Home > Uncategorized > Economic theories cannot be understood outside their historical context

Economic theories cannot be understood outside their historical context

from Asad Zaman

It is an Obvious Truth that economic theories analyze specific historical economic systems.

In nomadic societies, there is no production. Economics would be about finding plants, game, and moving according to seasons.

In agricultural societies, private property becomes important. Those who plant need to have rights to harvest their plantings.

Feudal Societies are mostly self-sufficient in commodities and operate without money. These are barter societies. Money is not a goal, but only a means to get more goods. Karl Marx explained this via the formula: C – M – C’  which means that Commodities are sold for money, which is used to get different commodities.

Market societies: people sell labor for wages to produce commodities. Money is used for purchase. Money is main driver of society. Laborers sell their lives for money. Producers start with money, use money to produce commodities, and sell commodities for more money: M – C – M’  – This inversion of goals is tremendously important in understanding market societies. Both laborers and producers are driven by the desire to make money – not to consume goods. It is important to note the modern economic theory does not recognize this, and treats market societies like barter societies. It is only because of this failure to recognize the motivations that economic theories treat money as a veil, and say that money is neutral.

All of this discussion is to make a very simple point: Economic theories cannot be understood outside their historical context.

To understand Keynes, we must study the Great Depression. What were the theories which failed, and how was Keynes driven to find a new theory? How did his theory explain the Great Depression?

To understand Minsky’s Financial Fragility Theory, we must study the repeated banking crises that occurred since the 1970’s. These led Minsky to think about the causes of these crises, and come up with a theory which explained them.

To understand Mercantilism, we must understand European history driven by wars, and the necessity for accumulating gold to finance them. For modern economies, it make no sense to accumulate gold, but in the 18th Century, gold was of central importance to finance wars.

It is of great interest to understand that the opposite is also true. Just as we cannot understand economic theory without the historical context, so we cannot understand history without understanding economic theory. This is because history is shaped by theories.  read more

  1. May 4, 2020 at 1:56 pm

    I do not believe private property is the least bit important to agriculture. This kind of statement is an assertion of personal ideological belief.

    • Meta Capitalism
      May 4, 2020 at 11:36 pm

      This is a debate between Dumuzid, the shepherd, and Enkimdu, a minor deity associated with cultivation and here representing the interests of the farmer…. Shepherds and farmers coexisted in the Mesopotamian economy and, while they may have had their differences, in many ways their interests were complementary. (Black 2004, 40)

      It appears trading started very early and it was certainly based upon what one party had and another party didn’t have and both mutually wanted to trade.

  2. May 4, 2020 at 3:45 pm

    See “Coevolution of farming and private property during the early Holocene” by
    Samuel Bowles and Jung-Kyoo Choi Proc Natl Acad Sci U S A. 2013 May 28; 110(22): 8830–8835.

  3. Robert Locke
    May 4, 2020 at 3:45 pm

    Just as we cannot understand economic theory without the historical context, so we cannot understand history without understanding economic theory.


    • May 4, 2020 at 3:52 pm

      To understand the Global Financial Crisis of 2007, we must understand the Economic Theories which blindfolded economists in charge of policy to looming economic catastrophe. Without bad economic theory, there would have been no crisis.

  4. ghholtham
    May 4, 2020 at 3:46 pm

    The striking thing about Minsky is his writing in the 1970s and even the early 1990s preceded the financial crises that he predicted. It was prescient and not a reaction to events. Keynes’ theory was inspired by depression and it was, as we know, anticipated by Kalecki who during WWII forecast the post-war phenomenon of policy-induced (mild) recessions aimed at controlling inflation. Again prescience, not reaction.

    It is true many economic theories presuppose a given institutional structure but some are more general. Hunter gatherer behaviour involves decisions about how long to search for food and how much rest to take, inter-group division of labour and when to decide an area is exhausted and move on – all susceptible to economic analysis. None of the relevant analysis – search theory, optimal stopping etc, was developed with hunter gatherers in mind.

  5. ghholtham
    May 4, 2020 at 4:21 pm

    Come, come Robert. The history of the Atlantic slave trade is explicable in terms of the theory of factor endowments: abundant land and natural resources in the Americas and a shortage of exploitable labour. British commercial policy in the 19th was rationalized by Ricardo’s theory of comparative advantage and again motivated by the rise of the manufacturing interest. Marx based the whole of history on changes in technology and therefore the form of the economic “substructure”. He may have underestimated the feedback from the “epiphenomena” of culture and politics but was he entirely wrong? What caused the Weimar inflation; you have to understand Keynes’ “transfer problem” to know. And the Depression? I suspect that just as M Jourdain did not realise he had been speaking prose you have imbibed and applied a lot of economic theory without noticing it.
    Writers on this blog seem to think economic theory is just Keynes and Friedman and Lucas and Sargent. Quesnay, Smith, Ricardo, Marx, List, Schumpeter and Veblen were all doing economic theory and historical analysis is permeated by their thought and has to contend with their influence.

  6. May 4, 2020 at 5:09 pm

    @ghholtham — I appreciate your remarks – what you are saying is that patterns of history can be understood by looking at economics. For example the quest for markets necessitated by overproduction made possible by industrial revolution led to colonization. However, what I am trying to say in the post is quite different. What I am saying is that policy makers shape response to events according to their understandings derived from economic theory. For example, a Hayekian response to Great Depression – leave everything alone and let free Market fix the problems – may have led to a laborer led revolution along communist lines, or otherwise disrupted natural course of affairs. However a Keynesian response, which emphasized provision of jobs over government deficit led to the survival of capitalism. Similarly policy responses crafted in the light of bad economic theories led first to the Global Financial Crisis and then later to the Great Recession which followed – neither was inevitable and both could have been avoid using different economic theories. It is in this sense that economic theories, used to shape policy responses, actually shape history.

  7. ghholtham
    May 4, 2020 at 5:29 pm

    Asad, I take your point though I think the issue is less clear cut than Keynes pretended. Contrary to his famous remark I think policies are generally driven by interests, real or perceived and policy-makers pick the economic doctrine that sanctions what they want to do anyway. Mrs Thatcher was not a free marketeer because she read Hayek. She read Hayek because she was already a free marketeer – because she was the daughter of a self-made Grantham greengrocer who inculcated those views. Roosevelt was reacting to political and electoral necessity, not to Keynes. That is not to excuse the ridiculous economic theories that have become fashionable over the past forty years. They have been deleterious but they are not decisive in themselves.

  8. Herbert
    May 4, 2020 at 5:46 pm

    This is nonsense. Theories are not the fruit of historical processes; rather, history is a consequence of theories. If Marx had not written his communist theories, then Lenin would not have built socialism in Russia.

  9. May 4, 2020 at 6:06 pm

    Interesting post but agricultural and feudal societies both had the commons available for people to use. Ownership allowed the appropriation of those lands for the benefit of the landowners creating serfdom which in modern terms are employees. I once wrote a piece about free trade agreements being tools to fence in the commons in the same way that feudal lords planted hedges to enclose parts of the commons for their exclusive use.

    But Professor (now emeritus) John McMurtry wrote about money in another way. He saw money as part of the life sequence as you describe. But now life is valued primarily for the money it can be converted into and the financial system then converts money into more money divorcing it from the life-money-life-money-life sequence you described creating a life-money-money-money-money sequence. He built his analysis on Polanyi and Marx. People now serve the economy instead of the economy serving society.

    But, while I get your point about economic theories shaping history, I respectfully disagree. It is like religion. Those with power, or those who lust for power, pick up ideas lying around (to quote Naomi Klein and Milton Friedman) during crises and shape the beliefs of people or as Chomsky said Manufacture their consent or as Edward L. Bernays said Engineer their consent.

    We see similar analyses about the financialization of society in the work of Hudson, Keene and other heterodox economists. Places where people live are no longer homes but investments or equity for example.

    McMurtry’s books include: Value Wars: The Global Market versus the Life Economy; Unequal Freedoms: The Global Market as an Ethical System; and The Cancer Stage of Capitalism.

    • May 4, 2020 at 9:50 pm

      Thank you. Private property and commons are important considerations at this juncture. Rather than view private property as an abstraction, it is an expression of evolution. And now we are at the point where soil degradation accounts for almost one third of impending global climate collapse. See, dirt, The Erosion of Civilizations by David R, Montgomery.

      This is a wide ranging subject, thank you again, this subject soon brings us to efficiency, as a concept. And we leap from there to the present, when efficient privatized agriculture is dumping food. Private property of a family producing in sync with their surroundings is real. Private property and a free market are a religion when they support corporatism. Economics can easily slip into being a religion, it seems, to me.

  10. John deChadenedes
    May 5, 2020 at 2:45 am

    Erosion and degradation of the fertility of soil should be seen as private appropriation of common property. Pollution should be seen as deflecting the costs of bad production processes onto the public, away from the profit-making hands of the owners of the means of production. The magnificent wealth of the aristocratic families of Europe and England should be seen as the spoils of slavery, colonialism, and violent conquest. Theories that provide other kinds of explanations for these phenomena should be seen as rationalizations that may have been appropriate for the age in which they were developed. Present day mainstream economics should be seen as a smokescreen and rationalization for the globalized exploitation and destruction of the commons that characterize this final phase of capitalism. This is certainly how people of the future will see it!

    • May 6, 2020 at 3:00 am

      Yes, You are talking in reaL economic parameters. Thank you. I can say that whoever you are, your perspective is appreciated by the few millennials I tried your response on.

  11. Robert Locke
    May 5, 2020 at 10:38 am

    If you had read Arthur Young’s descriptions of rural France, in the era of the French revolution, you would know that the small landholders, which existed in abundance, poorly managed their holdings, and that the rich proprietaire carried through the agricultural revolution in land management.

    • May 6, 2020 at 2:39 pm

      This is the same story world-wide, as near as I can tell from reading agricultural history. The wealthy become absentee landlords of large estates and normal people keep on farming their way up steeper and steeper land. Erosion wipes out hill sides, valleys and harbors or population increases from temporarily increased agricultural production as more and more land is cleared and farmed using technological progress that destroys Earth bounty and replaces it with semi slave labor tending machines and chemicals.

      The result is clear to see today using the US as an example; erosion and soil degradation is proceeding in the US faster than prior capitalist empires and will leave the land an eroded desert with pebbles and rocks littered over a continental expanse of heavy grained sand and a few sparse bunches of grass. Note that release of ancient soil carbons during this process of soil degradation via modern agricultural corporatization accounts for almost a third of climate collapse from greenhouse gasses. This negative one third responsibility of the agricultural revolution does not include fuel, chemicals or plastic distribution via socially backwards one-way polluting super markets and the freight systems they require.

      Return of social humans to the land and education which avoids precast ideology can turn things around, possibly in time to save life on Earth. Even so, rich people will resist and if they are successful, humanity could then die back drastically, maybe completely. Small scale land holders farming with advanced education and a gradually declining population educated to use less and less material goods are impossible for capitalist representative democracy mental framing to tolerate or understand.

  12. ghholtham
    May 5, 2020 at 11:01 pm

    Herbert, I admire your confidence, I suspect if Marx had never written a line, Lenin would have espoused some other radical thinker – Proudhon perhaps – and staged his coup d’etat anyway in which he seized control of a popular revolution made mainly by people who had never heard of Marx. Your faith in the power of pure ideas was not shared by Marx himself who argued they were epiphenomena – the consequences of an economic substructure. He thought the coming Communist revolution was down to historical forces not his own powers of persuasion. I think he overstated the case but he was more right than wrong.

  13. Herbert
    May 6, 2020 at 5:45 pm

    ghholtham!I completely agree with this. We cannot be responsible for who will use our ideas and how. But I also completely reject the idea of ​​the need for knowledge of history in order to understand the theory or create it. For example, We all know enough history, but its knowledge did not affect the theory of the emergence of the economy !!! The discovery of America is the main reason for the development of economic relations in Europe, but this fact is not supported by orthodox science. Such a conclusion can be made only on the basis of a theory that so far is little known to anyone. It all comes down to three historical events that occurred in one historical period: Equity of American gold, the development of maritime trade, and the technical revolution.
    I am very flattered by your attention to my post, but I am a contradictory person and I do not agree with the existence of historical forces. Marx could not assume that his ideas would become a guide to destruction. He sowed the seeds of hate into weak minds and became a provocateur of global destruction, which continues under the slogan “to rob robbers”

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