Bawma magazine

With the advent of modernity, economic thought focused on solving the issue of scarcity of goods. Modern economic thought focuses on the efficiency of production and the distribution of goods. Also, modern economic theories pay attention to market function and market operations, as markets have become the most used mechanism of resource assignment.

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Ancient societies assigned resources mainly through two different mechanisms. Self-sustaining was a mechanism through which people provided necessary goods for themselves without having to rely on other people. As ancient societies were less complex than modern societies, needs were successfully met by one’s simple, isolated work. The other mechanism, authority, relied on a leader’s plan to produce and distribute necessary goods that could not be easily produced by an individual on his own.

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Modern economics establishes a new, independent science. Economic theories rely on the process of abstraction to set aside non-economic phenomena. In other words, this modern, economical method separates strictly economic facts from other sciences. Economics is a branch of human knowledge and should be studied as such. On the other hand, ancient economists were philosophers, mathematicians, and even doctors. Thus, economic phenomena were studied jointly with several other phenomena, such as justice, equity, and religion. The economic study was just a part of a more complex, general study. It was not a separate discipline, as it is today.

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In his treaty of economic thought, Schumpeter concluded that non-western studies lacked an analytical, scientific approach. He considered ancient, non-western studies as mere reflections on public administration. Nowadays, recent studies have proven Schumpeter wrong. Ancient, non-western civilizations had some prominent authors that analyzed society with a scientific approach. Here, we will study: (1) Guang Zong as the most important precursor of economic thinking in Ancient China; (2) Hesiod, Xenophon, and Aristotle as prominent Greek authors; (3) Abu Hamid al-Ghazali and Ibn Khaldun as Islamic authors; and (4) Thomas Aquino as the most prominent scholastic author.

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Guang Zong

Guang Zong’s book stands out as going far beyond mere administrative reflections and advice. It encompasses scientific ideas and principles that are fundamental to economic thinking. First of all, Guang Zong asserted that whenever there is profit, no matter the risks, people will take part in any economic activity. This was the first psychological approach to human economic behavior.

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Guang Zong also proposed a “light/heavy” theory, which anticipated the law of supply and demand. He claimed that when a good was abundant, it became light and its price would fall. Contrario sensu, when a good was scarce, it became heavy and its price would rise. It is even more impressive that Guang Zong also explained that these prices had one tendency toward one price – equilibrium.

Using this “light/heavy” theory, Guang Zong was able to propose a quantity theory of money. When money was scarce, it became heavy, so its price would rise, and hence prices of goods would fall (deflation). When money was abundant, it became light and its price would fall, forcing the prices of goods to rise (inflation). Bearing this in mind, he suggested that, a state must buy goods when money was heavy and sell goods when money was light, to stabilize price levels.

 

Greek thought

In his book Theogony, Hesiod explained that the scarcity of goods did not arise from a human condition. It was rather one of the evils released when Pandora opened the Box. This mythical explanation was soon to be replaced by Aristotle’s views on scarcity.

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In his book Works and days, Hesiod portrayed his most important economic ideas. Since he was a farmer, he focused on finding ways to be efficient in production and household. Efficiency is a complex concept that one can understand in terms of productivity (maximizing the ratio of output to input) or in terms of costs (minimizing costs). This idea concerned producers and householders only. The term ‘Economics’ meant 'efficient management at the level of the producer and/or the household'. Although Xenophon applied this concept at the level of the household, the producer, the military, and the public administrator, there was no significant study regarding the efficiency of society as a whole.

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Aristotle averred that private property serves a purposeful role in society and thus regulations should not limit its amount in private hands. However, rulers -who Aristotle considered to be soldiers and philosophers- should not have private property, as it would divert their attention from more important issues. He advised that rulers should hold communal property to avoid conflicts of interest.

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Regarding the ethical aspects of economics, Aristotle pigeonholed goods as needs and as desires. Human needs were moderate and thus producing commodities to satisfy those needs was right and natural, while human desires were limitless and the production of goods in an attempt to satisfy those desires was unnatural. Aristotle condemned market exchange in anticipation of monetary gain, which he thought was used to satisfy people’s unlimited desires.

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Arab-Islamic thought

Arab-islamic scholars were much more than mere translators of Greek ideas; they made contributions of their own. They did not make abstractions like modern-day economists do. They considered all aspects of human activity -including economic activity- and their consequences for one’s salvation, in compliance with divine laws.

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Abu Hamid al-Ghazali described the evolution of markets through specialization and division of labor. He also described the difficulties of barter and the consequent need for a currency to ease exchanges.

Ibn Khaldun analyzed the developmental cycles of society. He showed how humans started as rural-desert life societies with low-income and small economic surplus and how they became non-nomadic societies in which agriculture predominated, with a higher economic surplus.

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Scholasticism

Before revising the economic ideas proposed in this period, we must understand how feudal society worked. Subsistence mainly came from agriculture and constraints by tradition, custom, and authority. There was a strict social hierarchy with no social mobility: serfs, landlords, royalty, and the church. The land belonged primarily to kings and the Church. It was given to lords, and their sons by birthright, who in exchange had an obligation to the central authority that consisted of supplying services and goods. The serf paid the lord for use of the land with labor, crops, and sometimes money. In return, the lord protected the serf from outsiders. This socio-economic system limited the production of goods and services for sale in the market.

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Scholastic writers were monks who tried to provide religious guidelines to be applied to secular activities. St. Thomas Aquinas was far the most important one. While attempting to harmonize religious doctrine and certain aspects of economic activity, he focused on three main concerns: private property, just price, and usury.

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Thomas Aquinas argued that, even though religious doctrine demanded communal property, private property was not a contradiction, but rather an addition, to natural law. It devised for the benefit of society and should be permitted without further restrictions. Similar to Aristotle, Thomas Aquinas advocated for communal living as the ideal for those of deep religious commitment.

Thomas Aquinas did not search for an understanding of the formation of prices in an economy, as his classical counterparts did. He dedicated his work to the moral aspects of prices. He concluded that, when exchanges take place in the market to meet the needs of the trading parties, no ethical issues were found. When exchanges take place in anticipation of gain, they are acting virtuously only if their motives are charitable and their prices are just. The definition of just price is highly discussed; some consider it to be an equivalent in terms of labor cost, while others say it is equivalent in terms of utility or total cost of production.

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A repercussion from the concept of just price was the notion of usury. As used today, it implies an excessive rate of interest. In Thomas Aquinas’ time, it was the taking of any interest at all, as money was barren.

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Due to these highly important ideas, classical economic authors found needed theoretical foundations later on. These contributions from the Ancient Chinese civilization, the Greek civilization, the Arab-Islamic culture, and the scholastics cleared a path for modern-day economic thinkers.