History of economic thought

1. History of economic thought Presentation 2 Petr Wawrosz

2. When does economics start? • At the beginning of human history. • The first Greek writers on „oikonomikos“ (household management) wrote on the best way in which to manage a household (what we would think of as a family farm or estate).

3. Why does economics start so many times ago? • In every society it is necessary that there be a process to organize andcoordinate choices regarding the production, distribution and consumption ofgoods and services. The need for this process arises because: • our resources or inputs are finite at any moment in time, • our technical knowledge constrains our ability to utilize theseresources to produce goods and services, • individuals, organizations, social institutions, business andgovernments may constrain output, • in Western societies, wants or desires of individuals or groups areshaped by cultural or physical forces and often exceeds the availabilityof economic goods and services.

4. Why does economics start so many times ago? • Politicaleconomy and economics began with a reflection on analready existing set of practices in the world. • Economists did not invent economic life—whether asevidenced by the organization of the household, theharvesting of crops, the rise of manufacturing, or the freetrade of goods and services across borders. Economic lifehappens, philosophers try to understand the manifestationsof it—the changes in prices, the life and death ofenterprises, the complexity of the division of labor, and thewealth and poverty of nations.

5. The allocation problem • What should be produced? • What is the best way to produce it? • Which individuals should get which goods and services?

6. How to solve allocation problem • At one endof the continuum, is the individualistic free market approach; individuals know theirown preferences and then rely on a system of markets to signal information aboutthe appropriate weights of individual preferences and establish incentives tocoordinate their voluntary choices. • At the other extreme of the continuum, theallocation process may be centralized and decisions are made through the authorityof an individual or group; individual choices are not allowed. • A third possibility is aneconomy where decisions are based on tradition; behavioral patterns that haveseemed appropriate in the past become embedded in the system. • Shortly: market (exchange), command, tradition. • The history of economic thought tends to be a study of alternativeexplanations about the perceptions of appropriate mechanisms to allocate resourcesand the proper relationship of the economy and economic behavior to society.

7. The solution of allocation problem depends on: • the endowment of resources and the physical nature of therelationships among them, • the level and nature of our understanding of those relationships, ortechnology, • iindividual objectives, • the objectives of society, (which reflect the organization of society andthe institutions that coordinate the preferences and behavior patternsof individuals within society) • information about alternative choices and the probable outcomes ofalternative choices, • perceptions of relationships among the individuals within the society • values held by individuals, • the methods used to describe, analyze and identify potentialalternatives and outcomes also shape the answers.

8. Elements of human behavior • the identification of objectives of the individual(s) and society, • the identification all possible alternatives that are feasible given the finite resources, social institutions and the current state of technical knowledge (technology), • the criteria to evaluate each possible alternative with respect to the objectives.

9. Elements of human behavior • In a world with finite resources and technological constraints, individualsmust choose among competing alternatives. They must know their preferences andobjectives in order to make appropriate choices. • In a social group the problem ismore difficult, not everyone has the same preferences. Therefore, the preferencesamong individuals must be prioritized or assigned weighted values.

10. Individual and society • The most important task for any economy (or for that matter any socialsystem) is to contribute to a balance between the autonomy of the individual withthe commonweal or social wellbeing. • The question about how to best insure thefreedom and wellbeing of the individual within a just, stable and peaceful society isan issue that has been a common thread that has run through most of theimportant contributions to the history of economic thought.

11. Individual and society • The central disciplinary puzzle of economics remains of explaining how through the self-interested behavior of individuals a social order can result that serves the public interest.

12. Individual and society • Possible views on the relationship: • 1. There is a natural harmony of interests among the individuals in society or there are natural processes that result in a harmony of interests. • 2. There is a conflict of interests among various individuals, groups or classes. • Common element in both classical and neoclassical economics is that voluntary exchanges among individuals in a free market will resolve all or most conflicts. • Marxist economic theory has opposite view – is based on a belief that there are inherent conflicts among classes in the capitalist system, which result in its inevitable failure.

13. Individual and society • Iinstitutions matter. • Although individualsrespond to incentives, they are also prone to suffer delusionsand other error-inducing cognitive limitations inthose responses. • Learning is context dependent. • Actors are not perfectly rational, information is imperfect,markets are not atomistic, and resources are notalways channeled to their highest valued use. • The context-dependent nature of choiceand the contingency of social order.