Academic journal article The Journal of Philosophical Economics

Economic Theory in Historical Perspective

Academic journal article The Journal of Philosophical Economics

Economic Theory in Historical Perspective

Article excerpt


In this paper, we attempt a brief and at the same time critical review of the salient features of each school of economic thought that withstood the test of time and is still fuelling with ideas and arguments for the conduct of economic policy. Furthermore, our interest focuses on the nature of economic theory and its future; inasmuch, as our analysis is conducted over very long stretches of time, whereby the phases of economic growth are followed by economic downturns in a long wave-like evolutionary pattern.

This paper advances the claim that new economic theories might be the result of four non-mutually exclusive conditions: first, a new theory might be the product of the elaboration of an existing theory; second, it might be the outcome of systematic failures of the dominant theory to account for phenomena that it was designed to explain; third, it may lead to economic policy conclusions that are more relevant to dealing with current problems than the policies proposed by the existing and prevailing theory and last, but not least, a theory may prevail on the basis of the interests that it serves regardless of its ability to aid in prediction and the formulation of economic policy. When at least one of these conditions is met, then various adjustment processes might be activated that could lead to the further advancement of an existing theory, or even the replacement of a prevailing theory by an altogether new theory. In order to establish our claim, we combine economic history and the history of economic thought. The intuitive idea is that economic history constitutes the testing terrain for economic theory, thus enabling us to understand the past and current economic situations in a fuller and analytically more accurate way. Furthermore, this combination of economic history and economic theory equips us with both the necessary data and analysis to confront current as well as future economic situations, at least, in a more prepared way.

The composition of the remainder of the paper is as follows: The second section deals with the core characteristics of the major economic approaches and the conditions that contribute to the development of economic theories. The third section continues with an examination of the concrete circumstances that gave rise to modern neoclassical macroeconomic theories. The fourth section makes some remarks about the elements for a new direction of economic theory and concludes with a need for a synthesis of the classical approach with the Keynesian theory of effective demand.

Core characteristics of competing economic theories

Economics as a scientific discipline was born out of observations concerning the movement of commodity market prices. Market prices were recognized as the main phenomenon whose deeper understanding would unlock and pave the way for the theorization of the workings of the economic system of generalized commodity exchange. Market prices, it was observed, are subjected to continuous fluctuations, whose superficial examination may suggest that they are purely stochastic, and, therefore, not amenable to generalization. A more careful examination, however, suggests that the actual prices of commodities are regulated by another set of more fundamental prices, the 'natural prices' which operate as centres of gravitation for market prices (Garegnani, 1976; Eatwell, 1983; Kurz and Salvadori, 1995; Tsoulfidis, 2008 and 2010).

More specifically, Adam Smith sought to discover the 'natural order' of economic life and for that, he was inspired by the movement of planets determined by the laws of gravity. Smith used this analogy to explain the movement of actual prices by the law of equal profitability which was supposed to hold in a particular set of hypothetical market prices which he called 'natural prices'. The term 'natural' signifies the fact that economic phenomena have their own internal dynamics, just like natural phenomena, and operate, as Francois Quesnay observed, in a way that is 'independent of men's will'. …

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