The Development of Economic Thought - Essay Example

?The Development of Economic Thought: The Relativist and Absolutist Perspectives There is this popular and alternative notion today that argues how economic thought can be best approached through two fundamental frameworks: relativism and absolutism. This view is attributed to Mark Blaugh who posited in his now classic work Economic Theory in Retrospect (1997) that: The relativist regards every single theory put forward in the past as a more or less faithful expression and reflection of contemporary conditions, each theory being in principle equally justified in its own context; the absolutist has eyes only for a steady progression from error to truth (p. 2) The idea is that economic thought answers many of the questions about economics and could provide groundwork for evaluating its theories, falsities and efficacies. It offers a mechanism to describe and explain the development of economic theory, the dynamics of the contemporary circumstance and in predicting about what will hold in the future. These are all anchored on the capacity to understand what has transpired in the past. To borrow the words of Backhouse, “we should judge the works of past economists… we should ask whether the writings of the economists we consider were original, influential and logically consistent; we should criticize economists for claiming to have shown things they did not show; and we should praise writers for explaining reality well” (p.32). This is the reason why relativism and absolutism are critical in economic thought. The first offers a systematic mechanism to evaluate economic theories, emphasizing their contributions to the present prevailing system whereas the latter has the capability to organize such theories according to periods and their efficiencies in this context. Historical Evaluation The historical development of economic thought follows a structured progression not unlike those found in formal scientific fields like physics, although significantly simpler in nature. Colander (2000) summarized the development in a straightforward descriptive account: It all began with Adam Smith’s insight of the invisible hand. Classical economics developed that insight, attempting to derive an acceptable theory of value based on all costs or on labor alone. It failed in that attempt, but in the process developed seeds of many ideas that were later expanded by Neoclassical economists [who]… who stopped looking for value on the cost side, and developed a supply/demand theory of value (p.32). The next stage in the timeline of development is marked by the breakthroughs introduced by economists like Leon Walras and Maynard Keynes. The former developed the general equilibrium theory, a school of thought that explained economic behavior that is typified by several interacting markets. Keynes, on the other hand, proposed his alternative macroeconomic theory, which brought together a host of factors in a general explanation of how an economy works. While Keynes’ theory has been taken up by next generation economists, his macro theory eventually diminished in prominence. Walras’ general equilibrium theory fared better and has endured to become the basis of modern economics. Many contemporary theorists expanded and modified his work, incorporating many variations and finally established the dominant framework of explaining the modern world (Colander, p.32). The series of developments summarized above can be told in differing perspectives. For relativist scholars, economic thought focus on the side roads, stressing the absence of a coherent and general roadmap that follows a cohesive all-encompassing theory. The absolutists, on the other hand, would emphasize the scientific dimension and arguing that there is a thread of development. Interpreting Mercantilism An excellent depiction of how relativist and absolutist positions differ is in their interpretations of mercantilism. From the sixteenth to the eighteenth century, the mercantilist economic doctrine became the norm in Western Europe as trading empires flourished. Its most important components include increased foreign trade, colonization, monopoly of markets, the accumulation of gold, among other mercantilist policies and regulations designed edge out economic rivals. Mercantilism was fundamentally anchored on the idea that national wealth and power were best maintained through an increase in exports and the collection of precious metals (Willner, Hero and Weiner, 2006, p.305). In their competition, the monarchies that govern Europe sustained mercantilist ideas in a mad scramble to colonize domains since they enriched the government coffers, providing raw materials and serving as markets for goods. The mercantilist doctrine became the precursor of many economic theories that emerged later on. For both relativist and absolutist perspective, mercantilism was economic theory in earliest form; hence, both of the theorists from these schools find numerous points of interest and interpretation. Relativist theories view mercantilism favorably. Scholars such as Gustav Schmoller and his English disciples explained that this is because mercantilist policies were appropriate if one contextualizes its policies according to the contemporary landscape, which was characterized by the ultimate objective of states to gain wealth and power (Congleton, Hillman and Conrad, p. 236). The absolutist theories, on the other hand, took a different position. Classical economists like David Hume and Adam Smith were quick to identify mistakes in mercantilist doctrines. For instance, there is the supposed “failure of the mercantilists to recognize the self-regulating nature of the ‘specie-flow mechanism’ imposed on the mercantilist objective of a perennial trade surplus” (Congleton, Hillman and Conrad, p. 236). Based on their respective perspectives, it is apparent how relativists and absolutists focus on specific dimensions that are aligned with their core principles. The absolutists focus on the drive to identify universal elements in the previous economic theories, describing those that have some semblance to truths in the process. This is the reason why economists like Smith criticize the errors of mercantilism and upgrades it into a better model that can make a meaningful contribution to economic thought. The relativist tack is different. They argue that what is effective for one period may not work for another. This is the reason why they view mercantilism favorably. The doctrine, for them, appeared sufficient and appropriate to the needs of the sixteenth and eighteenth century time period. Smith and Ricardo Adam Smith and David Ricardo, two prominent economic thinkers and their work serve as interesting subjects for relativist and absolutist discourse. Smith’s theories, like that of Alfred Marshall’s, were heavily characterized by an emphasis on the current economic activity. His was an absolutist view that established economic philosophy based on the modifications of previous experiences. This is significant according to Johnson (2010, p.17) because it provided his arguments – just like those made by other absolutist theorists - with a temporal specificity, which has the potential to offer important insights into the structure and performance of markets in previous epochs. The relativist school attacks this position, however, because it is considered, from their perspective, purely teleological because it conventionally treats previous economic theories archaic and, hence, peppered with faulty, misconceived and misread notions. This emerges because of the focus of the absolutist model on the modern economic thought. Johnson (p.18) argued that this incapacitated absolutist interpretation to explain the development of market institutions. Relativism offers a different approach by opting to examine the abstract and theoretical elements of economic ideas such as growth, value and distribution by giving full weight to the personal, social and political environment in which a phenomenon emerged (Johnson, p.18). This is depicted in how relativism explained the thoughts of Ricardo. Ricardo is credited to have introduced the economic concepts of rent, wages and profit. He agreed with Smith on many respects such as in his belief that Britain’s protectionist measures as faulty. But relativist scholars found some of his theories sound and valid. In 1817, Ricardo advocated a labor theory of value. At one point, he claimed: Notwithstanding the tendency of wages to conform to their natural rate, their market rate may in an improving society, for an indefinite period, be constantly above it; for no sooner may the impulse, which an increased capital gives to a new demand for labor, be obeyed, than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual and constant, the demand for labour may give a continued stimulus to an increase of people (Ricardo, Ramsay and McCulloch. 1871, p.51). Several years later, he shifted his position and found himself aligned with those who argue for mechanization. From the relativist perspective, these positions are justified because they are merely responses to the needs of the period. In 1817, a labor theory of value was deemed appropriate because fixed capital was little used at that time (Blaug, 1997, p.2). Marx and Value An interesting development that figure prominently in the absolutist and relativist discourse is the Marxist economic theory and his interpretation of value. Karl Marx based this theory on labor value theory espoused by Locke and many economic theorists of the nineteenth century and actually perfected it. The Marxist theory built on Locke’s claim that the laborers create value by working on his raw materials and that he has a right to the possession of the value so created (Sofroniou, 2005, p.118). Marx further updated this by arguing that in a more advanced society where manufactured goods are exchanged, the laborer who sells the product of his labor should obtain in exchange something equivalent (Sofroniou, p. 118). This is a relativist objection to the prevailing capitalist system, which the absolutists view favorably. Marx was able to introduce new historical realities as he scientifically analyzed the modes and factors of traditional economic theory (Porter, 2001, p.78). His position is based on a response to the variables that are present in the modern period as brought about by dominant economic system. It is aligned with the relativist position that the economic text should be interpreted and examined according to the landscape it was composed. Conclusion There are those who argue that interpreting the development of economic thought is a matter of choosing between the two broad frameworks of relativism and absolutism. The former emphasizes the interpretation according to an economic phenomenon or theory’s social and historical milieu whereas the latter argues in favor of interpretation and evaluation of past theories against standard/universal paradigms, which is the most updated theory today. However, this choice appears to be facile and too restrictive. The reason is that both of these theories can be used together. One can use the strength of the first to complement the weakness the other. Blaugh observed that, in its moderate versions, the relativist interpretation can yield a really valuable fusion of the history of economic thought with the history of political and moral philosophy against the background of economic and political history (p.2). On the other hand, there are many ideas and phenomena throughout history that can be identified in a coherent thread and the absolutist approach is crucial in this area (Backhouse, p.3). In assessing the progress throughout history, the combination of frameworks is important to comprehensively depict the logical development of economic theories. This paper argues for a need to treat these approaches as alternatives as opposed to two extreme opposites. The study of economics is a complex affair, entailing a host of variables that require multi-dimensional perspectives. As Blaugh (p.3), rightly stressed: “no assumptions about economic behavior are absolutely true and no theoretical conclusions are valid for all times and places.” The above argument underpins the ultimate point that both of relativism and absolutism are effective ways in explaining and interpreting the development of economic theories. They both contribute immensely in the way errors are identified and corrected in order to steer the development of economic thought towards the right direction. This aspect is critical in achieving the fundamental objective of economic thought. It investigates the variables that inform the decisions with regards to the validity of ideas so that they are considered relevant and applicable to the development of theories presently and in the future. References Backhouse, R 1996, Interpreting Macroeconomics: Explorations in the History of Macroeconomic Thought. London: Routledge. Blaugh, M 1997, Economic Theory in Retrospect. Cambrdige: Cambridge University Press. Colander, D 2000, Complexity and the History of Economic Thought: Selected Papers from the History of Economics Society Conference. London: Routledge. Congleton, R, Hillman, A and Konrad, K 2008, 40 Years of Research on Rent Seeking 2: Applications: Rent Seeking in Practice. Berlin: Springer. Johnson, P 2010, Making the Market: Victorian Origins of Corporate Capitalism. Cambrdige: Cambridge University Press. Porter, B 2001, The Good Life: Alternatives in Ethics. Lanham, MD: Rowman and Littlefield. Ricardo, D, and McCulloch, The works of David Ricardo: with a notice of the life and writings of the author. London: John Murray. Smith, A 1809, An inquiry into the nature and causes of the wealth of nations, Volume 3. Edinburgh: Lackington, Allen and Co. Sofroniou, A 2005, The Philosophical Concepts of Management Through The Ages. Swindon, UK: PsySys Limited. Willner, M, Hero, G and Weiner, J 2006, Global History Volume I: The Ancient World to the Age of Revolution. New York: Barron's Educational Series. Read More