A historical glance on economics – What can we learn from it?

Aug 8, 2018 by

We started today’s lesson with an animation video which explained that economy is for everybody.This video by the economist Ha-Joon Chang pulls back the curtain on the often mystifying language of derivatives and quantitative easing, and explains how easily economic myths and assumptions become gospel.
We totally agree with his theories but disagree with the fact that he ignored the economic school that does explain Singapore (and Hong Kong and other Pacific Rim city-states where the land is leased from government). That is the Georgist school. It is closely related to the classical school, but with more emphasis on getting public revenue from land rents instead of taxes on productivity.

Many people think that economics is about money. Well, to some extent this is true. Economics has a lot to do with money, with how much money people are paid, how much they spend, what it costs to buy various items, how much money firms earn, how much money there is in total in the economy. But despite the large number of areas in which our lives are concerned with money, Ernst Aigner’s lecture taught us that economics is much more than just the study of money.

Let’s talk about historical background. It is often claimed, with some justification, that the difference between classical political economy and neoclassical economics is that the former has social and historical content whilst the the latter does not and is universal in application. Indeed, critics and proponents of neoclassical economics point to its universal, ahistorical and asocial character as deficiency and strength, respectively.
In what way, in particular, do Smith, Ricardo and Marx apply a historical, and hence social, content to their theory, and what difference does it make? The focus will be on the historical, especially in the economy and classes peculiar to capitalism as a stage in history. But this inevitably carries with it a social content as well.
For Smith’s labour theory of value for the rude society is not simply an argument about the (labour) cost of production; it is also concerned with  what orthodoxy would now term property rights. In the rude society, only labour has any command over output and so, according to Smith, only labour can enter as a constituent part of price.

Asking ourselves how Smith’s theory was abandoned, we grasped from the lecture that the way prices were formed, and products valued has seen dramatical change, as problems with the classical doctrine were identified. What followed was a major shift, which resulted from the so-called marginalist revolution and that led to the evolution of neoclassical economics. Assuming that most economic students among us are certainly aware that the individual’s preferences and their rational decisions are at the centre of this approach, we question why neoclassical economics is still predominantly taught in universities and among the schools of thoughts classified under mainstream economics.

We agree that the latter requires critical assessment and we believe it is essential that economists rethink whether this approach is adequate to address the reality’s complexity. Debates around this have surged and argue that an individual’s behaviour is shaped by human values of social or cultural character, which do not necessarily lead to rational decision-making.

We recognise that the neoclassical model rather simplistically and selfishly assumes that the aim of every individual is to maximise one’s utility. Importantly, this narrow view has raised criticism and triggered alternative ways of describing economics, such as ecological macroeconomics or institutional economics. When observing these “heterodox” approaches to economics, it becomes clear that thought leaders are attempting to embed the economy into the broader society and the ecological environment. In fact, the need to take into account the world’s complexities on a social level, especially interactions between various social actors and institutions is emphasised. The needs and wants on the individual level lose their importance, making more room for a cooperative approach that values the interests of groups. Whether the “We” rationality will gain as much or more traction than the “I” rationality is yet to see.

Written by: Gentiana Mehmeti and Naomi Hayoun

Based on the lecture by: Wolfgang Fellner and Ernest Aigner (“Nature and Money in Economics: a pluralist introduction”)