DEFINITION: Economics is the scholarly study of the human activity of producing and exchanging goods, whether material or intellectual.

ETYMOLOGY: The word “economics” derives from the Greek words oikos, meaning “household” or “home,” and logos, meaning (in this context) “reason” or “rational thought.”

This etymology also explains a common spelling of the word found in older books: “œconomics.”

USAGE: Both the word “economics” and the discipline itself trace their origin back to the ancient Greeks.

Specifically, there are two surviving texts entitled Economics (Oikonomika), one by the author Xenophon and the other long attributed to the philosopher Aristotle, but now thought to have been written by his pupil, Theophrastus.

These texts mainly deal with matters involving household and agricultural estate management. However, in places they do touch upon more foundational issues that we would recognize today as properly belonging to the science of political economy, or economics.

Some economic content may also be found in the Scholastic authors of the High Middle Ages, such as Thomas Aquinas.

Nevertheless, it is closer to the mark to say that philosophical reflection upon problems that are recognizably economic when viewed from a modern perspective really begins during the Renaissance, especially during the sixteenth-century efflorescence of civilization in Spain known as the Siglo de Oro.

With respect to philosophy more specifically, the Spanish Golden Age may also be viewed as part of a wider renewal of the Scholastic style of philosophy, which became known as the Second Scholastic.

This philosophical renaissance was still centered in Spain, although it was present to a lesser extent in Italy, France, and elsewhere. Because many of the Spanish authors who were active at this time and who wrote on economics either studied or taught at the University of Salamanca, they are often grouped together in the history of economic thought as forming the Salamanca School.

The Salamanca School authors were the first thinkers in history to devote sustained and systematic attention to the analysis of such phenomena as money, inflation, interest rates, taxation, markets, and international trade.

On the whole, the results of the Salamanca School authors were in line with the ideas advanced by the founders of the “classical” school of economic thought, including Adam Smith, David Hume, Thomas Malthus, and David Ricardo in England, and Anne-Robert-Jacques Turgot and Jean-Baptiste Say in France, among others, some two centuries later.

The classical school made many important discoveries, but above all it advanced two theses:

  • According to the doctrine of comparative advantage, first proposed by Ricardo, there is a natural division of labor among nations just as there is among the individuals within a nation; for this reason, free trade is to the advantage of all nations; and
  • According to Adam Smith’s concept of the “invisible hand” and the French physiocrate (liberal) idea of laissez-faire, the economy works more efficiently and productively when the marketplace is left alone than it does under any form of centralized control.

Classical economics is also known as “economic liberalism,” because it was analogous to the political liberalism which became ascendant in England at about the same time. Both forms of liberalism aimed to constrain the power of the king to control his subjects’ lives, whether political or economic.

Thus, we can see that political and economic freedom have gone hand in hand for more than two centuries.

The science of economics that developed during the late nineteenth century made many new discoveries, notably, the insight that the value of a thing is determined by the subjective demand for it in the marketplace and not by the amount of labor that went into its production.

This key idea, known as the “subjective theory of value, was advanced by the Austrian Carl Menger, the Frenchman Léon Walras, and the Englishman William Stanley Jevons at roughly the same time, in the 1860s.

In other work by Jevonsas well as his successor at Cambridge University, Alfred Marshall, and others—many of the ideas of the classical economic consensus were given a more rigorous mathematical form.

At this point, idealized mathematical models begin to replace verbal descriptions of economic reality as the primary substance of the academic discipline of political economy.

Perhaps the summit of this new direction was the “general equilibrium theory” first advanced by Walras in the 1870s.

These new formal methods, together with the subjective theory of value, were then combined with the classical theory to form a new synthesis usually referred to as “neoclassical economics.”

During the late nineteenth and early twentieth centuries, the main competitor to the classical and neoclassical schools was the economics of Karl Marx. However, Marx’s economic analyses—as opposed to his political agitation—were not taken seriously by the academic economics discipline and thus had limited influence on the field.

Up until the stock market crash of 1929 and the Great Depression, neoclassical economics reigned supreme. However, the crisis of the early 1930s resulted in serious soul-searching among academic economists.

In 1936, the neoclassical consensus was shattered by the groundbreaking book of John Maynard Keynes, The General Theory of Employment, Interest, and Money.

In a nutshell, Keynesian economics renounced one of the two basic theses of the classical and neoclassical schools, namely, that markets work more efficiently and productively on their own than they do under centralized government control.

Through a combination of mathematical sophistication and literary flair, Keynes convinced many readers of his magnum opus that the fundamental notion of laissez-faire was erroneous, and that the government must inject money directly into the economy to support selected industries, in order to achieve maximum productivity and full employment.

It took time, but by the end of World War II, Keynes’s ideas had permeated the halls of power in nearly all the Western industrialized democracies.

At first, economic growth worldwide under the Keynesian regime was startling, leading to some 30 years of steadily increasingly prosperity between 1945 and 1975—what the French call “les trente glorieuses.”

However, things then began to break down. The combination of high inflation and low or negative growth (“stagflation”) that appeared during the second half of the 1970s eventually led to a partial repudiation of Keynesianism and a course correction back towards the neoclassical consensus.

This phase of economic history has come to be known as the reign of “neoliberalism.

For a while, the new neoliberal (really, more of a Keynesian-lite) consensus was quite successful, both in the developed and also in the developing world. With the spread of free-market policies and the rule of law to the world’s poorest countries, notably, China, the prospect to an end to human economic misery appeared to many to be within sight.

Then, as though at the beat of a metronome, 1929 happened all over again.

In 2009, an asset-price bubble in the housing industry burst, resulting in a worldwide chain of bank failures and sending political shockwaves around the world.

The 2009 financial crisis, together with the insolvency of several of the European Union’s smaller states over the next few years, marked a remarkable turning point in the history of economics.

Today, in 2022, we find ourselves in an unprecedented situation:

Not only is neoliberalism dead and buried; not only has Keynes been resurrected; but Marx himself has been heard stirring in his grave.