How Crises Shaped Economic Ideas and Policies: Wiser After the Events?

237 Pages·2015·1.827 MB·English

by  Nicos Christodoulakis

Nicos Christodoulakis
How Crises
Shaped
Economic Ideas
and Policies
Wiser After the Events?
How Crises Shaped Economic Ideas
and Policies
ThiSisaFMBlankPage
Nicos Christodoulakis
How Crises Shaped
Economic Ideas
and Policies
Wiser After the Events?
NicosChristodoulakis
DepartmentofInternational&EuropeanEconomicsStudies
AthensUniversityofEconomics&Business(AUEB)
Athens
Greece
TranslationfromtheGreeklanguageedition:
“ΟΙΚΟΝΟΜΙΚΕΣΘΕΩΡΙΕΣΚΑΙΚΡΙΣΕΙΣ”,Economic
TheoriesandCrises,Athens:KritikiPublications,2012.
ISBN978-3-319-16870-8 ISBN978-3-319-16871-5 (eBook)
DOI10.1007/978-3-319-16871-5
LibraryofCongressControlNumber:2015938161
SpringerChamHeidelbergNewYorkDordrechtLondon
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Preface
The question of whether economic theories are capable of explaining the root
causes of the global crisis in 2008 and how they will be transformed to take into
account previous inadequacies continues to stir academic economists, policy
makers,andthepublicatlarge.WhenIwasaskedtoorganizeanewundergraduate
courseonthesequestions,myfirstreactionwastogobackinhistoryandseehow
economic theories had responded to major economic crises in the past. Was it
possibleforthoseadheredtotheprevailingtheoriestoforeseeacrisisandtackleits
consequencesafterwards,orthedominantviewshadtobediscardedandreplaced
by new approaches? And further to inquire whether the conclusions drawn from
history could be of any use in amending the prevailing theories and better under-
standingthecurrentcrisis.
In the course of history, the interplay between economic theories and crises is
found to be a process far more influential than one might have thought. First
because it reveals the limitations of the theories prevailing in each epoch to face
unexpectedevents,andthismayactasacriticalwarningonhowintenselycurrent
thinking should be scrutinized and continuously improved upon. Second because
several theories—indeed the major theories—were catalyzed by previous major
crises that led the then dominant paradigm to become obsolete. If economics is
studying the relationship between ends and scarce means which have alternative
uses, as famously epitomized by Lionel Robbins in his Essay on the Nature and
SignificanceofEconomicScience,thentheevolutionofeconomictheoriesmightbe
considered as a process caused by unusually large crises on which alternative
interpretationsaretested.
AfterthreeyearsofdevelopingandteachingthesubjectintheAthensUniversity
of Economics and Business, I decided to write this book not just as a supporting
materialforthecoursebutalsoascontributiontothedebateonhowtheevolutionof
economicsshouldbepresented soastobebetterunderstood.Acaveatisduethat
the book is neither a concise history of economics nor a treatise on methodology
and comparativeassessment ofcompeting theories, though ituses several ofsuch
traits.Itisbettertobeseenasanattempttoframepastproblemsandinterpretations
v
vi Preface
intoacurrentdialogueonhoweconomicsshouldrespondtothecurrentcrisisand
whichquestionsneedtobeaddressedandreexamined.
Among many books and authors that I have read in the course of years and in
connectiontothisone,IneedtonotetheparticularbenefitItookfromsomespecific
works: The methodology of economics by Mark Blaug provided me with the
essentialsofscientificcriteriainexaminingeconomictheories;TheDistantMirror
byBarbaraTuchmanfascinatedmeinunderstandinghowsocietiesmayturnmajor
calamitiestoaprocessofnewachievements,whileIfoundthatTheCashNexusby
Niall Ferguson is exemplary in explaining the interactions between events and
policies over time. In writing on the evolution of economic theories, I was
frequently inspired by the authoritative study by Robert Heilbroner and William
MilbergonTheMaking ofEconomicSociety,andwasalsoinfluencedbytheway
past events are brought forward by John Kenneth Galbraith in his History of
Economics: The Past as the Present. The motivation and intellectual guidance I
havedrawnfromthesebooksbyfarexceedthespecificmentioninginthetext.
ThefirsteditionofthepresentbookappearedinGreekin2012,andthepresent
form has benefited from many comments and suggestions inthe meanwhile. I am
indebtedtoProfessorsNicos Theocharakis, Theodore Lianos,and AntonisLiakos
for useful comments and corrections on the first edition. I am also thankful to
George Christidis and Irene Watson who helped me in translating and editing the
bookinanearlierstageandtoJohannesGlaeserforhisencouragementandadvice
for the present publication. Inparticular,Iwouldlike tothank AnastasiaTsadaris
whopatientlyeditedthemanuscriptsseveraltimesbeforetakingthepresentform.
Naturally,anyremainingerrorsoromissionsareentirelyofmyown.
Athens,Greece NicosChristodoulakis
January2015
Contents
1 Introduction:DelusionsandLessons. . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 CrisesintheNileandtheRhine. . . . . . . . . . . . . . . . . . . . . . . 1
1.2 IstheHistoryofEconomicThoughtAnyUseful?. . . . . . . . . . . 5
1.3 TheHistoricalDivide. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.3.1 Pre-modernPeriod:SmallScaleofProduction—Low
FactorMobility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.3.2 ModernPeriod:LargeScaleofProduction—Increased
FactorMobility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.4 PlanoftheBook. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2 FormsofEconomicTheoriesandCrises. . . . . . . . . . . . . . . . . . . . . 13
2.1 TheRelationshipBetweenCrisesandTheories. . . . . . . . . . . . 13
2.1.1 OrganicTheories. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.1.2 AmendmentsandInsistence. . . . . . . . . . . . . . . . . . . . 14
2.1.3 ScaleandRelevance. . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2 FormsofEconomicThinking. . . . . . . . . . . . . . . . . . . . . . . . . 16
2.3 ATypologyofCrises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.3.1 Supply-SideCrises. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.3.2 DemandCrises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.4 WhatConstitutesaCrisis?. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.4.1 CrisisThresholds. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.4.2 Repression. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.4.3 ReactionPatterns. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3 HowOldAreEconomics?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.1 EconomicFunctionsintheAncientWorld. . . . . . . . . . . . . . . . 25
3.2 TheFirstBigCrisis:FamineinAncientEgypt. . . . . . . . . . . . . 26
3.3 MarketLessonsfromtheCrisis:HowAncientAthensAvoided
Famines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3.4 EconomicCrisesinAncientGreece. . . . . . . . . . . . . . . . . . . . . 29
3.4.1 MoneyCreation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.4.2 MoneyCorrosion. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
vii
viii Contents
3.4.3 LendingandDebtCrises. . . . . . . . . . . . . . . . . . . . . . 30
3.4.4 TaxationandRepresentation. . . . . . . . . . . . . . . . . . . . 31
3.5 TheEvolutionofEconomicThinking. . . . . . . . . . . . . . . . . . . 32
3.5.1 Plato’sEconomicAdvice. . . . . . . . . . . . . . . . . . . . . . 32
3.5.2 Xenophon’sEconomicOrganization. . . . . . . . . . . . . . 33
3.5.3 Aristotle’sEconomicPhilosophy. . . . . . . . . . . . . . . . 34
3.6 ModesofProductionandEconomicThinkinginthe
AncientEast. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.6.1 EasternEmpires. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.6.2 ModesofProduction. . . . . . . . . . . . . . . . . . . . . . . . . 38
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
4 EconomicCrisesandPracticesintheRomanandByzantine
Era. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
4.1 ExpansionWithoutInnovation. . . . . . . . . . . . . . . . . . . . . . . . 41
4.2 CrisesintheRomanEmpire. . . . . . . . . . . . . . . . . . . . . . . . . . 42
4.2.1 LendingandHousingCrises. . . . . . . . . . . . . . . . . . . . 42
4.2.2 FaminesandGovernmentPolicy. . . . . . . . . . . . . . . . . 43
4.2.3 TheCrisisUnderDiocletian. . . . . . . . . . . . . . . . . . . . 44
4.3 CurrencyReforminByzantium. . . . . . . . . . . . . . . . . . . . . . . . 45
4.4 LendingandTaxation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
4.5 Byzantium’sPioneeringEconomicThought. . . . . . . . . . . . . . . 47
4.5.1 InstitutionalContinuity. . . .. . . . . . . . .. . . . . . . . .. . 48
4.5.2 Commerce. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
4.5.3 MoreFreedominProduction. . . . . . . . . . . . . . . . . . . 49
4.5.4 GreaterSecularizationofPower. . . . . . . . . . . . . . . . . 49
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
5 EconomicTheoriesandPracticesinMedievalEurope. . . . . . . . . . 51
5.1 ProductionandEconomicRulesUnderFeudalism. . . . . . . . . . 51
5.2 ACenturyofDisasterandChange. . . . . . . . . . . . . . . . . . . . . . 54
5.2.1 TheEmergenceofTradeandBanking. . . . . . . . . . . . 55
5.3 TaxationandSovereignDebt. . . . . . . . . . . . . . . . . . . . . . . . . 56
5.3.1 TaxCrisesandRepresentation. . . . . . . . . . . . . . . . . . 56
5.3.2 TaxationinLateMiddleAges. . . . . . . . . . . . . . . . . . 58
5.3.3 FromRepresentationtoRevolution. . . . . . . . . . . . . . . 59
5.3.4 TypesofTaxation. . . . . . . . . . . . . . . . . . . . . . . . . . . 60
5.3.5 DebtandDeficits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
5.4 FromAutarkytoTrade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
5.4.1 TheoriesofMoneyandTrade. . . . . . . . . . . . . . . . . . . 63
5.4.2 ClassOrientedTheories. . . . . . . . . . . . . . . . . . . . . . . 64
5.4.3 ChurchReform. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
5.4.4 SocialPositivism. . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
5.4.5 TheAdventofReason. . . . . . . . . . . . . . . . . . . . . . . . 66
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Contents ix
6 EconomicsBeforetheIndustrialRevolution. . . . . . . . . . . . . . . . . . 69
6.1 ThePoliticalEconomyinEngland. . . . . . . . . . . . . . . . . . . . . . 69
6.1.1 Hobbes’sTheoryofState. . . . . . . . . . . . . . . . . . . . . . 70
6.1.2 Locke’sPoliticalandEconomicTheories. . . . . . . . . . 71
6.2 PhysiocracyinFrance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
6.2.1 Physiocracy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
6.2.2 DisseminationofPhysiocraticTheories. . . . . . . . . . . . 75
6.3 MachinesandMeasurement. . . . . . . . . . . . . . . . . . . . . . . . . . 76
6.3.1 EngineeringasanEconomicForce. . . . . . . . . . . . . . . 76
6.3.2 MeasurementasanEconomicTool. . . . . . . . . . . . . . . 77
6.4 EarlyEconomicCrises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
6.4.1 TheDutch“Tulipmania”(1636–1637). . . . . . . . . . . . 77
6.4.2 TheMonetaryCrisisinEngland,1690. . . . . . . . . . . . 78
6.4.3 TheFinancialCrisisinEngland,1720. . . . . . . . . . . . . 79
6.4.4 TheFinancialCrisisinFrance,1721. . . . . . . . . . . . . . 80
6.4.5 AlternativeResponsestotheCrises. . . . . . . . . . . . . . . 80
6.5 RepressionasCrisis:SlaveryandConvenientTheories. . . . . . . 81
6.5.1 SlaveryintheAntiquity. . . . . . . . . . . . . . . . . . . . . . . 81
6.5.2 SlaveryintheModernEra. . . . . . . . . . . . . . . . . . . . . 83
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
7 TheIndustrialRevolutionandtheFoundationofClassical
Economics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
7.1 TheAscentofIndustryandtheNewEconomicTheories. . . . . 87
7.1.1 SocialTurmoilandBalances. . . . . . . . . . . . . . . . . . . 88
7.1.2 EnglandontheRise. . . . . . . . . . . . . . . . . . . . . . . . . . 88
7.1.3 TheGapwiththeEast. . . . . . . . . . . . . . . . . . . . . . . . 89
7.2 IndustrialRevolution:ATaleofTwoCountries. . . . . . . . . . . . 90
7.2.1 CouldItHaveBeenFrance?. . . . . . . . . . . . . . . . . . . . 90
7.2.2 WhyItWasEngland. . . . . . . . . . . . . . . . . . . . . . . . . 91
7.3 AdamSmith:TheEconomicsofOptimism. . . . . . . . . . . . . . . 96
7.4 Malthus:TheDismalEconomics. . . . . . . . . . . . . . . . . . . . . . . 98
7.5 Ricardo:TheEconomicsofAccumulation. . . . . . . . . . . . . . . . 99
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
8 CrisesandTheoriesAftertheIndustrialRevolution. . . . . . . . . . . . 103
8.1 TheFirstCrisisofCapitalismandtheEmergenceofSocialist
Ideas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
8.2 TheEmergenceofEconomicThoughtinGermany. . . . . . . . . . 105
8.3 MarxistEconomicTheory. . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
8.3.1 KeyConceptsinMarxism. . . . . . . . . . . . . . . . . . . . . 107
8.3.2 TheCollapseofCapitalism. . . . . . . . . . . . . . . . . . . . 109
8.3.3 StructureoftheCommunistEconomy. . . . . . . . . . . . . 111
8.4 CrisesandEconomicUnions. . . . . . . . . . . . . . . . . . . . . . . . . . 112