Economics is more of a philosophy than a science
It is commonplace in the history of economic thought that economics inherited the extensive reliance upon mathematics from natural science. The appropriateness of mathematics in economics is still a hotly debated topic. Certain problems can hardly be analyzed with formal theories or only inefficiently at best. However, there are theoretical problems in the case of which formalism ensures high precision and hence high depth. Just for the sake of good order, a comprehensive exploration of a complex causal structure underlying a phenomenon is not deep. By contrast, here depth refers to an exhaustive and consistent analysis of a well-isolated part or facet of the mechanisms in a complex causal structure in order to pay attention to a wide range of consequences.
“Philosophy of Economics” consists of inquiries concerning
(a) rational choice,
(b) the appraisal of economic outcomes, institutions, and processes, and
© the ontology of economic phenomena and the possibilities of acquiring knowledge of them.
Although these inquiries overlap in many ways, it is useful to divide the philosophy of economics in this way into three subject matters which can be regarded respectively as branches of action theory, ethics (or normative social and political philosophy), and philosophy of science. Economic theories of rationality, welfare, and social choice defend substantive philosophical theses often informed by relevant philosophical literature and of evident interest to those interested in action theory, philosophical psychology, and social and political philosophy. Economics is of particular interest to those interested in epistemology and philosophy of science both because of its detailed peculiarities and because it possesses many of the overt features of the natural sciences, while its object consists of social phenomena.
Economic thought is the sum total of all the opinions and desires concerning economic subjects, especially concerning public policies of different times and places.
History of Economic Thought is different from Economic History and History of Economics. While the History of Economic Thought deals with the development of economic ideas, Economic History is a study of the economic development of a country. On the other hand, the History of Economics deals with the science of economics.
Significance of History of Economic Thought:
There are two views with regard to the importance of the study of the History of Economic Thought. One group of economists believed that there is no need to study the history of Economic Thought because it is a history of errors.
Whereas another group believed that one cannot possess knowledge of any economic doctrine until one knows something of its history. So a study of the History of Economic Thought is important for the following reasons:
1. The study of the History of Economic Thought clearly shows that there is a certain unity in economic thought and this unity connects us with ancient times.
2. The study of Economic Thought will help us to understand the origin of economics.
3. Economic ideas have been instrumental in shaping the economic and political policies of different countries.
4. Economic ideas are conditioned by time, place, and circumstances.
5. A study of Economic Thought provides a broad basis for the comparison of different ideas. It will enable a person to have a well-balanced and reasonable judgment.
6. Through the study of Economic Thought the student will realize that economics is different from economics.
7. The study of the subject helps us to avoid the mistakes committed by earlier economic thinkers.
8. The study of the History of Economic Thought will enable us to know the person responsible for the formulation of certain important principles.
In short, the significance of the study of the History of Economic Thought can hardly be overemphasized. It is an important tool of knowledge.
The history of economic thought can be studied and analyzed by adopting different approaches:
1. Chronological approach: In this approach, economic ideas are discussed in order of time. The economic ideas of different economists can be presented year-wise and can be studied. In this approach, we can find a continuity in the economic ideas of different economists.
2. Conceptual approach: This approach speaks about the evaluation of different economic concepts (ideas) and the interdependence of these concepts. The conceptual approach can also be called the ideological approach.
3. Philosophical approach: This was first adopted by the Greek philosopher, Plato. In the past economics was considered a handmade of ethics. Naturally philosophical approach was adopted by the very early writers/thinkers to discuss economic ideas.
4. Neo-Classical approach: This approach aims at improving the classical ideas by modifying them. The Neo-classical approach was first adopted by Marshall. The Neo-classical approach believed that “Inductive and Deductive reasoning is necessary for the science of economics just as the right and left feet are necessary for walking”.
5. Welfare approach: This approach mainly aims at providing the basis for adopting policies that are likely to maximize social welfare.
6. Institutional approach: The institutionalists questioned the validity of the classical ideas and gave more importance to psychological factors.
7. Keynesian approach: This is a major development in modern economics and is associated with the name J.M. Keynes. His approach is new and different from the classical school. It takes into consideration the operation of business cycles that affect the entire economic policies. Keynesian approach deals with the problem of the aggregate economy as a whole.
Adam Smith: Experimental Innovator Of Economics
Adam Smith possessed most of the attributes of an experimental innovator. He developed most of his ideas based on empirical and experiential evidence. He was a perfectionist, who made progress slowly, constantly revising and refining his writings. An Inquiry into the Nature and Causes of the Wealth of Nations, written late in his career when he was 53, is considered, by any measure of influence, his most important contribution.
Smith’s concept of competition and the division of labor are examples of important ideas rooted in observation. According to George Stigler (1957), Smith’s concept of competition was “in the sense of rivalry in a race — a race to get limited supplies or a race to be rid of excess supplies… Smith did not state how he was led to these elements of a concept of competition. We may reasonably infer that the conditions of numerous rivals and of independence of action of these rivals were matters of direct observation.”
In elaborating on the Division of Labor, Smith recounts “I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day.”
Adam Smith’s Legacy through the Lenses of Conceptual Innovators
After World War II, economics experienced a shift similar to the art world in the 20th century, where conceptual innovators became dominant. During this period, economics heavily incorporated mathematics to formalize established economic ideas and address social and economic issues. The modern understanding of Adam Smith in economics is rooted in the work of these conceptual innovators who formalized and interpreted his ideas.
Paul Samuelson was a great conceptual innovator, who made discoveries through highly abstract reasoning and made his greatest contributions early in his career. In his commemoration of Samuelson, Avinash Dixit (2009) asserts that, much like Sir Isaac Newton, Samuelson had the remarkable ability to extract the hidden principles of economics, which had been shrouded in convoluted language by earlier generations, and reframe them with remarkable clarity using the language of mathematics.
“I loved the Foundations [Paul Samuelson, 1947],” Robert Lucas wrote in a 2001 memoir. “Like so many others in my cohort, I internalized its view that if I couldn’t formulate a problem in economic theory mathematically, I didn’t know what I was doing. I came to the position that mathematical analysis is not one of many ways of doing economic theory: It is the only way. Economic theory is a mathematical analysis. Everything else is just pictures and talk.”
For example, when writing his best-selling textbook Economics, Samuelson conceptualizes the “invisible hand” as perfect competition and elucidates its welfare implications:
The invisible hand is not an actual, distinguishable entity. Instead, it is the sum of many phenomena that occur naturally when consumers and producers engage in commerce. Smith’s insight was one of the most important in the history of economics. It remains one of the chief justifications for free-market ideologies.
Modern interpretations of the invisible hand theorem suggest that the means of production and distribution should be privately owned and that if trade occurs unfettered by regulation, in turn, society will flourish organically. These interpretations compete with the concept and function of government.
Government is not serendipitous. It is prescriptive and intentional. Politicians, regulators, and those who exercise legal force (such as the courts, police, and military) pursue defined goals through coercion.
In contrast, macroeconomic forces — supply and demand, buying and selling, profit and loss — occur voluntarily until government policy inhibits or overrides them. In this sense, it is accurate to conclude that the government affects the invisible hand, not the other way around.
- Even Adam Smith, the canny Scot whose monumental book, The Wealth of Nations (1776), represents the beginning of modern economics or political economy — even he was so thrilled by the recognition of order in the economic system that he proclaimed the mystical principle of the “invisible hand”: that each individual in pursuing his own selfish good was led as if by an invisible hand, to achieve the best good of all so that any interference with free competition by the government was almost certain to be injurious. This unguarded conclusion has done almost as much harm as good in the past century and a half, especially since too often it is all that some of our leading citizens remember, 30 years later, of their college course in economics.
Along the same line, in his Foundations of Economics Analysis (1947) in Chapter VIII on Welfare Economics, he wrote:
- Beginning as it did in the writings of philosophers, theologians, pamphleteers, special pleaders, and reformers, economics has always been concerned with problems of public policy and welfare. And at least from the time of the physiocrats and Adam Smith, there has never been absent from the main body of economic literature the feeling that in some sense perfect competition represented an optimal situation.
George Stigler (1982) described The Wealth of Nations as “a stupendous palace erected upon the granite of self-interest.” Even though it can be argued that for “Adam Smith human nature was predominantly social, which explains the relevance of the impartial spectator, and human conduct is fundamentally ethical, which is determined by the social interaction that leads to moral rules” (Montes, 2004), the idea of Stigler is powerful and simple. As a conceptual innovator like Samuelson, he took from Smith what allowed him to simplify and develop a complete theory.
Robert Lucas (2003) posits that the fundamental framework of economics, as established by David Hume, Adam Smith, and David Ricardo, revolves around the idea of individuals being essentially similar and driven by simple objectives. Differences in behavior are attributed to situational factors rather than cultural, biological, racial, or class-based disparities. Lucas asserts that this viewpoint has remained unchanged for two centuries, with no new paradigms or shifts. However, he acknowledges progress in economics as primarily technical, involving advancements in mathematics, data analysis, statistics, and computational methods. This progress aims to enhance the empirical foundation and problem-solving capabilities of economic theory while remaining aligned with the initial goals set by Hume, Smith, and Ricardo.
Gary Becker made substantial contributions to integrating the complexities of human behavior into economic models by drawing inspiration from Adam Smith’s concepts in The Theory of Moral Sentiments. For example, in his book Accounting for Tastes (1996), Becker utilizes Smith’s insights to enhance economic analysis. In the book, Becker explores the role of habits in shaping personal and social capital. He highlights Smith’s explanation of the affection for family members through habit, quoting Smith’s statement that individuals are naturally inclined to have warmer affections toward their own family members due to the habit of sympathizing with them.
Conceptual Innovations in Economics and the Arts: Building on the Shoulders of Great Experimental Innovators
The formalization of Adam Smith’s ideas using mathematics helps explain the simplification of his concepts found in both The Wealth of Nations and The Theory of Moral Sentiments. This formalization occurred due to the influence of conceptual innovators in economics, who sought to enhance economic analysis and make it more rigorous.
Paul Cézanne revolutionized modern art through his breakthroughs. His concept of portraying multiple perspectives on a single canvas influenced artists like Picasso and Braque, who developed cubism by simplifying and abstracting Cézanne’s ideas. Cézanne’s meticulous approach to his craft, seen in his deliberate strokes and deep contemplation, left a profound impact. Similarly, to the innovation in economics, where conceptual innovators enhanced analysis, Picasso and his contemporaries reshaped artistic expression, pushing the boundaries of representation.
References
Becker, Gary S. Accounting for Tastes. Harvard U. Press, 1996.
Stigler, George J. “Perfect Competition, Historically Contemplated.” Journal of Political Economy 65, no. 1 (1957): 1–17.
Stigler, George J. 1971, “Smith’s Travels on the Ship of State,” History of Political Economy, 3(2): 265–277
