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History Of Economics

Bank Of England

When I was at university in the 1980s, I wrote an essay on the American writer David Henry Thoreau, and said he was interested in economics. My tutor's reaction is still clear in my memory: "Literature is not about economics!" he declared. This was quite shocking. I thought literature could be about anything. But no. I guess it had to be about star-crossed lovers, or small boys who get trained as pickpockets. Perhaps this was an early lesson in the way economics divides people. The fact is, however, as Alfred Marshall wrote: "Economics is a study of mankind in the ordinary business of life" (quoted in A History of Economics by J.K. Galbraith P5). Economics, seemingly an esoteric dark art confined to forbidding institutions is really about what we do everyday; going to work, or being unemployed, going out shopping, or staying in and watching television. Economics like literature, can be about anything.


Money is the common currency, something virtually all of us have, and something which divides us. People are divided by how much they earn and own. This seeming inevitability hasn't always been the case. In hunter gatherer societies surviving today, there does not seem to be a tendency to gather private property. Resources are more likely to be shared out, rather than hoarded by a few individuals. Both John E. Pffeifer in The Creative Explosion and James Shreeve in The Neandertal Enigma begin their explanations of human social development by pointing out that hunter gatherer societies rarely have a leader. Modern Kalahari Bushmen have no specific leader, and train their children from an early age to share all they have with each other. Charles Darwin remarked on the same social arrangement in the natives of Tierra del Fuego, during his famous voyage on the Beagle. He met the Fuegians on a freezing, rainy day, and wondered at their condition as rain ran over their entirely naked bodies. "In Tierra del Fuego, until some chief shall arise with power sufficient to secure any acquired advantages, such as domesticated animals or other valuable presents, it seems scarcely possible that the political state of the country can be improved. At present, even a piece of cloth is torn into shreds and distributed; and no one individual becomes richer than another" (The Voyage of the Beagle P184). There is a sad truth in Darwin's words. People aspire to nicer things, a better life. They look at other people and covet what they have. In this way, economies are driven forward. They depend fundamentally on some people having a great deal, and others having much less. But of course this division is never going to be stable. The fluctuating struggle between necessary social division and necessary reaction against such division is a fundamental aspect of economic history.


James Shreeve in The Neandertal Enigma describes a possible beginning for social division. He discusses archeological evidence suggesting that early in the period known as the Upper Paleolithic, around 20,000 years ago, huts on the Russian plain seemed to be clustered around a central pit, indicating an egalitarian sharing of resources, typical of hunter gatherers. Later each hut had its own pit, and some pits were bigger than others. Society seemed to be crystallising into a hierarchy. This period, during the last ice age, was a time of dramatic hardship. Mankind must have been fighting for survival. Quite why social hierarchy should develop at this time is unknown. Perhaps the intense hardship called for dynamic leadership. Perhaps a hierarchical society had the potential to develop in a more sophisticated manner, with different people fulfilling different specialised roles. But against these advantages was the inherent instability of a situation where some people had a greater share of resources than others. It is thought by some, Olga Soffer for example, that religion developed to support social division between leaders and those who were led, between those who had more and those who had less. In whatever manner the division of leader and led actually occurred, by the time of the ancient Greek civilisation money had come into being, along with dramatic social differences. Aristotle wrote about both money and social division in his Politics: Of social division he said: "The lower sort are by nature slaves, and it is better for them as for all inferiors that they should be under the rule of a master... Indeed the use made of slaves and tame animals is not very different" (Politics Book 1). It was in this kind of society that money developed, and Aristotle describes how the coinage of his time in the fourth century BC, had arisen out of barter: "The various necessities of life are not easily carried about, and hence men agreed to employ in their dealings with each other something which was intrinsically useful and easily applicable to the purposes of life, for example, iron, silver and the like. Of this the value was at first measured by size and weight, but in the process of time they put a stamp on it to save the trouble and to mark the value" (Politics Book 1). This sums up the development of money. Barter was awkward. It was difficult to carry your cows around with you. Much better to carry around a representation of their value. The physical characteristics of precious metals allowed them to be divided up easily into standard sizes, and they had high value in a bulk small enough to be put in a pocket. All the trade carried on with money of course relied on inequality, of which there was plenty. These differences remained into the Roman period, and indeed became protected by law. We know that private property predates the classical world, going back in all probability to those different sized pits on the Russian plain. But J.K. Galbraith in The History Of Economics suggests that the Romans were the first civilisation to enshrine private property in law.


Hengistbury Head

As far as Britain was concerned Hengistbury Head in Dorset, probably the site of Britain's first town, has demonstrated the early presence of money in Britain. Currency must have arrived here through trade with Mediterranean civilisations. The town at Hengistbury Head reached its peak from around 700BC when Celtic people engaged in sea bourne trade with Europe. Many coins have been found at the site, including examples of what seem to be ancient forgeries, with a bronze base dipped in silver. The British Museum has a collection of coins dating back to the seventh century BC, and has many other related items such as coin weights and tokens. The Ashmolean Museum in Oxford also has an excellent collection of early coins.


With the Roman Empire's collapse in the fifth century, Europe descended into many centuries of chaotic division, with local landowners virtually running their own tiny kingdoms. Trade was little developed and not considered important. The Roman Catholic Church became Europe's main cohesive influence. Theoretically Christianity was based on an egalitarian ethic. Jesus was the son of an artisan who showed that there was no divine right to privileged power. He attacked money lenders at the Temple. This egalitarianism may have counted to some degree against widespread development of economic activity in the Middle Ages. On the other hand religion from its earliest days has been linked with inequality, of power, and as an extension of wealth. The Church was extremely hierarchical, with its central texts kept firmly hidden away from normal believers. The Church was also very rich. The Pope's palace at Avignon symbolised the reality of ecclesiastical attitudes to wealth. It was, in the words of Terry Jones, "a paranoid's palace" (Who Murdered Chaucer P64). In the palace's most secure areas lay the Great Treasury, where beneath a false floor lay vast wealth collected in taxes from people who wanted to buy a better afterlife. The divided nature of society was in no danger during the centuries while the Church held sway. Egalitarianism existed more in word than deed.



Royal Exchange

As far as Britain was concerned, moves away from the limited economy of a divided post Roman world had begun with Viking invasions from the eighth century onwards. Until this time land had been the basis of power and wealth. Considered the ultimate resource it was jealously handed down through generations. Individuals only had what Julian D. Richards terms a "life interest". People rarely sold land since to do so would disinherit heirs. The Viking invasions disrupted this system and led to a massive privatisation of land ownership; and of course where there is private property there is trade. Meanwhile on the continent economic thinking was beginning to move towards something we would recognise today. Nicole Oresmer (1320 - 1382), the Bishop of Lisieux was perhaps the first person to write of economics in an early modern sense. In his Traietie de la Premiere Invention des Monnies he traced the history of money, and called on monarchs to encourage trade and arrange conditions for trade to flourish. From the fifteenth to eighteenth centuries trade both local and over great distances increased dramatically. 1492 saw Columbus sail to America. Vasco de Gama reached India five years later. New and exotic products started to flow from the east, while precious metals came in from South America. With a huge influx of gold and silver European prices were forced upwards. More money in circulation meant higher prices. Rising prices, causing hardship for some, also tended to stimulate trade and business. Any asset purchased was likely to increase in price, allowing sale at a profit. But while trade increased, business at this time was characteristically monopolistic. Merchants, organised in guilds, strove for monopolies to protect their interests. A wonderful fourteenth century guildhall, the Merchant Adventurers Hall can be visited in York. From the fourteenth century the wool trade, which can be explored at Lavenham in Suffolk, became hugely important in England. This vital trade was controlled by weavers' trade guilds. Preference for monopolies continued with the creation of great trading corporations, the Muscovy Company in 1555, the Dutch East India Company in 1602, and the British East India Company, which survived from 1600 to 1874. The Hanseatic League controlled trade in the Baltic region and most of the North Sea between the thirteenth and seventeenth centuries. There is one surviving Hansa building in Britain, at St Margaret's House in Kings Lyn, Norfolk, built in the fifteenth century. But perhaps the most impressive memorial to the "Age of Mercantilism" in Britain is the Royal Exchange established in 1566, which still stands in its nineteenth century building in the City of London.




As trade developed so did banks, institutions which were to change ideas profoundly. Banks appeared in Italy between the thirteenth and sixteenth centuries, first in Venice, then in other Italian cities. This association of Italy with money lending is recalled in the City of London, by the name of Lombard Street, right in the centre of the financial district. Banks regulated the quality of money, and standardised currency. They could also lend money at interest. This wasn't exactly an innovation. Aristotle in Politics had complained about the evil of usury - that is lending money at interest. But lending someone money, with which they could themselves make a profit, was an innovation. It was the practice of lending which led to the widespread introduction of paper money. A borrower could take out a loan in the form of bank notes, which confirmed a deposit of metal currency at the bank. The words "I promise to pay the bearer" still remain on British banknotes, referring to those old stashes of metal currency. A receiver of notes could theoretically go to the bank and claim the metal currency, but more usually they were passed on to another creditor. The metal, meanwhile, remained quietly in the bank, the value of which was being leant out to other borrowers. Now the value of circulating notes was far in excess of the metal kept in the bank. Money had been multiplied, and everything was fine as long as all holders of notes didn't descend on the bank at once and demand their metal money. As long as a panicky run on the bank did not occur it was as though money had simply been created out of nowhere. To see the results of this magical creation of money visit Stourhead in Wiltshire, built on the fortune made by the Hoare family, who ran Hoare's Bank from the seventeenth century onwards, one of Britain's earliest banking businesses. The huge fortunes that could be made are obvious in the extent of the Stourhead estate. So enticing was the prospect of this money making opportunity that a temptation to overdo it was always strong. The Bank Of England was created in 1694 to regulate the banking business, and to organise loans for Britain's government. The Bank of England now has a museum charting monetary history. Click on the Bank of England link for more details. The British Museum holds the national collection of paper money, ranging from fourteenth century Chinese banknotes to the Euro. The HSBC Money Gallery at the British Museum describes the development and use of money throughout the world.


Panmure House, Canongate, Edinburgh. Adam Smith lived here towards the end of his life

Supported by the new monetary system the Industrial Revolution gathered pace in the eighteenth and nineteenth centuries. As had been the case since Aristotle's time, economic activity went hand in a hand with a deeply unequal society. Many argued that these differences were inevitable. Early in the industrial period the eighteenth century Scottish writer Adam Smith in Wealth of Nations claimed that trade should be free from government interference. He believed in competition, a feeling which had been instilled in Smith by the experience of studying at Balliol College, Oxford. Here dons had sat around in a lazy stupor, their generous incomes not dependent on any kind of result or responsibility. By the nineteenth century free market ideas had developed into a ferociously competitive ethic. Some even dragged in Charles Darwin to support competitive, divisive views. Writers such as Herbert Spencer claimed the rich were winners in life's race. "I am simply carrying out the views of Mr Darwin in their applications to the human race. Only those who do advance... eventually survive " (The Study of Sociology P418). Of course this kind of social inequality had been present since the earliest days of economic activity, but had always been unstable. People wanted wealth but had reacted against the injustice of necessary social divisions. Adam Smith for example liked competition, which suggested winners and losers. But he detested the kind of social aspiration which had people trying to buy products which would allow them to look like, or behave like, their social betters. This aspiration which was fundamental to creating demand was for Smith "the most universal cause of the corruption of our moral sentiments " (Wealth of Nations 1.111.3). The contradiction in Smith's view, so characteristic of economics, never finds a resolution.



Reading Room at the British Museum where Karl Marx wrote Das Kapital

The nineteenth century's most famous campaigner against social division was the Prussian writer Karl Marx. Marx was clear in The Communist Manifesto that he admired industrialised society. Industrialism had "created enormous cities... and had rescued a considerable part of the population from the idiocy of rural life" (Communist Manifesto P9). But industrial society had been created by centuries of inequality. Marx wanted to take industrial society and make it equal. Perhaps inevitably Marx's revolution was not entirely successful. Nevertheless even western European governments which rejected Marx saw that moves had to be made towards easing harsh social divides. The advent of the welfare state came about in Bismarck's Prussia in the 1880s.


As an extension of developing social safety nets, some governments increasingly began to feel that they could control economies as a whole. Socialist states set out to plan their economies, and even capitalist countries, supposedly wedded to a "free market," made moves to centrally control economies. In the United States, government intervention advocated by John Maynard Keynes was instituted to try and overcome the Great Depression of the 1930s. While the value of social safety nets ensured their acceptance in one form or another in most western societies, the wisdom of trying to control economies is much more controversial. Some argue that government intervention helped economies climb out of the hole they fell into in the 1930s. It is also the case that government run economies in the former Soviet Union and Eastern Europe stagnated and fell apart. In Britain in the 1970s there was a National Plan to supposedly coordinate national economic activity. Inspite of a great deal of effort, the impact of the plan "on behaviour or performance was barely visible " (Ben Pimlott Harold Wilson P363). The prime minister at this time, Harold Wilson, a trained economist, eventually gave up on the charade of controlling a national economy. Some writers, Peter Schiff for example, even argue that economies characteristically decline when governments intervene to "rescue" them. Schiff would argue that recession is simply a result of borrowing and spending outstripping production and earnings. The great banking innovation of turning a fixed amount of gold into endlessly extended paper money supposedly representing its value, if pushed too far, is always going to collapse. Adam Smith warned of this. A crash is then the result. Sometimes it appears that government intervention to continue spending, and supposedly stimulate economies is simply the government taking over the individuals desire to spend what they do not earn. Schiff argues that historically Roosevelt's New Deal of government intervention did not rescue the United States economy. It seemed to be the Second World War that did that.



John Maynard Keynes' house at 46 Gordon Square, Bloomsbury

As we bring the story up to the present day, it is clear that the old struggle between social division and unification is as old as economics. In recent years this old struggle has taken on the new clothes of the environmental debate. Environmentalists generally call on people to cut back, use less. Wealth, rather than being admired, is seen as a symptom of greed with harmful environmental effects. Green campaigners rather than socialists have taken take over as the main counter force to economic division. We should remember, however, that while Marx basically admired industrial society, many environmentalists do not. The uncomfortable fact is that the environmental message of cutting back has never made economic sense. Even during the Second World War when people in Britain were mending and making do, the most important economy in the West, that of the United States, nearly doubled in size. It was this growth that finally pulled America out of the Depression. When economies decline and shrink, when things are cut back, the effects are terrible. People are thrown out of work, and in a climate of fear investment shrinks in a vicious spiral. It is a simple, and in some ways sad, fact that economies rely on growth. Adam Smith knew this back in the eighteenth century. In Wealth of Nations he describes stagnant economies where there is no incentive to chase after labour, which means the price of labour goes down. As wages shrink, so does spending power. And with people spending less there is less demand for things to be made. And so the downward spiral goes on. Certainly the idea of endlessly chasing increased profit is not perfect, and can harm the people that profit is supposed to serve. And yet the alternatives to a system based on growth only seem worse.

During the Great Depression, President Roosevelt told people that "We have nothing to fear except fear itself". He meant that fear for the future caused people not to spend or invest money. They simply hung on to whatever they had in the hope that these savings would cushion them from future blows. If a future president were to repeat Roosevelt's words, and tell people that "we have nothing to fear except fear itself" somebody, no doubt, would get up and say "What about global warming?". As the former British chancellor Nigel Lawson has suggested, this might be the crucial problem facing future economists. The crux of the problem could come down to distinguishing between a puritanical, negative desire to cut back, and a positive desire to do things more efficiently, to continue growing and developing as we remain confident about the future.