The Nature and Relevance of Economic Thought

The roots of the word economy can be traced back to Ancient Greece. The word oeconomicus is a combination of two Greek words, namely oikos (house) and nemein (management). Oeconomicus then means “household management.”

Modern economics, unlike pre-modern economic thinking, relies on complex analyses using formal modelling and empirical testing. In pre-modern times, however, economic thinking was based on normative (and often moral) judgments. From the 19th century onwards, not only economic ideas, which were based on faith and good management, have been transformed into systematic theories, but also the scientific discipline of economics has become multidimensional with its ever-expanding areas of specialization.

The period from the publication of Wealth of Nations in 1776 by Adam Smith (1723-1790), often considered the founding father of modern economics, to the 1870s is called the age of classical political economy.

Used primarily in the 18th and 19th centuries, political economy is the former name of the discipline currently known as economics. Today, the term political economy has a different connotation, referring to the area of study lying at the intersection of economics, politics and sociology, examining the relationships between individuals and society as well as markets and the state.

Often mixed, economics and economy are interrelated yet distinct terms. The economy is simply the system of production, distribution and consumption of a country, whereas economics is the scientific study of all aspects of economic life.

The history of economic thought is a research field that explores the past systematic, consistent, abstract, theoretical, methodological, analytical accounts, reflections and investigations into economic behaviors, policies, organizations and institutions without necessarily including ideological and normative thoughts.

The history of economic thought is sometimes confused with the sister discipline of economic history. Despite the close relationship between the two, the history of economic thought is not identical to economic history. The former is the intellectual history of economic ideas, while the latter is the study of economic phenomena in the past.

The first reason that comes to mind is that it helps to better understand contemporary economic theories. It also reminds us that modern economic theory has a past and a future. This understanding broadens our perspective, which, just in learning history of any science, deepens our awareness regarding the variety of worldviews. Learning old economic ideas is a source of inspiration for developing new ideas.

Logical positivism was a philosophical movement based on the argument that the only scientific knowledge is the knowledge that can be verified through logical or empirical analysis. Emerging with contributions of a group of early 20th century scholars known as Vienna Circle, this movement reached its zenith in the 1920s and 1930s.

The problem of induction means that there is no guarantee that what we have observed so far will persist in the future. A famous example is that although men infer from the experience that sun rises every morning, this cannot be a logically conclusive deduction since it is impossible to know whether it will rise tomorrow morning.

Kuhn identifies four phases of scientific evolution: (1) pre-paradigmatic phase, (2) normal science, (3) crisis, and (4) scientific revolution.

Pre-paradigmatic phase represents where every science begins. Once a scientific discipline moves on to the phase of normal science, it never returns to the first phase. In each stage of normal science, a certain paradigm is adopted. At this stage, the shared theoretical system gets ever more complex while its explanatory power increases. However, as normal science progresses, anomalies that the existing theoretical system fails to explain accumulate (the phase of crisis). This accumulation of anomalies may result, at a certain point, in what Kuhn calls scientific revolution. When this happens, a new paradigm and a new stage of normal science appears, meaning the scientific discipline returns to the phase of normal science (Kuhn, 1962).

Coined by Thomas Kuhn, paradigm is a set of assumptions, concepts and practices shared by members of a community of scientists to explain scientific phenomena in their field. Paradigm shift is a fundamental change in the paradigms, which mark a scientific revolution.

Scientific research programme means a sequence of theories that share a hard core containing unfalsifiable theses used in the construction of a theoretical system. This hard core, as the most important component of a research programme, resists anomalies with the support of several auxiliary hypotheses called the protective belt. The protective belt is quite flexible, while the hard core hardly changes. A research programme is successful to the extent that theories contained in it can discover and predict new facts. Scientific research programmes lose their validity when a better programme emerges.

According to those who adopt the relativist view, ideas should not be studied in isolation from their context. That is, an idea valid in a certain place and time may not be valid in another context. Put differently, economic thought is the product of the world surrounding it. According to those who adopt the absolutist view, on the other hand, to judge the validity of a theory it is enough to know whether it is internally consistent, and whether it can explain objective reality. Hence, the absolutist view considers internal factors rather than external ones.

The formalist-substantivist distinction has been made by Karl Polanyi (1886-1964) in his seminal book entitled Great Transformation (1944). According to Polanyi, pre-capitalist societies had different characteristics than capitalist societies. In the former, it was not market exchange but the principles of reciprocity and reproduction that governed economic life. Therefore, homo economicus as the main assumption of neoclassical economics, the idea that self-interested individuals seek to maximize their profit under certain constraints, cannot be valid for pre-capitalist societies and socialist economies based on central planning. According to the formalist view, on the other hand, economic theory has universal validity, that is, irrespective of time and place it can be used to explain the nature and dynamics of all societies.

A scientific theory is a scientifically valid principle, or a set of principles used to explain a fact or phenomenon. Theories are different from laws in that laws reflect the relationship between facts, while theories attempt to explain them. Unlike facts, theories can be verified or falsified. Once more information is collected, they can be improved or changed. An economic model, on the other hand, is a simplified form of economic reality that helps us to make more sense of it, often using a set of variables and logical/quantitative relationships between them.

The concepts of thesis, antithesis and synthesis come from Hegel’s dialectical method. In the first stage of knowledge production, one concept is introduced as a thesis. Then follows the emergence of antithesis that is opposed to the first. The antithesis is followed by a third concept which unifies the first two, which is called the synthesis.

A school of thought denotes an intellectual tradition maintained by a group of scholars who share a common characteristic about how the economies work. Institutional economics may be considered a school of economic thought in the sense that its adherents seek to explain the role of institutions in shaping economic behavior. It is thus their common emphasis on institutions (mostly neglected by mainstream economics) that make economic institutionalism a school of thought.

The distinction between positive and normative economics has a long history tracing back to the writings of Nassau Senior and John Stuart Mill in the 19th century. While positive economics is known as “scientific” economics, normative economics is rather a set of practical recommendations for policy makers. Positive economics is then based on testing certain objective and verifiable propositions. Much of contemporary economic theory falls under this category. Normative economics on the other hand often derives from an idea or perspective.

A fundamental division in economics is the one between microeconomics and macroeconomics. Simply put, microeconomics deals with the decisions of individuals and firms to allocate resources, while macroeconomics focuses on the economy as a whole mostly at the national level. For example, research on market forms such as monopoly, oligopoly and monopsony typically fall under microeconomics. Macroeconomists, however, are interested in such issues as economic growth, inflation and unemployment.