of the exchange of surplus produce amongst neighbours. Smith
uses the moral side of human nature to help him explain why voluntary agreement
and not violence takes place when these two hunters meet.”
In experiments, norms of positive reciprocity often create trust where it has no
business flourishing (according to the textbook view that emphasizes moral hazard
when contracts are incomplete)—among strangers in one-shot transactions. For
example, in simple “trust game” experiments, subjects decide how much money to
put in a mailbox, and their investment is tripled (representing a socially productive
return). A second subject takes the tripled money out and can keep it all, or repay
some to the original investor. Most experiments show that the second subject does
repay money, even in one-shot games that control for anonymity, and they typically
repay just enough to make the investment worthwhile (Berg, Dickhaut and Mc-
Cabe, 1995; Camerer, 2003, chapter 2). Experiments run in Russia, South Africa
and the United States showed that many trustors do not even expect to make
money, but are motivated to “invest” by pure “warm-glow” altruism (Ashraf, Bohnet
and Piankov, 2003). Simple models that incorporate a preference for fairness or
equality have been developed and applied to a broad range of games (Rabin, 1993;
in this journal, Fehr and Gächter, 2000).
Furthermore, trust, as measured in simple surveys, is strongly correlated with
economic growth (Knack and Keefer, 1997) (though the direction of causality is
unknown). An anthropology experiment involving 15 small-scale societies found
that in societies in which people buy and sell more often in markets, offers in
Fn4 ultimatum bargaining games4 are, perhaps surprisingly, closer to equal sharing
than in less market intensive societies (Henrich, Boyd, Bowles, Gintis, Fehr and
Camerer, 2004). Adam Smith would not be surprised by the finding that markets
are often built on motivations of fairness, altruism and trust—rather than on
self-interest alone—yet this mixture of motivations remains a challenge to the
modern economics profession.
Consumption and Its Discontents
In The Theory of Moral Sentiments, Smith argues that much economic activity is
the product of a forecasting error—people’s illusion that acquiring wealth, posses-
sions and status will make them permanently happy. In fact, Smith (1759, III, iii,
209) argued, both pleasure and pain are often transient: “By the constitution of
4
An “ultimatum game” has two players. The first player is given a sum of money. The player is instructed
to offer some share of that money to the second player. If the second player accepts the division, then
both players keep the money. If the second player rejects the division, both players receive zero. In a
one-shot play of the game, if players are rational and self-interested, then the first player should offer the
second player only a minimal amount, which the second player will accept because it is better than
nothing. But when the game is actually played, small offers are commonly rejected (even for high
stakes), and even in a one-shot game, it is common for the first player to offer a 50:50 split of the original
stake. For expositions of the ultimatum game in this journal, see Thaler (1988) and Camerer and Thaler
(1995).
human nature, agony can never be permanent.” Following a calamity, he noted, a

person “soon comes, without any effort, to enjoy his ordinary tranquility.” Smith
further observed that people not only adapt quickly to circumstances, but under-
estimate such adaptation and, as a result, often overestimate the duration of happy
and sad feelings:
A man with a wooden leg suffers, no doubt, and foresees that he must
continue to suffer during the remainder of his life, a very considerable
inconveniency. He soon comes to view it, however, exactly as every impartial
spectator views it; as an inconveniency under which he can enjoy all the
ordinary pleasures both of solitude and of society . . . . He no longer weeps,
he no longer laments, he no longer grieves over it, as a weak man may
sometimes do in the beginning.
Considerable modern research backs up Smith’s contentions. For example, Fred-

erick and Loewenstein (1999) show the short-term impacts on happiness of both
positive and negative outcomes. Indeed, Smith’s example of the man with a
wooden leg foreshadows a classic study by Brickman, Coates and Janoff-Bulman
(1978) showing that the happiness of paraplegics and lottery winners tends to
revert surprisingly close to a normal baseline after their respectively tragic and
wonderful life-changing events. A large body of contemporary psychological re-
search also suggests that people typically believe that pleasure and pain will last
longer than they actually do (for example, Wilson and Gilbert, 2003).
At numerous points, Smith (1759, IV, i, 259) expresses skepticism about the
pleasure derived from possessions: “How many people ruin themselves by laying out
money on trinkets of frivolous utility?” Smith further believed that the primary
purpose of wealth-accumulation beyond a minimal level was not for consumption,
but for the social attention. “What are the advantages which we propose by that
great purpose of human life which we call bettering our condition?” Smith asked (I,
iii, ii, 70 –71). “To be observed, to be attended to, to be taken notice of with
sympathy, complacency, and approbation, are all the advantages which we can
propose to derive from it. It is the vanity, not the ease, or the pleasure, which
interests us.”
Smith devotes numerous pages of The Moral Sentiments to describing ways in
which the anticipation of status gained was much better than the realization, since
pursuit of status can backfire. Indeed, he argues (1759, IV, i, 260 –261), even the
wealthy and great eventually recognize, albeit long after they can remedy the
situation, how little utility the goods they struggled so hard to procure have actually
provided:
Through the whole of his life he pursues the idea of a certain artificial and
elegant repose which he may never arrive at, for which he sacrifices a real
tranquility that is at all times in his power, and which, if in the extremity of old
age he should at last attain to it, he will find to be in no respect preferable to
that humble security and contentment which he had abandoned for it. It is
then, in the last dregs of life, his body wasted with toil and disease, his mind
galled and ruffled by the memory of a thousand injuries and disappointments
which he imagines he has met with from the injustice of his enemies, or from
the perfidy and ingratitude of his friends, that he begins at last to find that
wealth and greatness are mere trinkets of frivolous utility, no more adapted
for procuring ease of body or tranquility of mind, than the tweezer-cases of
the lover of toys.
Smith would have done well to heed his own advice. He worked himself so sick in
drafting The Wealth of Nations that in 1773, he sent David Hume a letter making
Hume his literary executor in case he should die before publishing any of his
manuscripts (though as it turned out, Smith outlived Hume by 14 years).
Because the rich pursue ends that fail to make them happy, Smith (1759, IV,
i, 265) believed that they end up being no more happy than the poor: “In ease of
body and peace of mind, all the different ranks of life are really upon a level, and
the beggar, who suns himself by the side of the highway, possesses that security
which kings are fighting for” and “in what constitutes the real happiness of human
life, [the poor] are in no respect inferior to those who would seem so much above
them.” Indeed, a large body of modern research on the determinants of happiness
has quite consistently found surprisingly weak connections between happiness and
wealth or income, especially over time or across countries (Easterlin, 1974; Diener,
and Biswas-Diener, 2002; Frey and Stutzer, 2002).
Yet while believing that consumption of goods, as well as wealth and greatness,
all provide only “frivolous utility,” Smith believed that the productivity of market
economy is driven by this “deception”—the misguided belief that wealth brings
happiness. As Smith (1759, IV, i, 263–264) notes, “[I ]t is this deception which
rouses and keeps in continual motion the industry of mankind. It is this which first
prompted them to cultivate the ground, to build houses, to found cities and
commonwealths, and to invent and improve all the sciences and arts, which
ennoble and embellish human life; which have entirely changed the whole face of
the globe.”
Indeed, Adam Smith even invokes the “invisible hand”—a term that may be the
the most prominent legacy of his work, although it occurs only once in The Wealth
of Nations and only once in The Theory of Moral Sentiments—to argue that as the
wealthy seek out goods and status that ultimately bring them little pleasure, they
Fn5 inadvertently end up promoting the good of the poor.5 Here is Smith’s invisible
hand (1759, IV, i, 264) in The Theory of Moral Sentiments:
5
For discussion in this journal of the context for the “invisible hand” in The Wealth of Nations, see Persky
(1989). For a discussion in this journal of the “invisible hand” in the context of The Theory of Moral
Sentiments and Adam Smith’s ethical system, see Evensky (1993).
“In spite of their natural selfishness and rapacity, though they mean only their
own conveniency, though the sole end which they propose from the labours
of all the thousands whom they employ be the gratification of their own vain
and insatiable desires, they divide with the poor the produce of all their
improvements. They are led by an invisible hand to make nearly the same
distribution of the necessities of life which would have been made had the
earth been divided into equal portions among all inhabitants; and thus,
without intending it, without knowing it, advance the interest of the society.”
While perhaps overstating the case, when Smith refers to the equitable distribution
of the necessities of life he is arguing that the distribution of things that actually
bring happiness to people is far more equitable than the distribution of tweezer-
cases and other “trinkets of frivolous utility.” That the things that really matter for
happiness are more equitably distributed than those that don’t may help to explain
why cross-sectional differences in income seem to bring such small increments in
happiness.
Unexploited Ideas
Adam Smith’s Theory of Moral Sentiments is not only packed with insights that
presage developments in contemporary behavioral economics, but also with prom-
ising leads that have yet to be pursued. Here we enumerate four of them: the desire
to be well-regarded by posterity; negative reactions to being misjudged; mistaken
belief in the objectivity of tastes; and sympathy for the great and rich.
A desire to be well-regarded by posterity certainly drives the efforts of many creative
professionals—artists, writers, architects and academic economists. As Smith (1759,
I, ii, 169) comments, “Men have voluntarily thrown away life to acquire after death
a renown which they could no longer enjoy. Their imagination, in the meantime,
anticipated that fame which was in future times to be bestowed upon them.” A
concern for one’s reputation to posterity might be thought of as reserved for the
richest and most powerful members of society, many of who do seem to care about
it based on the named buildings in universities and hospitals, but it is not limited
to the rich. Economists have studied the bequest motive, which is no doubt partly
fueled by this motive, but they have not yet explored what may be more potent
effects of posterity on current decisions—perhaps starting with the decision to have
children or to encourage grandchildren.
Economics generally assumes that people care about outcomes, not about the
source of outcomes. However, Adam Smith pointed out that people have negative
reactions to being misjudged that go beyond the outcome. Smith (1759, III, ii, 174)
drew special attention to one particular situation—that of “unmerited reproach,”
which, he noted, “is frequently capable of mortifying very severely even men of
more than ordinary constancy . . . . An innocent man, brought to the scaffold by
the false imputation of an infamous or odious crime, suffers the most cruel
misfortune which it is possible for innocence to suffer.” Resesarch on “procedural

justice” shows a substantial concern for whether a trial was fair, for example, as well
as for the outcome of the trial (Lind and Tyler, 1988). One study showed that the
propensity to file wrongful-termination lawsuits after firing is correlated with work-
ers’ perceptions of whether their firing was just (controlling for expected payoffs
from litigation; Lind, Greenberg, Scott and Welchans, 2000). This insight has
interesting implications for principal-agent theory. Smith’s insights suggest that
goodwill could be seriously eroded if a principal penalizes an agent who produced
a low level of output due to bad luck rather than poor effort.
Ample evidence— beginning with the huge cross-cultural differences in tastes
for food—suggests that tastes are subjective, based on a culture, familiarity and so
on. However, Smith argued that people underestimate such influences, having
instead a mistaken belief in objectivity of tastes. Smith (1759, V, i) commented, “[F]ew
men . . . are willing to allow, that custom or fashion have much influence upon
their judgments concerning what is beautiful, . . . imagine that all the rules which
they think ought to be observed in each of them are founded upon reason and
nature, not upon habit or prejudice.” Ross and Ward (1996) refer to the tendency
for people to think their own tastes and beliefs are more legitimate and more widely
shared than they really are as naı̈ve realism. Naı̈ve realism has potentially important
implications for a variety of economic issues: gift-giving; negotiations in which both
parties are likely to think that their own preferences are shared by the other side
more than they are; principal-agent situations in which the principal has to set
rewards for the agent; and sales and marketing (Davis, Hoch and Ragsdale, 1986).
It can also lead to cultural conflict. If those in one society believe that eating
monkey is inherently disgusting, then we are likely to disparage monkey-eaters,
rather than treating the tastes of those who disagree as akin to tastes for opera or
smelly cheese.
Finally, contrary to the sensible notion that one should sympathize with those
less fortunate than oneself, Smith (1759, iii, ii, 72–73) argued that there is a natural
tendency to experience sympathy for the great and rich:
When we consider the condition of the great, in those delusive colours in

which the imagination is apt to paint it, it seems to be almost the abstract idea
of a perfect and happy state. It is the very state which, in all our waking dreams
and idle reveries, we had sketched out to ourselves as the final object of all our
desires. We feel, therefore, a peculiar sympathy with the satisfaction of those
who are in it. We favour all their inclinations, and forward all their wishes.
What pity, we think, that any thing should spoil and corrupt so agreeable a
situation! It is the misfortunes of kings only which afford the proper subjects
for tragedy.
Smith’s description recalls the outpouring of grief after the accidental deaths of
Princess Diana and John F. Kennedy Jr. Popular Magazines like People and US, and
similar highly rated TV shows, are filled with stories about where athletes and stars
shop, what they eat and wear and the ups and downs of their love lives. Fascination
with celebrity of this sort also has a direct economic effect through the use of
celebrities as marketing vehicles.
Smith believed both that this sympathy for the rich was a form of corruption
based on a moral mistake, and also that it provided an important underpinning for
social stability. Smith (1759, I, iii, iii, 84) described the moral mistake in this way:
“[T]hat wealth and greatness are often regarded with the respect and admiration
which are due only to wisdom and virtue; and that the contempt, of which vice and
folly are the only proper objects, is most unjustly bestowed upon poverty and
weaknesses, has been the complaint of moralists in all ages.” Indeed, Smith further
argued that the “disposition to admire, and almost to worship, the rich and the
powerful, and to despise, or at least, to neglect, persons of poor and mean
condition . . . is . . . the great and most universal cause of the corruption of our
moral sentiments.” However, Smith (I, iii, iii) also held that this sympathy was
“necessary both to establish and to maintain the distinction of ranks and the order
of society.” This sympathy for the rich may help to explain one of the puzzles of
capitalism: the failure of the majority democratic societies to impose extremely
high taxes on the richest members. Smith’s perspective suggests that maybe people
don’t want to tax the rich because average citizens don’t want to “spoil and corrupt”
what they perceive as the “agreeable situation” of the rich!
Conclusion
Adam Smith’s actors in The Theory of Moral Sentiments are driven by an internal
struggle between their impulsive, fickle and indispensable passions, and their
impartial spectator. They weigh out-of-pocket costs more than opportunity costs,
have self-control problems and are overconfident. They display erratic patterns of
sympathy, but are consistently concerned about fairness and justice. They are
motivated more by ego than by any kind of direct pleasure from consumption, and,
though they don’t anticipate it, ultimately derive little pleasure from either. In
short, Adam Smith’s world is not inhabited by dispassionate rational purely self-
interested agents, but rather by multidimensional and realistic human beings.
y Thanks to Kim Border for an apt Adam Smith quotation; to Eric Angner, James Hines,
Jesse Shapiro, Jeremy Tobacman, Timothy Taylor and Michael Waldman for helpful com-
ments; and to Ed Glaeser and Andrei Shleifer for encouragement.
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Learning to Be Sociable The Evolution of Homo Economicus
Author(s): Irene C. L. Ng and Lu-Ming Tseng
Source: The American Journal of Economics and Sociology , Apr., 2008, Vol. 67, No. 2
(Apr., 2008), pp. 265-286
Published by: American Journal of Economics and Sociology, Inc.
Stable URL: https://www.jstor.org/stable/27739704
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Learning to be Sociable
The Evolution of Homo Economicus
By Irene C. L. Ng and Lu-Ming Tseng*
Abstract. This article studies the evolution of the economic man

(Homo economicus) from its original conception until the current day.
By analyzing the discourse of economic articles, we provide a chro
nological account of the economic man's intellectual and philosophi
cal development as it evolved from what we term the philosophical
age to the neoclassical age and finally to the strategic age. The article
then shows how the economic man in the strategic age is slowly
finding convergence with the sociological man (Homo sociologicus). A
reconciliation of the two sapiens is difficult. However, recent papers
on behavioral and experimental economics provide insights into a
possible reconciliation. Our study argues that the purpose of the
sociological man is to identify who he is, how he interacts with people
within a society, and the antecedents to such behaviors. Homo eco
nomicus, however, has no overarching philosophical assumptions on
what he values. The objectives of each discipline are different and,
once one is mapped onto the other, it is unclear if there is truly any
tension between them.
*Dr. Irene C L. Ng is an Associate Professor of Marketing at the School of Business

and Economics, University of Exeter. Correspondence address: School of Business
and Economics, University of Exeter, Streatham Court, Rennes Drive, Exeter EX4 4PU,
UK; Tel: +44 (0) 1392 263250, Fax: +44 (0) 1392 263242; e-mail: irene.ng?
exeter.ac.uk. Dr. Ng's interest is in pricing, game theory, services, and economic
thought. Her book The Pricing and Revenue Management of Services was published
by Routledge in September 2007. Lu-Ming Tseng is a doctoral student at the School
of Business and Economics, University of Exeter. Correspondence address: School of
Business and Economics, University of Exeter, Streatham Court, Rennes Drive, Exeter
EX4 4PU, UK; Tel: +44 (0) 1392 2?3217; e-mail: l.tseng@ex.ac.uk.
American Journal of Economics and Sociology, Vol. 67, No. 2 (April, 2008).
? 2008 American Journal of Economics and Sociology, Inc.

81.196.215.38 on Fri, 06 Nov 2020 11:33:43 UTC
266 The American Journal oj Economics and Sociology
Introduction
This article studies the evolution of the economic man {Homo eco
nomicus) from its original conception by John Stuart Mill and Adam
Smith until the current day. By analyzing the discourse of economic
articles, we provide a chronological account of economic man's
intellectual and philosophical development as it evolved from what
we term the philosophical age to the neoclassical age and finally to
the strategic age.
The philosophical age saw the formation of Homo economicus and
the development of his ideological foundations, including his most
enduring axioms of self-interest and rational behavior. As the eco
nomic man journeyed into neoclassical economics, he became an
analytical tool for the prediction of outcomes and a model for the
self-interested utility maximizer operating with finite resources within
a society. The neoclassical age also saw spinoffs of the economic man
to behavioral, contractual, and social dimensions as criticisms were
heaped upon its original concept. Our study discusses the criticisms
and shows how, as the economic man enters the strategic age, issues
such as social norms, interactive choice, learning, and cooperation
take center stage as economists strive for a more robust formulation of
Homo economicus.
The article then shows how the discourses in economics are
allowing Homo economicus to find convergence with the sociologi
cal man {Homo sociol?gicas) as the former loses its philosophical
and ontological assumptions. We survey the literatures of phenom
enology, social constructionism, and role theoiy to illustrate the
entity of Homo sociologicus, and examine the fundamental and theo
retical issues that arise when attempting to reconcile the two. It is
difficult to reconcile the two sapiens because the study of econom
ics views man as atomistic and self-interested, while sociology views
man as one whose identity and actions are defined by his role in
society. However, game theoretic models provide insights into a
possible reconciliation; that is, if the payoffs of economic man's
choice are not based on his own preference or his own judgment
but are determined by how he is able to predict the collective

81.196.215.38 on Fri, 06 Nov 2020 11:33:43 UTC
Evolution q/*Homo Economicus 267
choice. Then the question of how he devotes his social intelligence

to anticipate what the collective choice would be becomes the focus
of consideration in maximizing his payoffs. In this case, while the
motivation is self-interest, the economic man must become more
socially intelligent through learning and understanding the roles of
various players in society. Therefore, interactive choice and iterated
models of learning and thinking could be viewed as antecedents to
role behavior expounded in sociology. The difference between
Homo economicus and Homo sociologicus is therefore not about the
assumptions of human nature, contrary to popular belief. As we
argue here, the evolved Homo economicus in the strategic age does
not have any assumptions about human nature?merely that an
individual is self-interested?nor has he any overarching philosophi
cal assumptions on what he values. Hence, we claim that an indi
vidual can be Homo economicus in terms of his behavior while
retaining the ontological assumptions of Homo sociologicus.
II
Literature Review
Homo economicus is a cornerstone on which economic theories are

built, and its concept was thought to be submitted by John Stuart
Mill in 1836 (Persky 1995). For Mill, economic man is "solely as a
being who desires to possess wealth, and who is capable of judging
the comparative efficacy of means for obtaining that end" (1995:
321). Although Mill pointed out that the central idea of economic
man is the link between efficient means and wealth, the meaning of
wealth is not merely in attaining material pleasures. Other goals
such as accumulation, leisure, luxury, and procreation are also
embedded in the pursuit of "wealth" (Persky 1995). Therefore, the
economic man is one who judges the comparative efficacy of means
to obtain wealth, as well as one who seeks to maximize pleasure.
Adam Smith's seminal work (1776) suggested that by merely acting
on his own self-interest, he can unintentionally promote public
interests. Yet, his freedom of pursuing self-interested gains is not
unbounded (Grampp 1948) because a free market can work well
only when the divisions of labor and unfettered competition are

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268 The American Journal of Economics and Sociology
built on a civilized society (Coase 1976; Kaufman 2002). This is

similar in tone to Hobbes's (1947) work insofar as he posited that
human nature is self-interested and some people are thought to be
"sorely profit pursuing" (1969), which could be taken as an early
germ of the Homo economicus (Moss 2002). However, Hobbes's
view is different from classical economics in terms of spontaneous
social order. In classical economics, social order could be achieved
by the "invisible hand." Hobbes felt that sovereign power and pun
ishments are necessary to achieve order and peace.
As economic man journeyed into neoclassical economics, maximiz
ing wealth and pleasure took on the more generic term of maximizing
utility, often described as benefits for the individual. Hence, as Mises
([1949] 1996) noted, human action (and therefore economic theory)
can only be understood when a prioristic views of human nature (as
self-interested) is mapped onto the actions. This is similar to Robbins
(1932, 1945). In An Essay on the Nature and Significance of Economic
Science, Robbins claimed: "Economics is the science which studies
human behavior as a relationship between ends and scarce means
which have alternative uses" (Robbins 1945:16). He deemed that
economic reasoning is a neutral process, which means that economics
is about what is rather then what ought to be and that, as a science,
economic theoiy is applicable to various situations depending on the
extent to which concepts accurately reflect the actual situation.
Robbins therefore makes a case for the kind of deductive methodol
ogy that makes economics different from other natural and social
sciences.
When such a deductive methodology is employed in economic
analysis, the economic man is usually assumed to be perfectly ratio
nal. He (the economic man) is able to predict every possible
outcome for all his choices, and his decision will be the one that
will maximize his utility (Weale 1992; Schneider 1974). Without com
plications such as personality, value, belief, and emotions, economic
man's behavior can be explained by his own self-interested orien
tation. Other elements such as social norms are akin to rules of the
game?economic man maximizes his utility within these rules. In
economics, therefore, the definition of the game rules can define the
boundary of economic man's behavior, but it does not change the

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Evolution o/Homo Economicus 269
fact that economic man will always be self-interested. Even sacrifice

is driven by self-interest. Although some may argue that the concept
is unrealistic, it served as a powerful analytical tool in neoclassical
economics (Knight 1941).
Economic man is not without his critics, especially when empirical
observations of human behavior seem to contradict the predictions
(Beckert 1996; Mueller 2004). Some argue that the concept of eco
nomic man is too narrow, as self-interest is not the only motivation
and people are often driven by social norms as well (Dahrendorf
1968). Others claim that the ability to learn quickly is suspect, as
people often repeat the same mistakes. Simon (1957, 1972, 1976)
pointed out that human beings' rationalities are bounded. Seeing man
as omniscient is unrealistic and cannot credibly explain real phenom
ena. In addition, Kahneman and Tversky (1979) found that behaviors
are not always consistent with rational economic theory. Their studies
showed that most people will act irrationally, but lean toward loss
aversion. Benartzi and Thaler (1995) proposed the concept of "myopic
loss aversion" to illustrate that people will weigh a unit of loss to be
greater than a unit of gain. Benartzi and Thaler's (1995) work brought
forward the need for psychological consideration in traditional eco
nomics. Some argue that economists draw too many conclusions from
mere behavior and ignore the antecedents to such behaviors. The
theory of planned behavior (Ajzen 1991) suggests that one's behavior
is determined by one's intention, and one's intention is determined by
one's attitudes toward the behavior, subjective norms, and the per
ception of difficulty in performing the behavior. Thus, it isn't enough
to merely predict outcomes based on behavior; we must also explain
why people behave the way they do.
This orientation was also proposed by Mises ([19491 1996), who felt
that most important theorems in economics could be explained by the
assumption that human behavior is purposeful. Although his view of
human nature is similar to Robbins's (1945), Mises argued that econo
mists should deal with the real actions of real people and not build
their theories on the basis of some Utopian economic man (Kirzner
1976, 2000). In Human Action, Mises ([19491 1996: 236-237) disagreed
with the assumption of rationality. In his view, human beings are
individually different and always have weaknesses.

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270 The American four nal of Economics and Sociology
Further, some scholars do not take self-interest as a unique moti

vation for human behavior. For instance, Thompson's (1971) research
into the behavior of the English crowd in the 18th century found that
it wasn't only "rebellions of the belly" that caused the food riots; the
notion of legitimation to the riots also played a dominant role. In
addition, other issues such as moral codes (Sen 1982), social inter
dependence (Frank 1985), social relations (Granovetter 1985), insti
tutions (Bowles 1998), and emotion (Haidt 2003) are seen to be
associated with human behavior. Consequently, a self-interested ori
entation seems inadequate to explain outcomes.
As the pressure on the economic man to provide better prediction
of outcomes increased, economists moved into the strategic age
through the use of game theoiy. Game theoiy studies the optimal
choices made by individuals when the payoff to the individual is not
a constant but depends on the choices of other individuals (Spiegler
2005). Given the individuals' rational choices, an equilibrium outcome
is predicted (Nash 1951). Interactive choice thus is a central issue in
game theoiy (Harsanyi 1995), and the economic man has evolved into
a strategic being. For instance, the well-known prisoner's dilemma
game shows how a player makes his or her decision by taking the
other player into account. A cooperative game shows how players
make binding commitments to achieve pareto-optimality (Rasmusen
2001), and a bargaining model with incomplete information shows
how players' initial beliefs about other players will affect their choices
(Rubinstein 1985). Players need to form beliefs when information
structure is incomplete. In this case, interactive choice is built upon
Bayes's rule. The equilibrium that is achieved by updating beliefs
through Bayes's rule (i.e., Bayesian equilibrium) is also a crucial
aspect of game theoiy (Binmore 1992) because it shows that rational
players will make choices in light of new observations and informa
tion about others' actions (Mariotti 1995).
As game theory developed into more sophisticated repeated games
and evolutionary models (e.g., Samuelson 2002), the development of
the economic man concept became more robust in predicting out
comes. Kreps et al. (1982) indicated that even if the information is not
complete, players could be cooperative if they believed that other
players could obtain benefits from the cooperation and reciprocate. In

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Evolution of Homo Economicus 271
addition, Conlon (2003) provided a game to show that people could

be cooperative for an extremely long time and that the cooperation
does not break down easily. Thus, in contrast to the purely "Crusoe
like" neoclassical economic man, the strategic economic man makes
interactive choices given the actions of other players, rules, and
payoffs in a given context.
Through game theory, models have shown that economic man
could be altruistic and cooperative, imitating and learning from others.
Banerjee (1992) demonstrated through a sequential decision model
how each decisionmaker who observes the decisions made by pre
vious players will imitate others if he or she thinks the decisionmaker
will become better off by imitating. Besides this, two leading models
of learning?Roth and Erev's (1995) reinforcement learning model and
Fudenberg and Levine's (1995) belief-based learning model?revealed
that learning is motivated by self-interest (Feltovich 2000). In rein
forcement learning models, players are not required to get other
players' information because the cost of obtaining the information
might be too high. Thus, a player does not need to form beliefs of
what other players will do, but would adjust his or her behavior
according to the payoffs the player previously earned. If these payoffs
are desirable, the player will repeat the same behavior, but if they are
undesirable, the player should adjust his or her behavior through the
learning process. In contrast to the reinforcement learning models,
Fudenberg and Levine (1995) indicated that the histoty of an oppo
nent's plays and players' memory should be taken into account; when
players hold beliefs of what other players might do, they will choose
strategies on the basis of their beliefs and expected payoffs. Similar to
Roth and Erev's (1995) model, a player's belief will be reinforced if his
or her personal belief is consistent with other players' behaviors. Thus,
the evolved economic man is able to adjust his decision making by
learning.
In addition, models of the economic man in the strategic age have
investigated other issues, such as value, social relationships, and roles
(Burns and Gomolinska 2000). Today, game theorists' construction of
the economic man is far more complex, integrating elements such as
social relationships, roles, values, norms, and beliefs through eco
nomic models.

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272 The American fournal of Economics and Sociology
III
Social Issues and Economic Man
In economics, norms or social customs are often depicted as game

rules that constrain the behavior of economic man. For instance,
Akerlof (1980) incorporated elements such as reputation, obedience,
and disobedience toward the community's code of behavior into the
utility function and explained why some social customs could exist
while others could not. As for norms, neoclassical economists
assume that norms will not affect people's decisions if they are
irrelevant to behaviors. Nevertheless, some researchers have indi
cated that social norms will affect people's social behaviors
(Kallgren, Cialdini, and Reno 2000). Today, more economists study
the relationship between norms and economic actions. For example,
Lindbeck (1997) introduces social norms into the utility function
instead of assuming that norms constrain behaviors. He proposes
that social norms could be taken as rewards, such as the rewards
derived from being approving or disapproving of others, or even in
terms of bringing about feelings of pride or shame. Some organi
zational behaviors can be explained by using the utility function as
well. Akerlof and Kranton (2000) found that besides monetary
incentives, employees' identities with the organization play a domi
nant role in work incentives.
From the examples above, we can see that the components of the
utility function of Homo economicus have been expanded. Economists
do not take monetary benefits as the only components in the utility
function; a content state of life and well-being is often achieved
through economic means. Furthermore, incorporating social norms
into utility functions does not contradict the self-interested assump
tion, since economic man still acts as a utility maximizer. In other
words, economic man adheres to norms not because there is intrinsic
worth within the norms that would override his utility function, but
because by doing so he will increase his utility. Yet, no matter how
many social elements go into the utility function, economic man is still
self-interested. This is in contrast to the view of sociologists, as
presented below.

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IV
Homo sociologicus
Elster (1989) stated that one of the most significant divisions in social
science is the concepts of Homo economicus and Homo sociologicus.
The concept of economic man stresses individualistic preferences,
while the concept of Homo sociologicus stresses the social notion of
norms (Weale 1992). Economic man is unencumbered by any per
sonal relations (Grampp 1948), while Homo sociologicus is far more
interdependent (Durkheim 1893; Smelser and Swedberg 1994). Eco
nomic man is assumed to be perfectly rational, while Homo sociologi
cus is not all rational (Boudon 1982) and has to be a part of society
(Durkheim 1956). Economic man is driven by self-interest, whereas
Homo sociologicus tries to fulfill his social role (Hirsch, Michaels, and
Friedman 1990; Weale 1992). Thus, attributes such as interdepen
dence, bounded rationality, learning, construction by society, and
being norms-, roles-, and relations-driven draw us into an impression
of traditional Homo sociologicus.
In the beginning of the 20th century, the development of social
science depended largely on positivism. Scholars who held positivistic
beliefs claimed that serious scientific arguments should be testable and
falsifiable. Sociological methodology should rely on empirical means
so as not to allow common sense or personal judgment to bias the
research. Furthermore, the objectives of doing research should be
producing knowledge, explaining phenomena, and predicting pos
sible outcomes, not producing personal arguments. Husserl (1948),
however, argued against this and took the position that human con
sciousness was the starting point to understanding objects. He claimed
that the conscious experience is intentionally directed toward the
object of its meaning (the reflection of the object), and that the
meaning is always charged with humans' conscious experiences
(Hazelrigg 1986). Only after meaning has been formed will humans
be able to reconstitute the same object in their consciousness, and the
whole object world is constituted by the communication between the
self's conscious experiences and the conscious experiences of others.
Hence, an individual's perception of the reality of one object could be
experienced differently by others. Yet, although the original conscious

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experience of each person might be different, it could become similar

through communicating, learning, and sharing. In short, conscious
ness is a starting point through which communication enables human
beings to perceive the world they are living in and therefore hold
similar standpoints about an object. This point of view was incorpo
rated into constructionism, and constructionists propose that the
nature of the world is constituted by people's consciousness and
experiences.
In constructionism, social reality is therefore constructed by the
people who are in turn constructed by the existing society. Therefore,
the process of social constructionism is similar to historical analysis,
where people can be defined in terms of previous social processes
(Hacking 1999). During this dynamic process, they are produced by
the previous society and they will reproduce another society that will
be inherited and reproduced by them and others. Reality and knowl
edge are also derived from this process, and other conceptions such
as class, roles, institutions, nations, communication, and economic
behaviors are all socially constructed. Hence, Homo sociol?gicas is a
product of social processes and also is an agent who is able to
reconstruct social processes. During this construction process, certain
roles will be gradually given to Homo sociologicus that will further
define how he changes and reconstructs the society. Role is thus an
important mechanism in social construction because role defines how
people interact with others, who they can interact with (which might
determine what they can learn), and how they interpret and recon
struct this world. Thus, role could define and confine the means and
scope of social construction. However, the function of role is very
subtle. Turner (1956) defined role as a set of behaviors that could be
regarded as a meaningful unit; the meaningful unit makes the linkage
between behaviors and roles that could be understood or could be
expected by others. Dahrendorf (1968: 6-7) further defined Homo
sociologicus as the bearer of socially predetermined roles. By obeying
the obligations of the roles and by learning their expectations, Homo
sociologicus is able to become a part of society and build his social
relationships with others. The meaning of role therefore relates to a
particular status, position, and value in society. Furthermore, the
concept of role focuses on man's participation in an interactive

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process (Parsons and Shils 1951), not merely the status or positions of
the role. Hence, it is more relevant to discuss how a role interacts with
other roles than to discuss the status or position of the roles. In
addition, a role is a set of norms (Turner 1956), and norms guide what
Homo sociologicus should do and how he interacts with others (Thoits
1992). Although Homo sociologicus may not be willing to fulfill that
role, he cannot relinquish his role without paying a price because
roles will create expected modes of behavior for Homo sociologicus,
and there will be penalties if he fails to fulfill these expectations.
Briefly speaking, Homo sociologicus is neither purely self-interested
nor perfectly rational; he is driven by social forces that are often
beyond his control (Abell 1991).
The concept of Homo sociologicus is widely used in sociological
research today. Much of the research relates to the concept of role. For
example, Callero (1985) conducted an empirical study of 658 blood
donors, and found that the persons with high blood donor identity
salience defined themselves as regular blood donors, had stronger
relationships with blood donation, and donated blood more often.
Another example is DeGarmo and Forgatch's (2002) research on the
impact of role identity salience to the family interaction in stepfamilies.
Their research showed that negative interaction with a spouse who
has a highly spousal (role) identity salience increases psychological
distress, as opposed to when the spouse has low spousal identity
salience. The central issue in Callero's (1985) and DeGarmo and
Forgatch's (2002) works is that people's actions significantly relate to
their role identity salience.
Apart from role identity salience, social identity theory is another
issue that discusses the relationship between the individual's behav
ior and social structure. However, social identity theory focuses on
social categories such as nationality or marital status (Hogg, Terry,
and White 1995). In social identity theory, the individual is defined
by the social category to which he or she belongs. Thus, an indi
vidual has no identity except for membership within that category.
Furthermore, a person's social identity comes with perceived mem
bership in the social category (Hogg and Vaughan 2002), and that
social category provides stereotypical conduct rules and evaluation
for each member. Social identity therefore affects the individual's

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behavior, and individuals can thus be described by their social

identity.
In summary, the concept of role identities and social identity implies
that the individual's behavior is affected by social structure, and that
individuals themselves can be categorized by these social categories
(Stets and Burke 2000). This, then, is the sociological man whose
identity is defined by social elements such as roles. The concept of
sociological man has had no significant change, even in modern times.
As Black (2000) has commented, modern sociology is still classical
sociology.
As with economic man, Homo sociologicus cannot eschew his
philosophical problems. The first criticism of traditional Homo socio
logicus is on his propensity for not being self-interested. For example,
how does Homo sociologicus reconcile his self-interest and his social
role? When Homo sociologicus is struggling with his self-interest and
the obligation of his role, which one will he choose, and to what
extent will his choice be categorized? Since Homo sociologicus may
not be solely pursuing his selfish interests (Hirsch, Michaels, and
Friedman 1990), his behavior is far more complex and unpredictable.
Wrong (I96I) criticized the conception of man in modern sociology as
being "oversocialized," implying that man in sociology is overwhelm
ingly driven by rules. Furthermore, will the oversocialized conception
possess enough power in explaining human behaviors? For econo
mists, normative expectations can be explained by using the assump
tions of self-regarding, optimally chosen individual actions (Abell
I99I). Some scholars such as Kahn, Lamm, and Nelson (1977) and
Messick and Sentis (1983) claim that self-interest is still a motivation
when facing different norms. Although Dahrendorf (1968) claims that
Homo sociologicus keeps his nature yet retains his freedom to act in
a self-interested manner, there seems to be no decision criterion to
show how Homo sociologicus makes choices between norms and
individual self-interest.
Another criticism is on the explanatory power of Homo sociologicus
in economic actions. Can the concept of Homo sociologicus provide
better explanations for economic actions than the economic man
does? The sociologist Granovetter (1985), who reviewed classical
economics, neoclassical economics, new institutional economics,

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transaction cost economics, and sociology, propounded that people's

behavior is deeply affected by their social relations but that economic
actions are embedded within social relations. Nonetheless, the socially
constructed sociological man is far more complex than the economic
man and is therefore difficult to model. Incorporating one more social
element (e.g., roles) into the concept of economic man will result in
the whole structure of economics becoming different and extremely
complicated.
Learning to be Sociable
As Hirsch, Michaels, and Friedman (1987: 322) put it: "Th

difference between economics and sociology concerns th
tions about human nature." Economic man is driven by s
but the behavior of Homo sociologicus is determined by h
Can economic man and Homo sociologicus be reconc
cussed previously, economists such as Becker (1976, 198
(1997), Akerlof (1980), and Akerloff and Kranton (2000) h
economic methodologies to research into social issues. N
economic man and sociological man seem unable to b
because the root of economics is the self-interest of eac
regardless of his identity. Thus, the atomistic nature of
man is a contradiction to the concept of Homo sociologi
man and society are inseparable.
The reason that the sociological man holds a fair amou
macy comes from the critique of the economic man. W
rating social values, norms, and customs into an individ
function or game rules is convenient, explaining why t
values, norms and customs matter in the first place is m
atic. Also, it is left to the judgment of the modelers to
values, norms, and customs should be included in the util
hence, such elements may not be derived from the societ
but be arbitrarily chosen. In other words, the economic
indeed, economics as a tool, is without values or judgmen
spirit of Robbins (1945) and Mises ([19491 1996). Like mathem
is merely a tool to analyze economic society; the elements of

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society values is fed into it so that outcomes may be predicted, using

an algorithm that is based on rationality and self-interest. Therefore, as
a tool, economics is not inadequate to make judgments on what is best
for society, since what is best is predicated on what elements have
been brought in. Noneconomic researchers often misunderstand the
philosophy of economics, believing that it assumes monetary and
material benefits as the ultimate goal. In truth, economic philosophy
is even less than that.
A. Role Behavior and Self-Lnterest
Role behavior can be explained within self-interest economic behav

ior, even without factoring specifics into the utility function or game
rules. In Keynes's (1936) beauty contest, the best payoffs come from
someone who is able to predict the candidate who everyone else liked
and does not rely on his or her own judgment. Keynes wrote:
It is not a case of choosing those [faces] which, to the best of one's
judgment, are really the prettiest, nor even those which average opinion
genuinely thinks the prettiest. We have reached the third degree where we
devote our intelligences to anticipating what average opinion expects the
average opinion to be. And there are some, I believe, who practice the
fourth, fifth and higher degrees (1936: 156).
The meaning behind this gamble, as Keynes (1936) addressed, is that

players' choices are nothing to do with their own preferences but
relate to collective choices and their ability to predict or choose the
collective choice. In other words, social consideration goes into game
theoiy framework, and we see why an economic man could follow
collective choices or norms without contradicting his self-interest
assumptions.
Interactive choice and iterated models of learning and thinking
(Camerer and Ho 1999; Camerer, Ho, and Chong 2003, 2004) could
also be viewed as antecedents to role behavior expounded in sociol
ogy. In contrast to economic models that incorporate social or ethical
values within their utility functions, different types of seemingly
socialized behavior can result from the individual's perceived differ
ences in the degree of rationality of other players when the collective
choice is necessaiy to maximize the payoff of individuals. Thus,

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players need to devote their social intelligence to anticipating what

others might do on the basis of their historical or cultural choices.
When the best outcome can only be achieved by having a choice that
is predicated on collective choices, a rational player who makes his or
her choice according to the collective choice may be seen as playing
a "role" while retaining a self-interested orientation.
B. The Self in Self-interest
Homo economicus assumes that man is atomistically self-interested

with distinct and discrete boundaries (an obvious positivistic inclina
tion), an assumption that sociology researchers consider na?ve. Hence,
economists are prone to analyzing self-interest atomistically, with the
actions of the self interacting with or being driven by society (e.g.,
games, and social values in utility function, respectively). Sociologists,
on the other hand, see the self and the society as inseparable. Could
there be an argument for the "self" in the self-interested economic
man, as that which is embedded within the society according to
sociologists?
If so, it can be argued that the inseparability of self and society
is not in conflict with the notion of the economic man. While soci
ology is concerned with the role and identity of man, economics, on
the other hand, is not. Economics does not provide the philosophi
cal notion of what man is. One could then argue that man, when
interacting with or being driven by society, even in an atomistic
fashion, "loses" his atomistic nature and becomes sociological man;
that is, a self defined by society. Thus, the outcomes predicted by
economists do not provide inferences on the philosophical assump
tions of man, but merely on how he behaves driven by what he
values. By bringing social norms and values into the individual's
utility function, it can be argued that this could be the same as the
inseparability of self and society, particularly when how self and
society interacts is not specified in sociology. By looking at the
choice of an individual who seems like he is performing a "role,"
although it could be that the interactive choice is motivated by
self-interest, an individual is revealed as both Homo economicus and
Homo sociologicus.

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For example, Cooley's (1902) "looking-glass self" theoiy described

the self as not being first individual and then social, but that self and
society are inseparable, with that unity achieved through communi
cation. In Cooley's work, selves cannot be isolated from society
because self builds society, and society forms a mind of self. As
Cooley said: "There is no sense of I without its correlative sense of
you, or he, or they" (Cooley 1902: 182).
While sociologists such as Cooley are interested in the definition of
self, economists are more concerned with the choices made by the
individual. In other words, it's all well and good how an individual
perceives himself or herself but, ultimately, how does the individual
make the choice, given his or her identity and the scarcity of resources?
Economics does not have a definition for self. It merely suggests a tool
based on self-interest, and it has left the researcher free to decide what
exactly that self is interested in. In addition, modern interactive
economics is not keen to understand the definition of the self but to
predict what this "self" would do. It provides the methodology for
understanding that interaction so that outcomes can be predicted. Since
sociology does not provide answers to how self and society interacts,
it cannot be said that the two (self and society) are irreconcilable.
Finally, the purpose of the economic man is to predict his behavior
and look at the interactive choices he has to make within the society
in which he functions, considering the scarcity of resources. The
purpose of the sociological man is to identify who he is, how he
interacts with people within a society, and the antecedents to such
behaviors. Homo economicus therefore has no overarching philo
sophical assumptions on what he values, nor are economists inter
ested to seek his ontology. The objectives of each discipline are
different and, once one is mapped onto the other, it is unclear if there
is truly any tension between them.
VI
The Future of Economic Man
Our article investigates the discourse of economic articles over the

past century. Homo economicus, which began with philosophical
assumptions of man, has evolved into an algorithm to predict

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outcomes dependent on the economist's assumption of what the

individual values. Homo economicus, therefore, has lost his philo
sophical and ontological origins and could even be a sociological
man, in terms of how he behaves. The difference between Homo
economicus and Homo sociologicus is therefore not the assumptions of
human nature, contrary to Hirsch et al. (1990). Indeed, economics, as
far as the modern economic game-playing interactive man is con
cerned, does not have any assumptions about human nature; it merely
presumes that an individual is self-interested.
A further point requires consideration. When making an interactive
choice, the concept of the "other" in the interaction is also up for
negotiation. Interactive choices in game theory assume the "other" as
one who is identical to the individual and who holds the same utility
function to be true. This does not have to be; that is, game theoretic
axiom of i ^ j could be taken much more broadly than it is currently,
and different players could have different utility functions in an
interactive game. Clearly, equilibrium outcomes would change and be
vastly different, but this would not contradict the basic assumptions of
the algorithm.
By using the concept of economic man, economists have success
fully explained how free-rider problems can be alleviated by clarifying
property rights (Olson 1965) and why good cars would be driven from
the market and only lemons would be left (Akerlof 1970). Other issues
such as differentiating insurance premiums (Rothschild and Stiglitz
1976), governance structures (Williamson 1975, 1979, 1985), and
public choice theory (Brennan and Buchanan 1988) are also based on
the idea of economic man, a testimony to the robustness of the
concept. However, it is important to recognize that Homo economicus
is an algorithm in which the inputs have to be philosophically,
sociologically, and culturally grounded. Hence, excursions into
anthropology, psychology, sociology, and philosophy could be vety
helpful in order for economists to obtain a more comprehensive view
of human behavior.
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Chicago-Kent Law Review
Volume 77
Article 13
Issue 1 Symposium: Theory Informs Business Practice
October 2001
Why Some Countries Are Rich and Some Are

Poor
Douglass C. North
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WHY SOME COUNTRIES ARE RICH AND SOME ARE POOR
DOUGLASS C. NORTH*
INTRODUCrION
My subject is why some countries are rich and why some are
poor. Let me begin with some dry facts. If you look at the way we
economists measure the well-being of people in different countries,
you find we usually talk about per capita income: we take the income
of a country and we divide it by the population and come up with a
number. This is not the best way to measure well-being, but it gives
you some notion of the enormous disparities. Using these measures,
we find that in the United States per capita income is around $25,000
per person; in Mozambique it may be $120 per person. Now, that is an
extraordinary difference. In fact, it is hard to imagine how anybody
could live on $110 or $120 a year.
The data, of course, are misleading. It is clear that we understate
the well-being of people in Mozambique-whether we overstate the
well-being of people in the United States is something else. But
understated or not, if you visit a third world country, it is easy to see
that we are talking about something very real. We are talking about
human beings living in dire straits that are staggering compared to
standards of living in high-income countries. It is not that we do not
have poor people in our country; we do, and that is another problem.
But on average, the level of material well-being is enormously
different as between the developed countries, such as the United
States, Japan, and the countries of Western Europe, and countries
like Haiti and the countries of sub-Saharan Africa.
* Spencer T. Olin Professor in Arts and Sciences, and professor of history and a fellow of
the Center in Political Economy, Washington University in St. Louis; Bartlett Burnap Senior
Fellow, Stanford University's Hoover Institution. In 1993 Professor North was awarded the
Nobel Memorial Prize in Economics. He is a fellow of the American Academy of Arts and
Sciences and has served as president of the Economic History Association and the Western
Economic Association.
Professor North presented this lecture on October 15, 1999 at Chicago-Kent College of
Law as Chicago-Kent's 1999-2000 Centennial Lecture.
319
CHICAGO-KENT LAW REVIEW [Vol 77:319
Five or six hundred years ago, everyone was poor by present

standards, but the difference between countries was much smaller.
What has happened is that some countries, beginning with the
Netherlands, then England, then some of Western Europe, and then
the overseas colonies of Britain, developed. The gap between those
countries and others widened and is still widening today. In fact,
living standards in sub-Saharan Africa have been falling for most of
the last twenty-five years, and so the disparities not only are immense
but are getting worse.
Now this is puzzling; and it is puzzling because we know what
makes countries rich and what makes them poor. There is no secret
to it at all. What makes a country rich, very simply, is productivity.
And what makes a country productive is that output per unit of input,
to use the technical jargon of economics, keeps increasing. Achieving
productivity growth is easy. Productivity growth comes from
investing in new technology, investing in human capital for people -
that is, getting people to be better educated, to be better trained, and
to have better knowledge. It comes from putting those together and
putting them to work.
In fact there is a new area in economics called the new growth
economics, which has with great sophistication -all kinds of
mathematical, wonderful formulas-shown sources of economic
growth. The question is, if we know about what makes countries rich
and what makes them poor, why do we have poverty in the world?
The new growth economics does not answer that question. Indeed,
this is one of the reasons why I continue to be such a critic of
economics: if we all know what the causes of economic growth are
and yet cannot produce it, something very fundamental is missing.
I
That fundamental thing is incentives. If you go to a poor country
and you look at the incentives for people to invest in knowledge, to
invest in new technology, to build efficient firms, they are not there. I
will give you a simple illustration. The first time I went to Peru, in the
1980s, I asked a simple question to start with. Peru, like lots of places
in the world, produces textiles. I went to a textile factory and asked
how long it would take to get a spare part for a particular machine.
The factory owner said that if he did it legally it would take about
eighteen months to obtain the permits and go through the necessary
red tape. If he did it illegally and paid three or four bribes to the
2001] WHY SOME COUNTRIES ARE RICH AND SOME ARE POOR
customs officials, he could probably get it within two weeks. The

bribes, you will notice, are the real cost of transacting and they turned
out to be big numbers. The reason I use this particular illustration is
because a factory in Tampa, Florida, gets the same spare part in
twelve hours.
Another test is how long it takes to get a telephone installed. In
most Third World countries it takes anywhere from twenty to forty
months, and the telephone may not work when it is installed. You
can get telephones installed in a few weeks in the United States. In a
poor country, the cost of transacting and the cost of simply getting
and producing things is enormously high.
From there we ask why the cost of transacting is so high, and we
find that it all goes back to the rules of the game that define the way
the society works-the institutions. We must, then, understand what
institutions are, and why they work or do not work. Institutions are,
first, the formal rules of the game. You are familiar with rules, laws,
constitutions: they are written parts of the game, and they define
formally the way the game is played. But institutions are much more
than formal rules; they are also informal norms of behavior. We live
by informal constraints, conventions, codes of conduct. Informal
norms are a lot tougher to deal with because it is hard to define them,
hard to measure them, and hard to see how they work. And,
particularly, it is hard to change them. You can change formal
rules-and I will come back to this at some length-by getting the
political system to enact a new law. But how do you change norms of
behavior, or codes of conduct? It is very hard to do, but is also
extremely important. Institutions, thought of as just being the formal
rules of the game, do not produce results very well. To take one
simple illustration: when the Latin American countries became
independent from Spain in the early nineteenth century, most of them
adopted the United States Constitution or something very close to it.
They adopted, in other words, the same formal rules. The results,
however, were very different from those in the United States.
There were two reasons for the different results. First, the in-
formal norms were very different. Second, the enforcement
characteristics-what it is that institutions are-were different. To
the extent that the formal rules and informal norms are not enforced,
obviously they are ineffective. If you have a rule on the books that
says nobody should steal, but you do not have any enforcement
mechanisms, then the rule is ineffective. When you want to know
what the consequences of a set of institutions are, you are interested

in the interaction between formal rules, informal norms, and the
enforcement characteristics of both.
If you have on the books formal rules that define the way that
the game should be played, well-defined property rights and so on,
but the informal norms of behavior run counter to them, the odds are
that those institutions are not going to work very well. When you
have a set of institutions that work well in producing the outcomes
you want, they are a mixture of formal rules that are complemented
by norms of behavior and codes of conduct that extend those formal
rules into everyday contexts, as well as enforcement characteristics
that largely ensure that the rules and norms are lived up to.
For an analogy we can look at professional football. Professional
football has formal rules that define what you can and cannot do.
There are also informal norms-codes of conduct you should live up
to, such as not deliberately trying to maim the quarterback on the
other team. And there are enforcement characteristics: referees
attempt to see that those rules are lived up to. Now, anybody who
knows and watches professional football, or hockey-hockey is worse
than football-or basketball, knows that you sometimes win by
evading the rules, by massacring the quarterback on the other
football team and so on. If the refereeing is bad, if the informal
norms are such that you really do try to maim the quarterback all the
time, or if the formal rules can be evaded easily, the game will be of a
very different sort than a game in which you have well-defined rules
that are enforced fairly effectively.
II
You can think of the way in which institutions determine how a
political and economic system works as being analogous to my
description of how professional football is played. Therefore, of
course, we want to have a set of institutions-rules of the game-that
encourage people to be productive and creative. The question is, how
do we get institutions that will provide incentives for people to be
productive and creative? To find out, we must look at why human
beings believe what they believe and how those beliefs get translated
into institutions. After all, institutions are really the embodiment of
the beliefs of those individuals who are in the position to make the
rules of the game-both the formal and the informal ones.
20011 WHY SOME COUNTRIES ARE RICH AND SOME ARE POOR
So we ought to ask ourselves not only how do beliefs evolve, but

how do they affect the way the game is played and what determines
the way the game is played. Max Weber asked himself this question
in the late nineteenth and early twentieth centuries. In his very
famous work, The ProtestantEthic and the Spiritof Capitalism, Weber
argued that Protestantism, as it evolved from Luther and Calvin,
provided a set of attitudes and beliefs that were consistent with what
he called capitalism. While it did not turn out to be that simple, there
was a lot to it, particularly the notion that beliefs historically have for
the most part had their origins in religion. Indeed, the religious
beliefs of Confucianism in Asia and Christianity or Judeo-Christian
traditions in Western Europe were carried over into other kinds of
beliefs.
But the issue was broader than that. Empirical research testing
the degree to which Protestantism was coextensive with the
development of efficient markets has found that there certainly was a
correlation in England and the Netherlands, both of which were early
developers of modern economic growth. However, many other
places in the world that had Catholicism-such as the Italian city-
states Venice and Genoa-also developed efficient markets. So it
was a broad set of religious beliefs that evolved as the Judeo-
Christian tradition from about the ninth and tenth centuries on, which
gradually, in different settings, provided a framework that was
conducive to efficient markets. What leads to the rise of religions?
How do beliefs change? I still have not answered these questions.
What we are interested in is where the beliefs come from, why they
have the characteristics they do, how they form, and how they change
over time.
Ongoing experiments contrast belief systems that have evolved
in sub-Saharan Africa and in Asia. Experimenters have found that in
sub-Saharan Africa there has evolved a set of beliefs in redistributive
norms-that is, beliefs that assets ought to be divided equally among
people. Why did such a belief system evolve? The closest we yet
have to an answer is that there is such an enormous contrast between
performance characteristics of people in different settings that the
acquisition of assets cannot be traced directly to deliberate effort. In
such settings it was widely held that if you got rich it was because of
luck and not because of skill; norms tend to evolve that lucky people
ought to share their luck with everybody else. This is in contrast to
the Judeo-Christian tradition or the Protestant ethic of Weber, which
viewed outcomes such as getting rich as the product of hard work,

prudence, and the like.
We are beginning to understand the reasons for widely varying
norms of behavior, for different belief systems and their impact.
They have a direct impact: ultimately, people's beliefs determine the
performance of an economy, and the degree to which we can create
and put into place efficient institutions.
Economics does not have much to say about beliefs. In eco-
nomics we assume everyone is rational. By rational, in its pure sense,
we mean that people know what is in their self-interest and act
accordingly. If that were so, we would live in a very different world.
Instead, societies have stagnated; people have gotten poorer, not
better off; chaos and confusion and war have led to losers over and
over again throughout history. It is clear that we need to have
something more than the rationality calculus to be able to make sense
out of what happens to people. The rationality calculus assumes a
world of enough certainty that it is possible to make choices, to
confront problems and dilemmas with the ability to determine what
works and what does not work and then to make choices that will
improve your lot.
We live in a world full of uncertainty. That is, we have a world in
which we know so little about what is going to happen that we cannot
arrive at a calculus of what will happen and why-we cannot make a
probability distribution of outcomes. Uncertainty differs from risk;
risk means you can make a probability distribution of outcomes. We
think of a world in which we have converted uncertainty into risk as
one in which, for instance, we have learned enough about the
environment so that we can make it probabilistic, and we can insure
against the likelihood of loss, damage, or whatever it is that we are
concerned with. How do we make choices in the face of uncertainty?
We do it all the time. Yet when economists are confronted with
making choices in the face of uncertainty, we say we cannot theorize
in the face of uncertainty.
Now, I am giving you this as a dry background because what we
are interested in is trying to figure out how human beings, in the face
of pervasive uncertainty, go about making choices and creating the
kind of institutions that will produce the results that we want. To do
so, we have to understand how we learn and how the mind works. To
go back to my illustration about Weber and The ProtestantEthic and
belief systems, we must ask: how did beliefs evolve?
We say that redistributive norms evolved in Africa because the

land-to-man ratio was so vast and because the climate and habitat
were so uncertain that people could not figure out what would work
and what would not work. Therefore, they attributed everything to
luck, good fortune or bad fortune, which led to the redistributive
norms. In contrast, when we think of the Protestant ethic, we think
that somehow or other we evolved an understanding of the world
around us so that we knew what we were doing.
III
Again we are faced with the question of how human beings learn.
There are two contrasting views about learning. One is the artificial
intelligence view, which holds that the mind works like a computer-
efficient, logical, and consistent. The trouble with that view is that it
has no place for imagination or creativity-qualities to be seen even
in four-year-old children. The second view, involved with cognitive
science, is the connectionist theory view. Connectionism suggests
that the mind really evolves in some sort of pattern-based reasoning.
That is, the mind learns by doing. Good outcomes provide reinforce-
ment and patterns gradually evolve. If outcomes are not good they
are discarded. From this trial and error process of learning through
experience, we can argue that a belief system evolves as an interplay
between existing beliefs and the degree to which those existing beliefs
make sense out of new problems, ideas, and experiences. That
interplay is the key to the way that both individual human beings and
cultures evolve. In a society that has evolved successfully, let us say
the Netherlands, we see an initial set of beliefs which were receptive
to new ideas and to new problems, and experiences that forced new,
creative solutions. Successful economies in the Western world
evolved in this way.
Avner Greif tells this story in his study of the way medieval
Genoese and Magribe traders developed different ways of structuring
exchange. Both were successful in the early period and both relied on
personal exchange. Repetitive dealings with and personal knowledge
of people meant they could be trusted to live up to their name. But
then the market got bigger: both groups of traders went to Constan-
tinople where they dealt with people in another country, with an
unknown culture; further, these people would be seen only seldom.
The Genoese traders and the Magribe traders differed in their
treatment of these people. The Genoese traders developed formal
rules and laws with respect to them; they held the individuals in these
places liable; through notaries public they attempted to build up ways
to be able to ascertain what people did in exchange, to develop
formal rules with respect to liability, and indeed also to get law
merchants to develop mechanisms by which to ascertain the reliability
of merchants in different settings. The Magribe traders tried to
extend personal contact. This led to a dead end. Personal exchange
can be successful if everybody knows each other. But as trade and
commerce expanded, impersonal replaced personal exchange, and it
necessitated finding ways by which to trade with people one did not
know and would never see again.
Game theory illustrates the contrasting consequences of the
traders. Game theory tells you that if you have a game that the
players play continually, there is no end game, and they continually
interact in the small numbers, then it pays to cooperate. That is, it
pays to live up to the rules, to exchange fairly and honestly and so on.
Conversely, if you have a game that you never play again, it is only
played once, or there is an end game to it, and you have a large
number of players who do not know each other's background, then it
pays to lie, cheat, and steal.
The game theory story replicates the problems of getting from
personal exchange, which is characterized by small-scale and
relatively inefficient economies, to impersonal exchange and large-
scale markets that are necessary for economic growth. Getting there
is a gigantic step. The successful countries in the Western world
evolved out of a mixture of beliefs and experiences that forced them
to think differently from countries like the sub-Saharan African ones,
where the structure of the game was one that reinforced self-
sufficiency and redistributive norms-the reverse of what makes for
economic growth.
We have begun to learn something about the fact that the beliefs
and the way they have evolved can translate into a set of institutions,
and rules of the game, that lead people to more productive and
creative results.
IV
Now let me complicate the story in a big way. Let us consider
how we move a country from being poor to getting richer. Here the
story is infinitely more complicated because we have to consider path
dependence. When the economy and society evolve they evolve
incrementally; the culture, which is the set of beliefs and norms and
institutions that evolve, gradually changes, but in doing so it builds up
a structure which is so highly articulated that it is very hard to change.
Indeed, one of the reasons that economists have not looked so
brilliant in the last ten years is that they had a set of very simple
definitions of what made for productivity and attempted to impose
them on various countries. If the economists' views were inconsistent
with the culture, values, norms, and beliefs of a society, the views
were rejected, or those who ran the polity were quickly out of
office-something that happened in many cases.
The problem is thus not that we do not know what makes for
productivity, but how to change beliefs. That is a much more difficult
task because once you are on a particular path the degree to which
you can alter that path is very limited. It is limited because most of
the things you want to do are inconsistent with the heritage, and
culture, and beliefs in that society.
So the trick, and it is a trick, is to learn enough about the culture
of a society so that you understand the way it operates, and then to
look for windows of opportunity to alter the way the game is played,
so that you can introduce, consistent with the culture and beliefs, new
rules and norms that will encourage productive and creative activity.
Let me give you two extreme examples to show how difficult that
is. The first is from Russia and the second from the Czech Republic.
The Soviet Union never had a heritage of a background of beliefs or
institutions that was congenial either to a market economy or to
democracy. Long before Peter the Great, a society had evolved
which had none of these characteristics in either beliefs or insti-
tutions. When the Soviet Union disintegrated between 1989 and
1991, the rules of the game that did exist were wiped out; all that was
left was a void.
In this setting, what formal economics said to do was to introduce
the rules of the game that work in developed countries. But formal
rules, unaccompanied by norms of behavior that go with them, are
not going to work. If they cannot be enforced they will produce very
different results. When we put formal rules in what became Russia,
private Mafias sprang up to enforce them. The existing norms of
conduct were inconsistent with the formal rules, and the norms that
gradually evolved looked more like a kleptocracy than any kind of a
market economy.
Contrast Russia with the Czech Republic, which before 1948 had
a thriving market economy and was a democracy. After the Soviet
withdrawal in 1991, Austrian law, which had been the law before
1948, was reintroduced with modifications to effect desired changes in
the legal structure and in the property rights structure. It was
possible to reintroduce rules that made markets work efficiently, and
it was easy to redevelop norms of behavior that were complementary
to the rules, because the rules resonated with the country's past
heritage.
I do not mean to tell you that the Czech Republic is an unmiti-
gated success, although I can tell you that Russia is an unmitigated
failure. But together they illustrate the tough and the easy stories we
have with respect to the problems of development. We do not know
how to create a political system that will produce and put into place
property rights that will provide incentives for people to be
productive, and put into place a judicial system that will make for
low-cost enforcement of agreements and contracts, both of which are
necessary conditions for getting a viable polity. We do not know how
to create such a polity. We do not even know how we did it
ourselves.
Here in the United States, The Federalistpapers are probably the
most interesting and thoughtful analysis of the problems of creating a
polity that has ever been written. But you can put those formal rules
in place and you will not necessarily get a polity that works like that
at all. You have to have the formal rules, and informal norms, and
enforcement characteristics together; and we do not know how to
create them in the short run. When we go to Third World countries
we are immediately struck by the difficulty. Sub-Saharan Africa,
which is a "basket case" everywhere, is going to continue to be a
"basket case" until we can create political systems that somehow or
other can put into place something that will work. And while we have
some clues about it and are learning a lot, we still do not know how to
do it. So that is point one.
Point two is that path dependence and culture matter. Econo-
mists do not understand this. They think that path dependence and
culture are neutral. But the beliefs, institutions, and norms that have
evolved in society over time and the way they have evolved are
enormous constraints on the way in which people today and
tomorrow are going to think about problems. Therefore, there are
20011 WHY SOME COUNTRIES ARE RICH AND SOME ARE POOR
constraints on the degree to which the way the game is played can be
changed.
Point three is a straightforward one. The only thing we can
actually alter is the formal rules of the game. While it is the formal
rules, the informal norms, and the enforcement characters that
together define the way the game is played, we have direct control
over only one-the formal rules. Therefore, we have very limited
ability to make the system work better. We may change the formal
rules; but unless we recognize the complex interdependence between
the informal norms and enforcement characteristics and the formal
rules, usually the results are unanticipated.
The final point is also very straightforward: that is, most of the
time there is very little you can do in the short run. The time span in
which a politician has to operate in terms of survival is maybe one or
two years at most, or until the next election; the time span within
which any intelligent level of reform is going to start to work is
anywhere from five to fifteen years. Now it is true you may get some
immediate results, but to really get fundamental reform going is a big
job.
I will conclude with a brief story about a particular country to
illustrate all of these problems. I have been involved with Venezuela
off and on for the last five years. Venezuela is an interesting case for
a very simple reason. It should be the richest country in the world, or
very nearly that: it is sitting on more oil than any other country in the
world except Saudi Arabia and may even have more than Saudi
Arabia. It has, or had, a very efficient oil industry, which was
nationalized in the 1970s and became an efficiently-run government
monopoly. Yet Venezuela has remained a poor country-and the
inequality in income is one of the highest in the world. It has
remained a poor country partly because people tried to capture rents
from the oil industry and did very little else.
The interesting part of the story begins in 1990 when a man
named Perez was elected president. He introduced liberal market
reforms in Venezuela. The rate of growth in the economy, which had
been negative in 1988-1989, grew to seven percent in 1990, and to
nine percent in 1991. Success story? In 1993, Perez was out of office
and under house arrest. What had happened was that in 1991, the
price of gasoline was raised from eight cents to twelve cents a gallon.
The result was riots in which three hundred people were killed. In
1992 the military undertook a coup to replace Perez. A man named
Chavez led this military coup; while the coup failed and Chavez went
to jail, nevertheless it had an effect. Another coup in late 1992 ended
the Perez regime and Perez was under house arrest for corruption.
That is not the end of the story. Chavez got out of prison after
three years; in 1998, he ran for president of Venezuela and was
elected with a sixty-eight percent majority. Since then he has wiped
out political institutions; but he must put in place a whole new
structure. Now he is in the fortunate position of having oil as a base
on which to be able to build this structure. But without an under-
standing of the very difficult problem of implementing and creating a
set of new institutions that will complement the historical traditions of
Venezuela, put in place productive activity, and use oil as a fulcrum
by which one can start to make the economy work again, he is bound
to fail.
Can he be successful? Well, he probably could be if he is given
ten to fifteen years. The reason why I am ending with this story is
because you can all watch for yourselves and see what happens.
Chavez probably has a better chance of success than a leader in any
other place that I know of because he has, initially, the potential
income from oil to be able to use as a lever-unlike Haiti, for
example, which has nothing to build on. In the next few years he will
either take an economy that should, by any rights, be good and
restructure the game so that it can be viable, or he will not.
The reason Venezuela is particularly interesting is that Chavez
does have a window of opportunity. His popularity is unequaled in
the history of polities, so he has political moxie to be able to
restructure the game. He claims that he understands the basic kinds
of institutions that must be created to make the society more
productive. We will see whether in fact he succeeds.
CONCLUSION
We know what makes for rich countries. We know the charac-

teristics of productivity. We even know the kinds of institutions that
must be put in place. The rule of law, property rights that provide
incentives for people to be productive, and investment in human
capital: all of these are necessary. We know all of this; but we do not
know how to put in place the formal rules of the game accompanied
by the informal rules and enforcement characteristics that are
necessary for success.
12/16/2018 Marxism - Econlib
Marxism
By David Prychitko
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M ore than a century after his death, KARL MARX remains one of the most controversial
figures in the Western world. His relentless criticism of CAPITALISM and his
corresponding promise of an inevitable, harmonious socialist future inspired a revolution
of global proportions. It seemed that—with the Bolshevik revolution in Russia and the
spread of COMMUNISM throughout Eastern Europe—the Marxist dream had firmly taken
root during the first half of the twentieth century.
That dream collapsed before the century had ended. The people of Poland, Hungary,
Czechoslovakia, East Germany, Romania, Yugoslavia, Bulgaria, Albania, and the USSR
rejected Marxist ideology and entered a remarkable transition toward private PROPERTY
RIGHTS and the market-exchange system, one that is still occurring. Which aspects of
Marxism created such a powerful revolutionary force? And what explains its eventual
demise? The answers lie in some general characteristics of Marxism—its economics, social
theory, and overall vision.
Labor Theory of Value

The labor theory of value is a major pillar of traditional Marxian economics, which is
evident in Marx’s masterpiece, Capital (1867). The theory’s basic claim is simple: the value
of a commodity can be objectively measured by the average number of labor hours
required to produce that commodity.
If a pair of shoes usually takes twice as long to produce as a pair of pants, for example, then
shoes are twice as valuable as pants. In the long run, the competitive price of shoes will be
twice the price of pants, regardless of the value of the physical inputs.
Although the labor theory of value is demonstrably false, it prevailed among classical
economists through the midnineteenth century. ADAM SMITH, for instance, flirted with a
labor theory of value in his classic defense of capitalism, The Wealth of Nations (1776), and
DAVID RICARDO later systematized it in his Principles of Political Economy (1817), a text
studied by generations of free-market economists.
https://www.econlib.org/library/Enc/Marxism.html?to_print=true 1/6
So the labor theory of value was not unique to Marxism. Marx did attempt, however, to
turn the theory against the champions of capitalism, pushing the theory in a direction that
most classical economists hesitated to follow. Marx argued that the theory could explain
the value of all commodities, including the commodity that workers sell to capitalists for a
wage. Marx called this commodity “labor power.”
Labor power is the worker’s capacity to produce goods and services. Marx, using principles
of classical economics, explained that the value of labor power must depend on the
number of labor hours it takes society, on average, to feed, clothe, and shelter a worker so
that he or she has the capacity to work. In other words, the long-run wage workers receive
will depend on the number of labor hours it takes to produce a person who is fit for work.
Suppose five hours of labor are needed to feed, clothe, and protect a worker each day so
that the worker is fit for work the following morning. If one labor hour equaled one dollar,
the correct wage would be five dollars per day.
Marx then asked an apparently devastating question: if all goods and services in a capitalist
society tend to be sold at prices (and wages) that reflect their true value (measured by labor
hours), how can it be that capitalists enjoy PROFITS—even if only in the short run? How do
capitalists manage to squeeze out a residual between total revenue and total costs?
Capitalists, Marx answered, must enjoy a privileged and powerful position as owners of
the means of production and are therefore able to ruthlessly exploit workers. Although the
capitalist pays workers the correct wage, somehow—Marx was terribly vague here—the
capitalist makes workers work more hours than are needed to create the worker’s labor
power. If the capitalist pays each worker five dollars per day, he can require workers to
work, say, twelve hours per day—a not uncommon workday during Marx’s time. Hence, if
one labor hour equals one dollar, workers produce twelve dollars’ worth of products for
the capitalist but are paid only five. The bottom line: capitalists extract “surplus value”
from the workers and enjoy monetary profits.
Although Marx tried to use the labor theory of value against capitalism by stretching it to
its limits, he unintentionally demonstrated the weakness of the theory’s logic and
underlying assumptions. Marx was correct when he claimed that classical economists failed
to adequately explain capitalist profits. But Marx failed as well. By the late nineteenth
century, the economics profession rejected the labor theory of value. Mainstream
economists now believe that capitalists do not earn profits by exploiting workers (see
PROFITS). Instead, they believe, entrepreneurial capitalists earn profits by forgoing current
consumption, by taking risks, and by organizing production.
Alienation
There is more to Marxism, however, than the labor theory of value and Marx’s criticism of
profit seeking. Marx wove economics and philosophy together to construct a grand theory
of human history and social change. His concept of alienation, for example, first
articulated in his Economic and Philosophic Manuscripts of 1844, plays a key role in his
criticism of capitalism.
Marx believed that people, by nature, are free, creative beings who have the potential to
totally transform the world. But he observed that the modern, technologically developed
world is apparently beyond our full control. Marx condemned the FREE MARKET, for
instance, as being “anarchic,” or ungoverned. He maintained that the way the market
economy is coordinated—through the spontaneous purchase and sale of private property
dictated by the laws of SUPPLY and DEMAND—blocks our ability to take control of our
individual and collective destinies.
Marx condemned capitalism as a system that alienates the masses. His reasoning was as
follows: although workers produce things for the market, market forces, not workers,
control things. People are required to work for capitalists who have full control over the
means of production and maintain power in the workplace. Work, he said, becomes
degrading, monotonous, and suitable for machines rather than for free, creative people. In
the end, people themselves become objects—robotlike mechanisms that have lost touch
with human nature, that make decisions based on cold profit-and-loss considerations, with
little concern for human worth and need. Marx concluded that capitalism blocks our
capacity to create our own humane society.
Marx’s notion of alienation rests on a crucial but shaky assumption. It assumes that people
can successfully abolish an advanced, market-based society and replace it with a
democratic, comprehensively planned society. Marx claimed that we are alienated not only
because many of us toil in tedious, perhaps even degrading, jobs, or because by competing
in the marketplace we tend to place profitability above human need. The issue is not about
toil versus happiness. We are alienated, he maintained, because we have not yet designed a
society that is fully planned and controlled, a society without COMPETITION, profits and
losses, money, private property, and so on—a society that, Marx predicted, must inevitably
appear as the world advances through history.
Here is the greatest problem with Marx’s theory of alienation: even with the latest
developments in computer technology, we cannot create a comprehensively planned
system that puts an end to scarcity and uncertainty. But for Marxists to speak of alienation
under capitalism, they must assume that a successfully planned world is possible. That is,
Marx believed that under capitalism we are “alienated” or “separated” from our potential
to creatively plan and control our collective fate. But if comprehensive socialist planning
fails to work in practice—if, indeed, it is an impossibility, as we have learned from MISES
and Hayek—then we cannot be “alienated” in Marx’s use of the term. We cannot really be
“separated” from our “potential” to comprehensively plan the economy if comprehensive
planning is impossible.
Scientific Socialism
A staunch antiutopian, Marx claimed that his criticism of capitalism was based on the
latest developments in science. He called his theory “scientific socialism” to clearly
distinguish his approach from that of other socialists (Henri de Saint-Simon and Charles
Fourier, for instance), who seemed more content to dream about some future ideal society
without comprehending how existing society really worked (see SOCIALISM).
Marx’s scientific socialism combined his economics and philosophy—including his theory
of value and the concept of alienation—to demonstrate that throughout the course of
human history, a profound struggle has developed between the “haves” and the “have-
nots.” Specifically, Marx claimed that capitalism has ruptured into a war between two
classes: the bourgeoisie (the capitalist class that owns the means of production) and the
proletariat (the working class, which is at the mercy of the capitalists). Marx claimed that
he had discovered the laws of history, laws that expose the contradictions of capitalism and
the necessity of the class struggle.
Marx predicted that competition among capitalists would grow so fierce that, eventually,
most capitalists would go bankrupt, leaving only a handful of monopolists controlling
nearly all production. This, to Marx, was one of the contradictions of capitalism:
competition, instead of creating better products at lower prices for consumers, in the long
run creates MONOPOLY, which exploits workers and consumers alike. What happens to the
former capitalists? They fall into the ranks of the proletariat, creating a greater supply of
labor, a fall in wages, and what Marx called a growing reserve army of the unemployed.
Also, thought Marx, the anarchic, unplanned nature of a complex market economy is
prone to economic crises as supplies and demands become mismatched, causing huge
swings in business activity and, ultimately, severe economic depressions.
The more advanced the capitalist economy becomes, Marx argued, the greater these
contradictions and conflicts. The more capitalism creates wealth, the more it sows the
seeds of its own destruction. Ultimately, the proletariat will realize that it has the collective
power to overthrow the few remaining capitalists and, with them, the whole system.
The entire capitalist system—with its private property, money, market exchange, profit-
and-loss accounting, labor markets, and so on—must be abolished, thought Marx, and
replaced with a fully planned, self-managed economic system that brings a complete and
utter end to exploitation and alienation. A socialist revolution, argued Marx, is inevitable.
An Appraisal
Marx was surely a profound thinker who won legions of supporters around the world. But
his predictions have not withstood the test of time. Although capitalist markets have
changed over the past 150 years, competition has not devolved into monopoly. Real wages
have risen and profit rates have not declined. Nor has a reserve army of the unemployed
developed. We do have bouts with the business cycle, but more and more economists
believe that significant recessions and depressions may be more the unintended result of
state intervention (through MONETARY POLICY carried out by central banks and government
policies on TAXATION and spending) than an inherent feature of markets as such.
Socialist revolutions, to be sure, have occurred throughout the world, but never where
Marx’s theory had predicted—in the most advanced capitalist countries. On the contrary,
socialism was forced on poor, so-called Third World countries. And those revolutions
unwittingly condemned the masses to systemic poverty and political dictatorship. In
practice, socialism absolutely failed to create the nonalienated, self-managed, and fully
planned society. It failed to emancipate the masses and instead crushed them with statism,
domination, and the terrifying abuse of state power.
Nations that have allowed for private property rights and full-blown market exchange, in
contrast to those “democratic socialist republics” of the twentieth century, have enjoyed
remarkable levels of long-term ECONOMIC GROWTH. Free-market economies lift the masses
from poverty and create the necessary institutional conditions for overall political
freedom.
Marx just didn’t get it. Nor did his followers. Marx’s theory of value, his philosophy of
human nature, and his claims to have uncovered the laws of history fit together to offer a
complex and grand vision of a new world order. If the first three-quarters of the twentieth
century provided a testing ground for that vision, the end of the century demonstrates its
truly utopian nature and ultimate unworkability.
In the wake of communism’s collapse, traditional Marxism, which so many mainstream

economists criticized relentlessly for decades, is now seriously questioned by a growing
number of disillusioned radicals and former Marxists. Today there is a vibrant post-
Marxism, associated with the efforts of those active in the scholarly journal Rethinking
Marxism, for instance. Rather than trying to solve esoteric puzzles about the labor theory
of value or offering new theoretical models of a planned economy, many of today’s
sharpest post-Marxists appreciate marginal analysis and the knowledge and incentive
problems of collective action. In this new literature, FRIEDRICH HAYEK seems to be getting a
more positive reception than Marx himself. Exactly what will come out of these
developments is hard to predict, but it is unlikely to look like the Marxism of the past.
About the Author

David L. Prychitko is an economics professor at Northern Michigan University.
Further Reading
Boettke, Peter J. The Political Economy of Soviet Socialism: The Formative Years, 1918–1928.
Boston: Kluwer, 1990.
Böhm-Bawerk, Eugen von. Karl Marx and the Close of His System. 1896. Reprint. Clifton,
N.J.: Augustus M. Kelley, 1975.
Burczak, Theodore. Socialism After Hayek. Ann Arbor: University of Michigan Press, 2006.
Elliot, John E., ed. Marx and Engels on Economics, Politics, and Society: Essential Readings with
Editorial Commentary. Santa Monica, Calif.: Goodyear, 1981.
Hayek, Friedrich A. The Fatal Conceit: The Errors of Socialism. Edited by W. W. Bartley III.
Chicago: University of Chicago Press, 1988.
Kolakowski, Leszek. Main Currents of Marxism. 3 vols. New York: Oxford University Press,
1985.
Prychitko, David L. Markets, Planning, and Democracy: Essays After the Collapse of
Communism. Northampton, Mass.: Edward Elgar, 2002.
Prychitko, David L. Marxism and Workers’ Self-Management: The Essential Tension. Westport,
Conn.: Greenwood Press, 1991.

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Historical Foundations of

•47 As predicted, for seven years the land produced bumper

• 20 SoJoseph bought all the land of Egypt for Pharaoh. All

Hesiod also wrote about the scarcity of products and

He made the distinction between things

• a medium of exchange and unit of measure;

• (See: S. Todd Lowry, “Ancient and Medieval Economics”, in

He condemned the purchase of a product

- a disciple of Socrates (470-399 BC);

- a book about household management and agriculture;

- translated by Cicero into Latin.

The Roman Law – a great achievement.

- the urbanization of the Roman Empire;

- the demographic growth: Pax romana helped the

Reynolds, Susan, The Middle Ages without

François Crouzet, A history of the European Economy, 1000-2000, University Press

The Cistercian order was

In the City of Good, Saint Augustine

He is considered the Catholic Church's greatest

Paper presented at the 18th World Economic History

Answers could be found in:

- could we talk about a first

The rise of a modern thought.

- could we talk about a first

At that time the currency was directly convertible to gold or silver.

also by Adam Smith.

It is not a coherent system of economic principles or a fully

foreign colonies (raw materials, precious

State protectionism helped merchants and

English East India Company

‘The art of taxation consists in so

It is an economic theory developed in 18th century in

The Physiocrats have been viewed as the founders of

In Economics, they introduced the

The physiocrats believed that the wealth of

Laissez faire et laissez passer

(E. Ray. Canterbery, A Brief History of Economics. Artful

- surgeon; the doctor of

The Theory of Taxation

In 1778, Smith was appointed commissioner of

In 1783, he became a founding member of the Royal

In 1787, Adam Smith was elected Rector of the

and also … he had

a book on moral philosophy:

Adam Smith and the

We can identify some of his ideas in the writings

The supply and demand need to be free from

The government should intervene/interfere less.

!!! These ideas are opposite to that of mercantilists.

He was in favor of greater

“The greatest improvement in the productive

(Peter J. Dougherty, Who’s Afraid of Adam Smith. How

(Sandelin, Trautwein, Wundrach, p. 18)

!!! A competitive market place

The unobservable market force that helps the demand and

(Adam Smith, The Theory of Moral Sentiments, II.ii.3.1)

(Stigler, 1958, p. 358-359)

• „The founder”: Adam Smith (1723-1790)

He spread widely in Europe a lot

A Treatise on Political Economy