Brief History of Economic Thought I The beginnings of the subject lie in the works of Kautilya in India and of Aristotle

and Plato in ancient Greece. However, during these days the subject was incorporated within a broad discussion of statecraft and public administration. While some aspects of economic life of different ancient civilizations have been studied, there is not clarity on existence on any specific economic doctrine either documented or otherwise other than directions to the king for achieving public welfare of maximizing revenue collection. In addition to this we know of existence of barter system in most of the societies. The barter system continued largely unchanged until the emergence of modernity. The state was largely monarchial during these times with several flavors of feudalism at the intermediate level. The social structures of feudalism and its implications on economic welfare have been largely criticized as exploitative by modernist historians. However, a more impartial look at these structures is required. Some modern historians have suggested that certain aspects of these economic and social structures would have important learnings which can be effectively used for dealing with current economic and social issues. We shall refer to this issue in subsequent chapters. Modern history of the subject begins in the 16th and 17th century Europe. Europe underwent through some major changes in its medieval ages. The emergence of protestant thought was helpful in many ways in liberating the society from the clutches of the clergy. As a result several dictates of the clergy that were detrimental to the development of trade and commerce were ignored leading to a boost to trade and commerce. Some of these developments largely during 1200 AD to 1600 AD which later led to the Industrial revolution are (a) 3 field system of agriculture The system to leave 1/3rd of the field fallow and further use the fallow land for growing crops like Oats that help fix nitrogen back in the soil. This led to large surpluses in Agricultural incomes. (b) Hundred years war between England and France led to weakening of feudal lords. (c) Enclosure system The weakened feudal lords resorted to the enclosure system. The lands were enclosed for sheep rearing and the peasant serfs were driven away. This led to emergence of large force of unemployed workers who migrated to towns in search of work. (d) Putting out system Production started being carried out outside the guilds using the unemployed migrant labor. Rich traders hired these workers at cheap rates, provided them tools and thus leading to first rise of the factory system. (e) Interest income no longer usury The Church had so far seen interest income as a form of usury and therefore a sin. However, with emergence of the protestant ethic some of these ideas of the church were being questioned. This encouraged lending and investment activities, thereby boosting economic activity. From a cultural perspective

(a) The authority of church had encompassed almost all walks of life, including physical, natural and social sciences. (b) The protestant movement questioned the very right of the church to stand as a mediator between man and god. Once this basic authority of the church was questioned, the other areas of life where the church had expanded its jurisdiction, such as the sciences, also developed a culture of questioning. (c) And then if truth is not what is certified by the church, then what is truth. And thus emerged the ideas of scientific proofs and need for verification of claims. There was another important outcome of these above developments in the way we organized knowledge systems. With the over-arching presence of the church, all knowledge emerged from theology. This connection with theology now weakened and different fields of knowledge started asserting their independent existence. Thus one sees emergence of several fields of enquiry such as psychology, economics, political science, history, etc. and even some in natural sciences come out on their own during the renaissance and the post-renaissance period. All these developments have had an impact on the emergence and development of economics during the period between 1600 to 1776. Mercantalism (1500 1750) As the name suggest, this was the understanding of economics from the perspective of the Merchants. With agricultural surpluses, there was need to explore new markets both for sell of produce as well as for spending of extra income generated. Later, with the emergence of industrial production, the need for trade was in search of ensuring continuous supply raw material for the factory and markets to sell the finished products. Trading, thus emerged as one of the key activities in the economy during this period. Mercantalism, was therefore, a way of explaining the role of trade in the economy, the need for trade and the advantages and disadvantages of trade for the country. The key ideas of mercantilism can be summarized as follows

(a) During this time bullion was looked upon as wealth. Thus accumulation of bullion increased a country s wealth while spending of bullion lead to a decrease in wealth. (b) When the merchants exported they earned bullion and hence exports were good for the country. On the other hand when the merchants imported they spent away bullion and hence was not good for the country. (c) It was seen that left to themselves, the merchants exported goods from the country and earned bullion for the country. This was good as it increased the wealth. However, instead of bringing the bullion back in the country, the merchants spent their earnings abroad in buying luxuries, eg. cotton, silk and spices from India and China. This led to an outflow of bullion and thus impoverishment of the parent country. (d) A need was therefore felt to have government control of trade.