Why Economics Needs History

When economics was becoming it’s own subject in the late 18th and early 19th century, one of the common themes of what we now call classical economics was it’s approach to argue from universal assumptions. Take this famous passage from Adam Smith’s Wealth of Nations:

The division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequences of a certain propensity in human nature, which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.

Wether this propensity be one of those original principles in human nature, of which no further account can be given, or whether, as seems more probable, it be the necessary consequences of the faculties of reason and speech, it belongs not to our present subject to inquire. It is common to all men, and to be found in no other race of animals, which seems to know neither this nor any other species of contracts….Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog.

Here Smith assumes that the ability to make contracts and exchanges was created by a “propensity in human nature”, not by historical or cultural circumstances. You can also find in the writings of Ricardo and Malthus the view that the economy tends towards some “natural state” (Classical theory of growth and stagnation) based on a set of universal laws on wages, rent, and population that held throughout time. However, some economists, most notably Marx, criticized this idea. In a letter to journalist Pavel V. Annenkov, Marx heavily criticized Pierre-Joseph Proudhon’s approach to economics, claiming that:

He fails to see that economic categories are but abstractions of those real relations, that they are truths only in so far as those relations continue to exist. Thus he falls into the error of bourgeois economists who regard those economic categories as eternal laws and not as historical laws which are laws only for a given historical development, a specific development of the productive forces. Thus, instead of regarding politico economic categories as abstractions of actual social relations that are transitory and historical, Mr Proudhon, by a mystical inversion, sees in real relations only the embodiment of those abstractions. Those abstractions are themselves formulas which have been slumbering in the bosom of God the Father since the beginning of the world.

Although Marx is considered a classical economist by most standards (or at the very least, his economics was heavily informed and influenced by his classical predecessors), his stance underlies an important methodological difference between him and other classical economists. To him, universal economics laws and categories do not capture the important features of a particular social-economic system. He recognized the importance of historical development within an economic context.

This problem, what we might call the problem of historical specificity*, is a problem that has been ignored by a number mainstream economists. In all of the academic and internet debate over complicated economic models, we abstract away the institutions that should dramatically change our analysis of any given economic structure or phenomenon. When we talk about individual preferences, we neglect how institutions and culture can mould individual preferences.

Too much history is missing from the current debates on economics. Yes, there have been many fantastic mainstream economic historians over the years. Peter Temin, Barry Eichengreen, Kevin O’Rourke, and many others have all written insightful books, created valuable datasets, and produced useful empirical studies. But what’s lost in many of these empirical studies are the social and institutional realities that shape any social-economic system:

As I inspect current work in economic history, I have the sinking feeling that a lot of it looks exactly like the kind of economic analysis I have just finished caricaturing: the same integrals, the same regressions, the same substitution of t-ratios for thought. Apart from anything else, it is no fun reading the stuff any more. Far from offering the economic theorist a widened range of perceptions, this sort of economic history gives back to the theorist the same routine gruel that the economic theorist gives to the historian. Why should I believe, when it is applied to thin eighteenth-century data, something that carries no conviction when it is done with more ample twentieth-century data?

Robert Solow

Economic debates, especially ones over the “econ-blogsphere”, need to be more historically informed.

*From Geoffrey Hodgson’s fantastic book How Economics Forgot History


1. Chang, Ha-Joon. Globalisation, Economic Development, and the Role of the State. London: Zed, 2003. Print.

2. Hodgson, Geoffrey Martin. How Economics Forgot History: The Problem of Historical Specificity in Social Science. London: Routledge, 2002. Print.

3. Hodgson, Geoffrey Martin, and Geoffrey Martin Hodgson. The Evolution of Institutional Economics: Agency, Structure, and Darwinism in American Institutionalism. London: Routledge, 2004. Print.



Filed under Economics, History, Home

7 responses to “Why Economics Needs History

  1. Blue Aurora

    Um…how far did you get through An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith, Rousseau1214? Dr. Smith is actually very observant of economic history, and was definitely influenced by the events of his time (the collapse of the Ayr Bank had an effect on his views).

    • Not very far. I do plan on reading the entire book at some point, but it’s enormous and written in old 18th century English. Anyway, I’m not claiming that Adam Smith wasn’t historically informed, just that large chunks of his economic analysis seem to rely on a set of universal laws that hold throughout time. His writings on exchange, division of labor, the “stationary state”, as well as some other topics seem to suggest this. I’m also not saying that all of his economic analysis is like this, but a lot of it certainly was.

      I’m also aware of the Ayr Bank crisis and how that changed Smith’s views. Great post by JP Koning

      • Blue Aurora

        In case you did not know, Adam Smith was not the creator of the term “division of labour” – it had been in the literature prior to his famous work on political economy. Although it is good to know that you have read J.P. Koning’s post on Ayr Bank’s collapse…I think that Adam Smith is far more nuanced, careful, and subtle a thinker than you give him credit for. No offence, I think you need to learn how to make yourself get over the 18th Century English aspect.

      • I think that Adam Smith is far more nuanced, careful, and subtle a thinker than you give him credit for.

        I’m not saying that he isn’t a nuanced or brilliant thinker, I’m just describing his methodological method. While he thought of many important economic insights at the time, his methodological method lead him to make some major mistakes, as well as make some bad history (But, I do have the benefit of hindsight and a much more developed historiography on economic history than he does).

        No offence, I think you need to learn how to make yourself get over the 18th Century English aspect.

        I was being facetious.

      • Blue Aurora

        Well, I would like to apologise for failing to recognise your facetiousness. *face-palms*

        While you may have the benefit of coming from a later generation than Adam Smith himself, Rousseau1214, I think you might be mischaracterising his method…I think you ought to suspend your judgement until you’ve finished the book, because you should be able to appreciate the nuance more by the end.

  2. Pingback: Vaguely Interesting » History Carnival 134

  3. Pingback: Why Economics Need History

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