Roger E. Backhouse: The Ordinary Business of Life Chapter 1 The Ancient World

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Roger E. Backhouse The Ordinary Business of
LifeChapter 1 The Ancient World

• Udayan Roy
• Lecture Notes 2008

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The ancient world

• Homer and Hesiod
• Xenophon
• Plato
• Aristotle
• Economic justice
• Acquisition of wealth
• Rome

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Homer and Hesiod

• Homer
• The Iliad and the Odyssey
• Tales from a long oral tradition, finally written
  down c. 750-725 BC
• Hesiod
• Works and Days
• Poems, c. 700 BC
• Earliest written record in Europe

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Homer

• Describes the Mycenaean (Bronze Age) world of
  Troy around 14001100 BC
• This society was not based not on market
  transactions
• Wealth was acquired through gifts, theft, prizes
  for winning competitions, plunder received in
  war, and tribute paid by defeated cities to their
  conquerors.
• Compared to agriculture and war, trade was viewed
  by Homer as an inferior way of acquiring wealth.

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Homer

• Most economic activity took place in the
  household, understood as the landowner, his
  family, and all his slaves
• Prosperity came from efficient management of the
  household

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Hesiod

• Hesiod realized that the basic economic problem
  is one of doing ones best with scarce resources.
  
• The reason men have to work is that the gods
  keep mens food concealed otherwise you would
  easily work even in a day enough to provide you
  for the whole year without working.

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Hesiod

• There is in Hesiod an intuitive understanding of
  the need to be inventive, and that
• Choices have to be made between work (which leads
  to wealth) and leisure.
• Hesiod even suggests that competition can
  stimulate production, for it will cause craftsmen
  to emulate each other.
• But these ideas are not explicitly stated one
  has to infer them
• In Hesiod, the virtues that lead to prosperity
  are hard work, honesty and peace.
• This is far from the aristocratic disparagement
  of work and support for martial virtues in Homer

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Xenophon (c. 430 354 BC)

• Oikonomikos, the title of Xenophons work, is the
  origin of the words economist and economics.
• Taken literally it means Household Management
• The book is in fact about the management of an
  agricultural estate.
• Efficient management required effective
  leadership (of slaves).
• Effective leadership required knowledge of the
  production technology and an understanding of the
  importance of order and organization
• Xenophon extended these notions to the
  administration of a state
• The emphasis was on top-down administration, and
  not on decentralized markets

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Xenophon division of labor

• Xenophon is important for two crucial insights
• Division of labor leads to higher productivity,
  and
• The extent of division of labor is determined by
  the extent of the market
• Xenophon saw that in a small town the same
  workman may have to make chairs, doors, ploughs
  and tables, but he cannot be skilled in all these
  activities.
• In large cities, however, demand is so large that
  men can specialize in each of these tasks,
  becoming more efficient.
• Turning back to the household, Xenophon argues
  that division of labor can be practiced in the
  kitchen. Food prepared in a large kitchen will be
  superior to food prepared in a smaller kitchen
  where one person has to perform all tasks.

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Xenophon division of labor

• But in Xenophons writings, trade and markets are
  peripheral.
• He does not connect division of labor to the
  market mechanism
• He takes the extent of the market as given, and
  not as something that can be expanded through the
  expansion of trade

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Plato (c. 429 347 BC)

• Republic, blueprint for an ideal state
• In a democracy, leaders would do only what was
  popular, not what was just
• In a tyranny, the tyrant would do only what was
  good for himself
• Plato proposed a middle ground.
• Some people would appoint themselves to the role
  of guardians or philosopher kings.
• They would be trained by the state for their
  roles.
• They would be forbidden to own property.
• The state would pay them a wage to cover their
  needs.
• Therefore, they would put the state above their
  own interests

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Plato

• Like Xenophon, Plato noted the importance of
  division of labor
• Men should specialize in those activities for
  which they were naturally suited, and should be
  trained accordingly.
• The origins of cities (states) lay in
  specialization and the dependence of people on
  one another.

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Plato

• Though he saw a role for trade, the role for
  markets in his ideal state was very limited.
• Consumer goods might be bought and sold, but not
  property, which was to be allocated by the state
  (on mathematical principles)
• There would be no profits or payment of interest.

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Aristotle (384 322 BC)

• His writings dominated Western thought in most
  areas for nearly 2,000 years.
• His thoughts on economic issues are found in
• Book V of the Nichomachean Ethics, which was on
  justice, and in
• Book I of the Politics, which was about the
  household, the state, and wealth acquisition.

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Aristotle Economic justice

• In organized, modern markets, the scope for
  disputes between buyers and sellers is limited
• However, in Aristotles days, markets were not
  widespread, and products were not standardized.
• This led to legal disputes between buyers and
  sellers.
• Aristotle sought to set out the principles for
  the settlement of such disputes

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Aristotle Economic justice

• Aristotle considered three concepts of justice
• Distributive justice how should the spoils of
  war be shared
• Rectificatory justice how should one be
  compensated for past injustice
• Reciprocal justice when is an economic exchange
  between a buyer and a seller just

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Aristotle Distributive justice

• How should, say, the spoils of war be shared?
• Aristotle felt that when concrete cases of such
  disputes are considered, the just share for each
  person usually becomes obvious.
• The sharing must be done according to each
  persons merit
• In concrete cases, the merits of the people
  involved in the joint acquisition of wealth are
  clear and the wealth should then be shared in
  proportion to merit

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Aristotle Rectificatory justice

• Rectificatory justice restores equality by
  compensating those who had suffered from past
  wrongs

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Aristotle reciprocal justice

• If two people exchange goods, how do we assess
  whether the transaction is just?
• One idea, commonly understood in ancient Greece,
  is that if an exchange is voluntary it must be
  just.
• Xenophon cited the example of two boys one tall
  and with a short tunic, the other short and with
  a long tunic who exchanged tunics. The
  conventional view was that this was a just
  exchange, for both boys gained from it.
• Aristotle recognized, however, that voluntary
  exchange does not determine a unique price, but
  merely a range of possible prices in between the
  lowest price the seller is prepared to accept and
  the highest price the buyer is prepared to pay.
• Within this range, what is the just price?
• Aristotles answer was the harmonic mean of the
  two extreme prices.

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Aristotle harmonic mean

• Suppose
• the lowest price the seller would accept is
  5.00, and
• The highest price the buyer would pay is 8.00
• According to Aristotle, the just price for this
  exchange is the harmonic mean of 5 and 8.
• This is 2/((1/5)(1/8)) 6.15
• This price is 23.08 higher than 5.00 and 23.08
  lower than 8.00
• This general property of the harmonic mean makes
  it the just solution, according to Aristotle

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Aristotle Acquisition of wealth

• Getting rich by identifying and pursuing a
  profitable productive activity was fine
• Exchange of ones surplus product for the surplus
  of another was fine
• But getting rich through commerce and usury was
  unnatural and unacceptable
• It was assumed that there was a socially
  acceptable level of consumption
• Anything in excess was frowned upon

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Aristotle

• Aristotle was suspicious of trade
• He felt that commerce and usury enabled people to
  make huge amounts of money, without doing any
  hard work and far in excess of normal needs
• This implied that money was being made simply for
  the sake of making money, and not for the needs
  of the good life
• This implied that commerce and usury were
  unnatural
• Aristotle did not see markets as a social
  regulatory mechanism
• He saw the running of society as basically a
  top-down administrative issue

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Aristotle on money

• Money had three basic functions
• Means of exchange
• Measure of value (unit of account)
• Store of value
• As the metallic content of money is a convention
  determined by the state, the ruler was entitled
  to profit by reducing the metal content of money

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Rome

• The Greek glorification of agriculture and
  suspicion of commerce and usury continued
• War and conquest remained the major source of
  wealth acquisition
• Most wealth was held in the form of land
• Legal protection of property (land) became an
  important contribution to subsequent eras

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Conclusions

• The Greeks and the Romans asked the fundamental
  questions
• They established the methods of thinking that we
  still use today
• Their emphasis was on logic, and not on revealed
  knowledge
• They were far more suspicious of market activity
  and the acquisition of wealth than we are today