01 Mar 2010 | History

Economic Thinkers Part 1 - Ancient Greece 

In the first of a series about great economic thinkers throughout history, Peter Acton traces the roots of modern day economic philosophy back to Ancient Greece.

In 1973, the historian Moses Finley argued in his book The Ancient Economy that: “Marshall’s title (Principles of Economics) cannot be translated into Greek or Latin. Neither can the basic terms, such as labour, production, capital, investment, income, circulation, demand, entrepreneur, utility, at least not in the abstract form required for economic analysis.”

Finley was referring to Alfred Marshall’s seminal work of 1870, Principles of Economics, which brought together concepts like supply and demand and the costs of production into a cohesive philosophy and became the dominant economic textbook in England for a long time. Marshall, who lived from 1842 to 1924, was one of the most influential economists of his time and was one of the founders of neoclassical economics.

Finley argued that, as the Ancient Greeks did not have an economy to think about, they did not have the words to write about one either. He wrote: “In stressing this I am not suggesting that the ancients were like Moliere’s M. Jourdain, who spoke prose without knowing it, but that they lacked the concept of an ‘economy’ and a fortiori*  they lacked the conceptual elements which together constitute what we call ‘the economy’.”
 

HOUSEHOLD MANAGEMENT

Moses Finley’s view has influenced most historians since The Ancient Economy was published in the seventies, but seems a little unfair. Much is made of the fact that though Aristotle covered more disciplines than some universities do today, writing works called Physics, Politics, Poetics, Metaphysics and so on, he did not write an ‘Economics’. This is only because the Greek word ‘economics’ meant household management and Aristotle’s views on what we call economics were contained in his work on politics. Indeed, Aristotle recommends the state learn from the success of people who have cornered various commodity markets and introduces some fairly sophisticated concepts that were later picked up by both Adam Smith and Karl Marx.

Aristotle and Plato, like many gurus since, held that indiscriminate pursuit of wealth was bad for the soul and led to waste, luxury, idleness, corruption, jealous rivalry, poverty and debt; commerce was a much less valuable way to spend one’s time than philosophical enquiry and business people were of no account or insignificant. They recognised the need for commerce in their ideal states, though it would be tightly regulated. Plato’s ‘Laws’ included one against lending at interest, no legal status for credit sales, regulated market days and hours, and a ban on market activity by citizens. All industrial work was to be done by foreigners or freed slaves. If, despite these constraints, someone did succeed in making a reasonable amount of money, he would be given thirty days to get out of town, for good.
 

RISK AND RETURN

The lawyers and politicians who spoke as orators form a less biased source. Many of their lawsuits were about business deals and they were often businessmen themselves who frequently advocated state intervention in business in Athens – perhaps for less than altruistic reasons. Demosthenes and Lysias owned factories and Isocrates’ father made flutes – probably quite a big business. Andocides was an early investor in Public Private Partnerships who acquired the right to collect harbour taxes for one year. They also understood risk and return. Demosthenes, for instance, contrasts the security of income from a factory with the high risk of lending other people’s deposits.

Perhaps Xenophon was the best economic thinker among the ancient Greeks. He certainly understood supply and demand. He said, “An increase in the number of coppersmiths, for example, produces a fall in the price of copper work, and the coppersmiths retire from business. The same thing happens in the iron trade. Again when corn and wine are abundant, the crops are cheap…”

Xenophon also understood compound interest and devised a plan for the state to make money by leasing out mining slaves and reinvesting the proceeds. Unfortunately, in calculating this 30 per cent p.a. compound return, Xenophon had overlooked depreciation – slaves die, get sick and run away. On the other hand, depreciation was not recognised in English tax law until 1878 so he could be forgiven.

His contemporary, Socrates, arguably the most famous philosopher in history, may well have influenced Xenophon’s economic thinking. Socrates saw economics as a branch of knowledge that ‘enables men to secure an interest in their household’. According to Xenophon, Socrates defined the household as the sum of one’s possessions and that possessions themselves were ‘whatever each person found useful for his life’; QED, all things that served a purpose were useful.

This seems to fit Marshall’s own definition of economics rather well; it is, he said, “the study of mankind in the ordinary business of life”.

* A fortiori suggests an inferential step.  In other words, because the Ancients lacked the concepts regarded as necessary to compute an economic model, an economy based on Marshall's theories could not have existed.

Peter Acton is currently writing a book on industry in Classical Athens. He studied Classics at Oxford before acquiring an MBA from Stanford and spending 20 years with The Boston Consulting Group, where he was head of the Melbourne Office.