Chapter 9: Economic Ideas (Part 1: The Oldies)

At the dawn of the First Industrial Revolution, a new academic field emerged: Economics. (Well, something called “Political Economy” anyway.)  But centuries of economic thought had to be supplanted first.

In this Chapter, we review some of the ideas that permeated Europe leading up to the Industrial Revolutions. We’ll discuss the works of…

  • Plato & Aristotle

  • The Scholastics

  • The Mercantilists

  • Quesnay and the Physiocrats

  • Galiani, Beccaria, and Verri

  • Thomas Robert Malthus

Sources for this episode include:

Beckert, Sven. Empire of Cotton: A Global History. Vintage. 2014.

Hamlin, John E. "Thomas Robert Malthus, 1766-1834." http://www.d.umn.edu/cla/faculty/jhamlin/4111/Malthus/Thomas%20Robert%20Malthus.htm

Kurz, Heinz D. Economic Thought: A Brief History. Translated by Jeremiah Riemer. Columbia University Press. 2016.

Malthus, Thomas R. An Essay on the Principle of Population. J. Johnson, in St. Paul's Church-Yard. 1798.

Screpanti, Ernesto and Stefano Zamagni. An Outline of the History of Economic Thought. Translated by David Field. Oxford University Press. 1993.

Full Transcript

What do you think when you hear the word “economics”?

Maybe you think it’s the study of finance, or of commercial markets, or jobs, or even money. In recent years, guys like Steven Levitt and Stephen Dubner have recast it as the study of decision making and incentives.

And in a way, yes, it’s about all these things.

But the study of economics, as we know it, really comes into its own at the dawn of the first Industrial Revolution. And ever since then, this special academic field evolved to explore the unknown territory that industrialization was creating, in real time.

And it makes sense, because, with the Industrial Revolutions came a new phenomenon: Economic growth. The total value of goods and services in Great Britain – in particular – was increasing year after year. As a result, incomes grew, as did the overall standard of living.

Of course, this was a slow process, and it was not immediately obvious to everyone that the broader population would benefit. In fact, most people who lived through the first Industrial Revolution in Britain were poorer than they used to be.

Yet, it could not be ignored that some were richer – way richer – than their ancestors. The owners of the new mills, mines, and foundries were often times the descendants of simple craftspeople – but they were suddenly living like the nobility.

And if the phenomenon of growth wasn’t enough to turn people’s heads, the phenomenon of crashes was. Panics, runs, depressions, and recessions create the kinds of hardships and headaches that are impossible to ignore.

From Adam Smith to Karl Marx, from John Maynard Keynes to Milton Friedman, what economic thinkers have been studying – even without always knowing it – is industrialization.

But well before Smith and before the study of economics, there were still those who dabbled in economic thought. And understanding their ideas, and the ideas that dominated history before the Industrial Revolutions, is helpful. Because these ideas illustrate for us a world that’s about to be turned on its head.


This is the Industrial Revolutions

Chapter 9: Economic Ideas (Part 1: The Oldies)


Unfortunately, what attention is paid to pre-industrial economic thinking is devoted almost entirely to that of the Europeans. Only a few scholars bother to pay any attention to the rich history of economic thought in China or the Middle East.

I am going to be guilty of this today as well, both because there’s a lot for us to cover and because it leads us in directly to the economists of the first Industrial Revolution, who would not have been familiar with the ideas in eastern societies.

We begin in Ancient Greece, where the term economics comes from: Oikonomia, which translates to “household management”.

You see, for most of history, the term “economics” wasn’t so much used to describe theories or research – it was the practical management of one’s home and one’s business. To the extent that economic thought covered grander ideas, it was usually in terms of a broader moral and political philosophy.

That was the kind of economic thinking we got from Plato and Aristotle. Their goal was to make the running of households and businesses in harmony with the public good.

Their views were the product of the social environment of the time. Greece was a slave society, and Plato envisioned the ideal state as having that kind of social stratification, especially where labor was product of those lower in the social hierarchy.

Although his protégé, Aristotle, often disagreed with him, he did share most of Plato’s economic ideas. Money, they believed, was only useful as a means of exchange. It should be used for spending, not saving. Not investment.

They particularly opposed the charging of interest on loans. It was as if the lender was pretending to create new value where there was none. They didn’t share our modern understandings of inflation or economic growth.

Nevertheless, their ideas would persist and dominate economic thought for centuries to come. Saint Augustine of Hippo used many of their ideas in his Confessions, which would permanently implant these areas of Greek philosophy in the European worldview for over a millennium.

Plato’s and Aristotle’s objections to usury was a key reason for its prohibition by the church during the Middle Ages. It was reinforced with Hell fire imagery by Saint Thomas Aquinas, who adopted the idea of a “just price” to the Scholastic tradition.

While “just prices” and “just wages” are still lodged in our economic thinking – especially in the socialist tradition – they are deeply rooted in Medieval Catholicism. Aquinas pointed to the Golden Rule, in particular, to explain the philosophy. The concepts were later branched out from usury to include any transactions that can be determined by common estimation. That means no price gouging, no wage theft, no unfair bargaining.

But in practice, none of these ideas would endure the test of time – in part because Italian traders and others had figured out how to get around the usury laws, in part because the Black Death had permanently shaken up the old social stratification of the Middle Ages. And in part because of the new world discovered in 1492.


The events described in Chapter 3 (“The Rise of the Global Empires”) created a new economic reality for Europe and the world. It was impossible to ignore the ways the huge influx of silver from Potosí was reshaping world trade. As a result, a new period of economic thought emerged: Mercantilism.

Now, I say a “period” of economic thought, rather than a “school” of economic thought. Because Mercantilism was never a coherent economic philosophy. In fact, we only have the term “Mercantilism” because of Adam Smith’s Wealth of Nations. Smith was among the many economic thinkers who emerged in the mid-18th Century to oppose the dominant Mercantile system.

They weren’t Mercantilists because they believed in some sort of Mercantile ideology. They were Mercantilists because they were the people engaged in the Mercantile trade of the era. From 1500 to 1750, or so, their thinking dominated the new economic order.

Like Scholastics, Mercantilists thought of economics in terms of prescription, not so much in analysis of the broader system. But unlike the Scholastics, their views were almost always the products of their own self-interests, and their writings tried to explain their self-interests as in the broader interests of the economy at large.

Take, for example, the East India companies of Europe.

In 1614, British merchants imported about 12,000 pieces of cotton cloth from the subcontinent. By the end of the Century, that annual figure had spiked to nearly 900,000 pieces. And the key to it was driving down prices. One of their biggest complaints was that Indian weavers were able to sell their goods to competing East India companies, getting the best prices they could. The only way the Europeans could increase profits was by monopolizing trade.

Between 1700 and 1760, the British East India Company began increasing its militarization on the subcontinent. By 1765, it effectively ruled the state of Bengal.

You see, unlike the Ancient Greeks or the Scholastics, the Mercantilists had generated ideas about economic value. And with their ideas of economic value, they were able to promote their interests. They believed a nation’s wealth was tied to its trade surplus. Hence, they tended to support ideas like trade monopolies and, critically, tariffs.

Okay, why don’t we take a time out here and discuss what money is?

Nowadays, if you want to see how much money you have, you might pull out that smart phone you’re using and check the app for your bank account. There you’ll see the numbers of dollars and cents in that account. (or, if you’re not in a country that uses dollars and cents, fill in the name of your currency there)

You could also pull out your wallet. Maybe you have some dollar bills in there. That’s money too. That might seem like an odd statement (“of course its money, Dave”), but really, paper money hasn’t been used for very long in the west – in the grand scheme of history anyway. Just like the idea that your money is a bunch of digits in a computer – paper currency is relatively new.

Maybe you’ve got some coins in your pocket. Chances are they aren’t worth very much. A few dollars at most, if you have a lot of coins. Coins have been used for a long time – a long time. But what are the coins you have worth, really? If you melted them down, what would be the value of the metal contents? Equal to the value of the coins in present form?

No, defiantly no. And that’s something that took a long time to be the case. Throughout history, all the way back to Roman times, governments have debased the metallic content of coins to make them worth less in practice than they are in theory.

In 1971, President Nixon finally got the United States off the gold standard. The value of the dollar is no longer tied to units of gold. It’s a floating currency. A lot of people aren’t fans of the change.

But what is gold worth, really?

Well, as of the time I’m writing this, an ounce of gold is worth about $1300. That’s up about 200% in the last 20 years. That’s in part because gold jewelry is climbing in demand as economies like China and India become richer.

But besides the fact that we like shiny jewelry, gold doesn’t have a huge amount of intrinsic value. You can’t use it in very many utilitarian applications. But gold and silver have been used as units for exchange since antiquity in the Fertile Crescent. And so, it has a perceived value.

The point I want to impress on you is that money is a social construct – an important one, certainly – but it’s no more than an agreed-upon myth that a piece of gold or a quarter or a dollar bill or a number on a bank app has some sort of economic value. But, let’s face it, it would have little-to-no economic value if we didn’t all go along with the myth.

Now, myths are fine. Myths are very useful, in fact, when it comes to teaching us lessons or for getting us on the same page for social cooperation. But some people take myths very seriously and very literally. When it comes to money, that includes the myth of the gold standard, and it’s a myth that was taken very literally in the lead up to the first Industrial Revolution.

You see, the Mercantilists had a theory we call bullionism, the idea that a nation’s wealth was equivalent to that nation’s supply of money – particularly gold and silver. Treasure, in the form of these two commodities, was the only type of wealth worth accumulating. Therefore, the export of gold and silver – in return for imports of cotton goods, tea, etc. – should be avoided.

And governments liked this theory too. The wider and greater the circulation of money within a nation’s borders, the more extensive the tax base.

Under this theory, few nations faced the same kinds of pressures as England and Scotland. Great Britain has no significant gold deposits. The need for a trade surplus was more greatly felt there than in other parts of Europe.

It also led England to be among the European nations most invested in piracy. Privateers like Sir Francis Drake made careers out of stealing gold and silver off foreign ships – usually Spanish ships – all over the world on behalf of the English crown.

And if this is the prevailing idea of where value comes from, it makes sense that the Mercantilists should view trade surpluses as being so important. They’re not producing manufactured goods, they’re trying to buy low and sell high. To them, the trading process is where value is created.

But the self-interest of it all was understood well enough that the Mercantilists began waning in popularity. And by the mid-18th Century, a slew of philosophers across Europe began turning on them.


The 1750s and 60s saw new schools of economic thought emerge in Scotland, France, Milan, and Naples. And although there was little theoretical homogeny between them, what they held in common was a fierce opposition to mercantile orthodoxy, and a generally more laissez-faire approach to the national economies of the time than their governments had considered.

Among the earliest detractors of Mercantilism were a group of French philosophers known as the Physiocrats. There were a lot of these guys, but the most prominent and influential one was a surgeon named François Quesnay.

Born into a middle-class family at the end of the 17th Century, Quesnay was apprenticed to a surgeon in Paris at the age of 16, and he continued to practice medicine for decades before he was appointed as a physician to King Louis XV. During his time there, Quesnay had impressed the King with his thoughts on issues outside the scope of medicine. By the 1750s, he became fully immersed into the study of economics.

Over the next 16 years, Quesnay published several texts that became the centerpieces of Physiocratic ideology. Three ideas of his really stand out.

Number 1: The mercantilists were overstating the value of trade. The reality is, economic exchange is simply the circular flow of money and goods among the many economic sectors.

Number 2: There is a macroeconomic equilibrium and the various production process in it are interdependent.

Most importantly, Number 3: The real source of all wealth – that is, all the value in an economy – is when labor is applied to land. Not trade, but agriculture and mining, is the key to economic prosperity.

Now, it’s important to remember that, at this time, Europe is overwhelmingly rural. In France, only about 20% of people live in cities or towns. Most economic activity is agricultural. So, it made a lot of sense to them that all value would derive from land.

And while the 18th Century Agricultural Revolution and the growth of metalwork is happening most prominently in England, these developments were being realized on the continent too. And to explain the growth they saw, the Physiocrats pointed to ground beneath their feet.

The land, of course, isn’t worth very much if nobody is farming it or mining it. Labor is critical to realizing the value stored in the land.

But to the Physiocrats, not all labor was created equal. And here lies one of the major problems with their school of thought. They believed that manufacturing produced no new value for the economy - the new value had been created when the raw materials they worked with were extracted from the land.

They viewed the economy in terms of three classes: The “Distributive” Class – that is, the landlords who lived off the rents collected and redistributed the surpluses of peasant labor; The “Productive” Class – that is, the poor farmers and miners who cultivated the land; and the “Sterile” or “Non-Productive” Class – that is, the manufacturers and craftspeople who made useful tools and products, but who weren’t in fact generating any new value for the economy. They lived off the wealth generated by the Productive Class, captured by the Distributive Class, and then passed on to them for their work.

But even as the Physiocrats were promoting this view in France, there were academics in Italy who saw it differently.

The most important of them was the Neapolitan bureaucrat and humorist, Ferdinando Galiani.

Born in an ancient Italian city near the Adriatic, Galiani had the kind of brilliant mind often celebrated in the Enlightenment, as well as a dirty-minded wit that made him popular at court and beloved by thinkers like Voltaire and Nietzsche.

First, and perhaps most importantly, Galiani recognized there was no intrinsic value to any good. If nobody wanted a certain good, then it was worthless. Demand plays a role in determining value. This went at the heart of the “just price” views of the Scholastic tradition.

Second, scarcity of goods affected people’s perceptions. Supply plays a role in determining value.

Third, people generally have choices between several goods. If you can substitute Good A for Good B, then both goods are going to see less overall demand.

Although he agreed with the Physiocrats on the ways the Mercantilists were wrong, Galiani was not a fan of the French school, which he argued was too committed to abstract laissez-faire ideas and not practical when it came to short-term economic crises.

Similar ideas came out of the Milan school, with the economists Cesare Beccaria and Pietro Verri. Beccaria went further with the ideas of prices between substitutes and Verri came up with an early theory of a demand curve.

But more importantly, Beccaria outlined a theory of labor’s impact toward increasing the returns not just in agriculture and mining, but in industry as well. Verri, similarly, argued that all activities which pay profits over and above wages and replacement costs are in fact creating surplus wealth – that means manufacturing (as well as land cultivation) added value to the economy.

The work of the Italian economists would be critically influential in what was to come in the Scottish Enlightenment. Soon, a new school of thought emerged: what we now call “Classical Economics.”

We’re going to spend more time on the key figure of Classical Economics next week. But before that, I want to talk about another important figure in the Classical School. Because his ideas so perfectly illustrate the realities of the world economy prior to the first Industrial Revolution. Thomas Robert Malthus.


Thomas Malthus was born in 1766 and grew up in a small village in Surrey, south of London. His father, Daniel, was a prosperous country gentleman and a personal friend of Enlightenment philosophers David Hume and Jean-Jacques Rousseau. In fact, it appears Daniel homeschooled his son according to Rousseau’s peculiar ideas about education, as laid out in his book Emile or On Education.

At 18, Malthus went to Cambridge University to study. Four years later, he was ordained a minister of the Church of England. He continued his academic work, earning a Master’s degree in 1791 and becoming a fellow of his college in 1793. He would go on to enjoy a successful academic career with an almost perfect focus on the new study of political economy.

Okay, it’s time to discuss this term, political economy. Because so far in this episode I’ve been talking about economics. But they didn’t call it that back then.

Political economy was, broadly speaking, the study and development of political and economic theory. The field of economics we know today is reinforced by data and mathematics and even experiments. But those advancements wouldn’t come until the mid-to-late 19th Century. At the turn of the 19th Century, economic thought was still very much in the abstract.

But it was starting to become more focused and the ideas were becoming more thought through. Malthus would go on to develop theories about differential rent, economic value, and money.

But although he’s remembered for being among the Classical economists, he never seemed comfortable with that. For one thing, the overall Classical School was significantly more liberal than he was. In particular, the Classical liberals supported the idea of free trade – breaking down the old protectionist laws that upheld the Mercantile system and guarded the position of the landed gentry.

At first, Malthus tacitly supported the repeal of the so-called Corn Laws, the tariffs and trade restrictions that kept prices high to benefit domestic grain producers in the United Kingdom. This was after carefully laying out the pros and cons of the laws. But about a year later he flip-flopped and sided with the protectionists, arguing the Corn Laws encouraged Britain to be self-sufficient in food production.

Perhaps, just perhaps, this had to do with who was paying him. Years earlier, he was granted a position as a professor in modern history and political economy at – wait for it – the new East India Company College. The college was established to educate those who would go off to govern the huge area in India now wholly controlled by the British East India Company. And with the Mercantilists paying the bills, maybe we shouldn’t be too surprised he backed the Mercantilists.

But he was also a fairly conservative guy. Certainly more so than his father. And both the liberals and the radicals – that is, to say, proto-socialists – of his time lambasted him as a monster.

Why? Well, for that, we need to talk about his most famous work, his 1798 Essay on the Principle of Population. Then, as now, the Essay was something of a WTF jaw-dropper. Essentially, this is what he said…

As food production increases, so too does the population. Soon enough, the population will be greater than the means of subsistence can support. So-called “positive checks” though will keep the population in line – checks like, you know, famine, plague, general misery. But he asserted that the people could also avoid misery by avoiding vice. These so-called “preventative checks” included postponing marriage and practicing sexual abstinence.  

Now, remember that, as he’s writing this, food production in England has increased considerably. For nearly a hundred years, going back to guys like Jethro Tull, agricultural output has improved food surpluses. And, yes, the population has gotten bigger – bigger, in fact, than the demand for labor has gotten.

And this is causing a political concern in the country. “What are we supposed to do with all these unemployed and underemployed agricultural workers?”

Ever since the Black Death and the rise of enclosure, England had a series of Poor Laws to help address the problem. Elizabeth I had passed measures to redistribute wealth for poor relief in the local parishes, long before the development of the welfare state.

But the British Agricultural Revolution was exhausting this system. By the time of Malthus’s Essay, it’s possible that over a million subjects in England and Wales were receiving some amount of poor relief.

Malthus’s solution? Eliminate the Poor Laws and create an unfettered labor market. As he saw it, the Poor Laws were helping keep poor people alive, and the more poor people alive, the more the supply of labor would outweigh demand for labor. Wages would get more and more depressed.

He also suggested that Britain should have universal suffrage and state-sponsored universal education. But for poor English workers, those ideas probably got lost somewhere between “stop having sex” and “it wouldn’t be the worst thing if you starved to death.”

His goal was to introduce the working-class to middle-class virtues like “moral restraint” – a classic cocktail that’s one part elitist, one part judgy, and a splash of paternal patronizing. But the idea was that it would encourage the working-class to seek a higher standard of living for themselves before starting a family.

But it also reflects an understanding of world history that was – unbeknownst to him – becoming irrelevant.

Because Poor Laws aside and Corn Laws aside, the “just price” and bullionism and the value of land aside, the rise of manufacturing and the processes of mass production are changing the game.

And decades before Malthus’ controversial pamphlets were published, one economic philosopher figured it out. And every economic theory that has come since can be traced back to him.

Adam Smith – next week on the Industrial Revolutions.


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Thank you.

Dave Broker