Economic organization in the earliest civilizations of the fertile crescent was driven by the need to efficiently grow crops in river basins. The Euphrates and Nile valleys were homes to earliest examples of codified measurements written in base 60 and Egyptian fractions. Egyptian keepers of royal granaries, and absentee Egyptian landowners reported in the Heqanakht papyri. Historians of this period note that the major tool of accounting for agrarian societies, the scales used to measure grain inventory, reflected dual religious and ethical symbolic meanings. The Erlenmeyer tablets give a picture of Sumerian production in the Euphrates Valley around 2,200-2,100 BC, and show an understanding of the relationship between grain and labor inputs (valued in "female labor days") and outputs and an emphasis on efficiency. Egyptians measured work output in man-days. The development of sophisticated economic administration continued in the Euphrates and Nile valleys during the Babylonian Empire and Egyptian Empires when trading units spread through the Near East within monetary systems. Egyptian fraction and base 60 monetary units were extended in use and diversity to Greek, early Islamic culture, and medieval cultures. By 1202 AD Leonardo of Pisa Fibonacci use of zero and Vedic-Islamic numerals, motivated Europeans to apply zero as an exponent, birthing modern decimals 350 years later.
The city states of Sumer developed a trade and market economy based originally on the commodity money of the Shekel which was a certain weight measure of barley, while the Babylonians and their city state neighbors later developed the earliest system of economics using a metric of various commodities, that was fixed in a legal code. The early law codes from Sumer could be considered the first (written) economic formula, and had many attributes still in use in the current price system today... such as codified amounts of money for business deals (interest rates), fines in money for 'wrong doing', inheritance rules, laws concerning how private property is to be taxed or divided, etc.For a summary of the laws, see Babylonian law.
Earlier collections of (written) laws, just prior to Hammurabi, that could also be considered rules and regulations as to economic law for their cities include the codex of Ur-Nammu, king of Ur (ca. 2050 BC), the Codex of Eshnunna (ca. 1930 BC) and the codex of Lipit-Ishtar of Isin (ca. 1870 BC).
The influence of Babylonian and Persian thought on Greek administrative economics is present in the work of Greek historian Xenophon. Discussion of economic principles are especially present in his Oeconomicus, his biography of Cyrus the Great, Cyropaedia, Hiero, and Ways and Means. Hiero is a minor work which includes discussion of leaders stimulating private production and technology through various means including public recognition and prizes. Ways and Means is a short treatise on economic development, and showed an understanding of the importance of taking advantage of economies of scale and advocated laws promoting foreign merchants. The Oeconomicus discusses the administration of agricultural land. In the work, subjective personal value of goods is analyzed and compared with exchange value. Xenophon uses the example of a horse, which may be of no use to a person who does not know how to handle it, but still has exchange value. Although this broadens the idea of value based in individual use to a more general social concept of value that comes through exchange, scholars note that this is not a market theory of value. In Cyropaedia Xenophon presents what in hindsight can be seen as the foundation for a theory of fair exchange in the market. In one anecdote, the young Cyrus is to judge the fairness of an exchange made between a tall and a short boy. The tall boy forces the pair to exchange tunics, because the tall boy's tunic is too short, shorter than the short boys, which is too tall for him. Cyrus rules the exchange fair because it results in a better fit for both boys. Cyrus' mentors were not pleased with Cyrus' basing his decision on the values involved, as a just exchange must be voluntary. Later in the biography, Xenophon discusses the concept of division of labor, referencing specialized cooks and workers in a shoemaking shop. Scholars have noted that Adam Smith's early notes about this concept "read like a paraphrase of Xenophon's discussion of the role of the carpenter as a "jack of all trades" in small cities and as a specialist in large cities. Marx attributes to Cyropaedia the idea that the division of labor correlates to the size of a market. Xenophon also presents an example of mutual advantage from exchange in a story about Cyrus coordinating an exchange of surplus farmland from Armenians, who were herders, and surplus grazing land from Chaldeans, who were farmers.
Allocation of scarce resources was a moral issue to Aristotle, and in book I of his Politics, Aristotle expresses that consumption was the objective of production, and the surplus should be allocated to the rearing of children, and personal satiation ought to be the natural limit of consumption. (To Aristotle, the question was a moral one: in his era child mortality was high.) In transactions, Aristotle used the labels of "natural" and "unnatural". Natural transactions were related to the satisfaction of needs and yielded wealth that was limited in quantity by the purpose it served. Un-natural transactions aimed at monetary gain and the wealth they yielded was potentially without limits. He explained the un-natural wealth had no limits because it became an end in itself rather than a means to another end—satisfaction of needs. This distinction is the basis for Aristotle's moral rejection of usury. Later, in book VII of Politics, Aristotle formulates the concept of diminishing marginal utility and an ordinal hierarchy of values, which later appeared in Maslow's contribution to motivation theory.
Aristotle's Nicomachean Ethics, particularly book V.v, has been called the most economically provocative analytic writing in ancient Greece. Therein, Aristotle discusses justice in distribution and exchange. Still considering isolated exchanges rather than markets, Aristotle sought to discuss just exchange prices between individuals with different subjective values for their goods. Interestingly, Aristotle suggested three different proportions to analyze distributive, corrective, and reciprocal or exchange transactions: the arithmetic, the geometric, and the harmonic. The harmonic proportion is interesting, as it implies a strong commitment to the subjective values of the traders. Sixth century A.D. philosopher Boethius used the example of 16 as the harmonic mean of 10 and 40. 16 is the same percentage larger than 10 as it is smaller than 40 (60 percent of 10 is 6, while 60 percent of 40 is 24). Thus if two bargainers have subjective prices for a good of 10 and 40, Aristotle points out that in exchange, it is most fair to price the good at 16, due to the equality proportional differences from their price to the new price. Another interesting nuance in this analysis of exchange is that Aristotle also saw a zone of consumer surplus or mutual advantage to both consumers that had to be divided.
Chanakya (c. 350 BC-275 BC) considered economic issues. He was a professor of political science at the Takshashila University of ancient India, and later the Prime Minister of the Mauryan emperor Chandragupta Maurya. He wrote the Arthashastra ("Science of Material Gain" or "Science of political economy" in Sanskrit), which can be considered a precursor to Machiavelli's The Prince. Many of the topics discussed in the Arthashastra'' are still prevalent in modern economics, including its discussions on the management of an efficient and solid economy, and the ethics of economics. Chanakya also focuses on issues of welfare (for instance, redistribution of wealth during a famine) and the collective ethics that hold a society together.
The Arthashastra argues for an autocracy managing an efficient and solid economy. The qualities described is in effect that of a command economy. It discusses the ethics of economics and the duties and obligations of a king. The scope of Arthaśāstra is, however, far wider than statecraft, and it offers an outline of an entire civil and criminal code and bureaucratic framework for administering a kingdom, with a wealth of descriptive cultural detail on topics such as mineralogy, mining and metals, agriculture, animal husbandry and medicine. The Arthaśāstra also focuses on issues of welfare (for instance, redistribution of wealth during a famine) and the collective ethics that hold a society together.
Chanakya says that artha (sound economies) is the most important quality and discipline required for a Rajarshi, and that dharma & kama are both dependent on it. Chanakya writes on the economic duties of a king:
According to Chanakya, a conducive atmosphere is necessary for the state's economy to thrive. This requires that a state's law and order be maintained. Arthashastra specifies fines and punishments to support strict enforcement of laws (the Dandaniti).
Ideal and effective economic policy was long sought for in ancient China, one of the greatest early reformers being the Emperor Qin Shi Huang (r. 221 BC-210 BC), who standardized coin currency throughout the old Warring States once he unified them under a strong central bureaucracy (which the Zhou Dynasty had always lacked).
However, one of the greatest economic reformers in China lived during the medieval Song Dynasty (960-1279 AD), that being Chancellor Wang Anshi (1021-1086). Espousing heated reaction by conservative ministers at court, Wang Anshi's political faction of the New Policies Group enacted a series of reforms that centered around military reform, bureaucratic reform, and economic reform. The latter included low-cost loans for farmers (whom he considered the backbone of the Chinese economy in terms of production of goods and greatest source of the land tax), replacing the corvee labor service with a tax instead, enacted government monopolies on crucial industries producing tea, salt, and wine, introduction of a local militia to ease the budget spending on the official standing army of 1 million troops, and the establishment of a Finance Planning Commission staffed largely by political loyals so that his reforms could pass quickly with less time for conservatives to oppose it in court. Reformers and conservatives would oust each other from power once they had the support of the emperor.
Many scholars trace the history of economic thought through the Muslim world, which was in a Golden Age from the 8th to 13th century and whose philosophy continued the work of the Greek and Hellenistic thinkers and came to influence Aquinas when Europe "rediscovered" Greek philosophy through Arabic translation. A common theme among these scholars was the praise of economic activity and even self-interested accumulation of wealth. Persian leader Shams al-Mo'ali Abol-hasan Ghaboos ibn Wushmgir (Qabus) (d. 1012) advises his son in the work Qabus nama:
Persian philosopher Ibn Miskawayh (b. 1030) notes:
This view is in conflict with an idea Joseph Schumpeter called the great gap. The great gap thesis comes out of Schumpeter's 1954 History of Economic Analysis which offers discusses a break in economic thought during the five hundred year period between the decline of the Greco-Roman civilizations and the work of Thomas Aquinas (1225-1274). However in 1964, Joseph Spengler's "Economic Thought of Islam: Ibn Khaldun" appeared in the journal Comparative Studies in Society and History and took a large step in bringing early Muslim scholars to the contemporary West.
The influence of earlier Greek and Hellenistic thought on the Muslim world began largely with Abbasid caliph al-Ma'mun, who sponsored the translation of Greek texts into Arabic in the 9th century by Syrian Christians in Baghdad. But already by that time numerous Muslim scholars had written on economic issues, and early Muslim leaders had shown sophisticated attempts to enforce fiscal and monetary financing, use deficit financing, use taxes to encourage production, the use of credit instruments for banking, including rudimentary savings and checking accounts, and contract law.
Among the earliest Muslim economic thinkers was Abu Yusuf (731-798), a student of the founder of the Hanafi Sunni School of Islamic thought, Abu Hanifah. Abu Yusuf was chief jurist for Abbasid Caliph Harun al-Rashid, for whom he wrote the Book of Taxation (Kitab al-Kharaj). This book outlined Abu Yusuf's ideas on taxation, public finance, and agricultural production. He discussed proportional tax on produce instead of fixed taxes on property as being superior as an incentive to bring more land into cultivation. He also advocated forgiving tax policies which favor the producer and a centralized tax administration to reduce corruption. Abu Yusuf favored the use of tax revenues for socioeconomic infrastructure, and included discussion of various types of taxes, including sales tax, death taxes, and import tarrifs.
Early discussion of the benefits of division of labor are included in the writings of al-Farabi (873–950), Qabus, Ibn Sina (Avicenna) (980–1037), Ibn Miskawayh, al-Ghazali, Nasir al-Din al-Tusi (1201–74), Ibn Khaldun (1332-1406), and Asaad Davani (b. 1444). Among them, the discussions included division of labor within households, societies, factories, and among nations. Farabi notes that each society lacks at least some necessary resources, and thus an optimal society can only be achieved where domestic, regional, and international trade occur, and that such trade can be beneficial to all parties involved. Ghazali was also noted for his subtle understanding of monetary theory and formulation of another version of Gresham's Law.
The systems of contract relied upon by merchants was very effective. Merchants would buy and sell on commission, with money loaned to them by wealthy investors, or a joint investment of several merchants, who were often Muslim, Christian and Jewish. Recently, a collection of documents was found in an Egyptian synagogue shedding a very detailed and human light on the life of medieval Middle Eastern merchants. Business partnerships would be made for many commercial ventures, and bonds of kinship enabled trade networks to form over huge distances. Networks developed during this time enabled a world in which money could be promised by a bank in Baghdad and cashed in Spain, creating the cheque system of today. Each time items passed through the cities along this extraordinary network, the city imposed a tax, resulting in high prices once reaching the final destination. These innovations made by Muslims and Jews laid the foundations for the modern economic system.
|When civilization [population] increases, the available labor again increases. In turn, luxury again increases in correspondence with the increasing profit, and the customs and needs of luxury increase. Crafts are created to obtain luxury products. The value realized from them increases, and, as a result, profits are again multiplied in the town. Production there is thriving even more than before. And so it goes with the second and third increase. All the additional labor serves luxury and wealth, in contrast to the original labor that served the necessity of life.|
|Ibn Khaldun on economic growth|
Perhaps the most well known Islamic scholar who wrote about economics was Ibn Khaldun of Tunisia (1332–1406), considered a father of modern economics, Ibn Khaldun wrote on economic and political theory in the introduction, or Muqaddimah (Prolegomena), of his History of the World (Kitab al-Ibar). In the book, he discussed what he called asabiyyah (social cohesion), which he sourced as the cause of some civilizations becoming great and others not. Ibn Khaldun felt that many social forces are cyclic, although there can be sudden sharp turns that break the pattern. His idea about the benefits of the division of labor also relate to asabiyya, the greater the social cohesion, the more complex the successful division may be, the greater the economic growth. He noted that growth and development positively stimulate both supply and demand, and that the forces of supply and demand are what determine the prices of goods. He also noted macroeconomic forces of population growth, human capital development, and technological developments effects on development. In fact, Ibn Khaldun thought that population growth was directly a function of wealth.
Although he understood that money served as a standard of value, a medium of exchange, and a preserver of value, he did not realize that the value of gold and silver changed based on the forces of supply and demand. He also introduced the concept known as the Khaldun-Laffer Curve (the relationship between tax rates and tax revenue increases as tax rates increase for a while, but then the increases in tax rates begin to cause a decrease in tax revenues as the taxes impose too great a cost to producers in the economy).