It All Began, As Usual, With the Greeks

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This is the
first chapter of An
Austrian Perspective on the History of Economic Thought
available exclusively through the Mises Store.


The Natural

The Politics
of the Polis

The First “Economist”:
Hesiod and the Problem of Scarcity

The Pre-Socratics

Plato’s Right-wing
Collectivist Utopia

Xenophon on
Household Management

Private Property and Money

Exchange and Value

The Collapse
After Aristotle

Taoism in
Ancient China



It all began,
as usual, with the Greeks. The ancient Greeks were the first civilized
people to use their reason to think systematically about the world
around them. The Greeks were the first philosophers (philosophia
– lovers of wisdom), the first people to think deeply
and to figure out how to attain and verify knowledge about the
world. Other tribes and peoples had tended to attribute natural
events to arbitrary whims of the gods. A violent thunderstorm,
for example, might be ascribed to something that had irritated
the god of thunder. The way to bring on rain, then, or to curb
violent thunderstorms, would be to find out what acts of man would
please the god of rain or appease the thunder god. Such people
would have considered it foolish to try to figure out the natural
causes of rain or of thunder. Instead, the thing to do was to
find out what the relevant gods wanted and then try to supply
their needs.

Greeks, in contrast, were eager to use their reason – their
sense observations and their command of logic – to investigate
and learn about their world. In so doing, they gradually stopped
worrying about the whims of the gods and began to investigate
actual entities around them. Led in particular by the great Athenian
philosopher Aristotle (384–322 BC), a magnificent and creative
systematizer known to later ages as The Philosopher, the Greeks
evolved a theory and a method of reasoning and of science which
later came to be called the natural law.

The Natural Law

Natural law
rests on the crucial insight that to be necessarily means
to be something, that is, some particular thing or entity.
There is no Being in the abstract. Everything that is,
is some particular thing, whether it be a stone, a cat, or a tree.
By empirical fact there is more than one kind of thing in the
universe; in fact there are thousands, if not millions of kinds
of things. Each thing has its own particular set of properties
or attributes, its own nature, which distinguishes it
from other kinds of things. A stone, a cat, an elm tree; each
has its own particular nature, which man can discover, study and

Man studies
the world, then, by examining entities, identifying similar kinds
of things, and classifying them into categories each with its
own properties and nature. If we see a cat walking down the street,
we can immediately include it into a set of things, or animals,
called “cats” whose nature we have already discovered and analyzed.

If we can
discover and learn about the natures of entities X and Y, then
we can discover what happens when these two entities interact.
Suppose, for example, that when a certain amount of X interacts
with a given amount of Y we get a certain quantity of
another thing, Z. We can then say that the effect, Z,
has been caused by the interaction of X and Y.
Thus, chemists may discover that when two molecules of hydrogen
interact with one molecule of oxygen, the result is one molecule
of a new entity, water. All these entities – hydrogen, oxygen,
and water – have specific discoverable properties or natures
which can be identified.

We see, then,
that the concepts of cause and effect are part
and parcel of natural law analysis. Events in the world can be
traced back to the interactions of specific entities. Since natures
are given and identifiable, the interactions of the various entities
will be replicable under the same conditions. The same causes
will always yield the same effects.

For the Aristotelian
philosophers, logic was not a separate and isolated discipline,
but an integral part of the natural law. Thus, the basic process
of identifying entities led, in “classical” or Aristotelian logic,
to the Law of Identity: a thing is, and cannot be anything other
than, what it is: A is A.

It follows,
then, that an entity cannot be the negation of itself. Or, put
another way, we have the Law of Non-Contradiction: a thing cannot
be both A and non-A, A is not and cannot
be non-A.

in our world of numerous kinds of entities, anything must be either
A or it won’t be; in short, it will either be A or non-A.
Nothing can be both. This gives us the third well-known law of
classical logic: the Law of the Excluded Middle: everything in
the universe is either A or non-A.

But if every entity in the universe –
if hydrogen, oxygen, stone, or cats – can be identified,
classified, and its nature examined, then so too can man. Human
beings must also have a specific nature with specific properties
that can be studied, and from which we can obtain knowledge. Human
beings are unique in the universe because they can and do study
themselves, as well as the world around them, and try to figure
out what goals they should pursue and what means they can employ
to achieve them.

The concept
of “good” (and therefore of “bad”) is only relevant to living
entities. Since stones or molecules have no goals or purposes,
any idea of what might be “good” for a molecule or stone would
properly be considered bizarre. But what might be “good” for an
elm tree or a dog makes a great deal of sense: specifically, “the
good” is whatever conduces to the life and the flourishing of
the living entity. The “bad” is whatever injures such an entity’s
life or prosperity. Thus, it is possible to develop an “elm tree
ethics” by discovering the best conditions: soil, sunshine, climate,
etc., for the growth and sustenance of elm trees; and by trying
to avoid conditions deemed “bad” for elm trees: elm blight, excessive
drought, etc. A similar set of ethical properties can be worked
out for various breeds of animals.

Thus, natural
law sees ethics as living-entity- (or species-) relative.
What is good for cabbages will differ from what is good for rabbits,
which in turn will differ from what is good or bad for man. The
ethic for each species will differ according to their respective

Man is the
only species which can – and indeed must – carve out
an ethic for himself. Plants lack consciousness, and therefore
cannot choose or act.

The consciousness
of animals is narrowly perceptual and lacks the conceptual: the
ability to frame concepts and to act upon them. Man, in the famous
Aristotelian phrase, is uniquely the rational animal –
the species that uses reason to adopt values and ethical
principles, and that acts to attain these ends. Man acts;
that is, he adopts values and purposes, and chooses the ways to
achieve them.

Man, therefore,
in seeking goals and ways to attain them, must discover and work
within the framework of the natural law: the properties of himself
and of other entities and the ways in which they may interact.

Western civilization
is in many ways Greek; and the two great philosophic traditions
of ancient Greece which have been shaping the Western mind ever
since have been those of Aristotle and his great teacher and antagonist
Plato (428–347 BC). It has been said that every man, deep
down, is either a Platonist or an Aristotelian, and the divisions
run throughout their thought. Plato pioneered the natural law
approach which Aristotle developed and systematized; but the basic
thrust was quite different. For Aristotle and his followers, man’s
existence, like that of all other creatures, is “contingent,”
i.e. it is not necessary and eternal. Only God’s existence is
necessary and transcends time. The contingency of man’s existence
is simply an unalterable part of the natural order, and must be
accepted as such.

To the Platonists,
however, especially as elaborated by Plato’s follower, the Egyptian
Plotinus (AD 204–270), these inevitable limitations of man’s
natural state were intolerable and must be transcended. To the
Platonists, the actual, concrete, temporal factual existence of
man was too limited. Instead, this existence (which is all that
any of us has ever seen) is a fall from grace, a fall from the
original non-existent, ideal, perfect, eternal being of man, a
godlike being perfect and therefore without limits. In a bizarre
twist of language, this perfect and never-existent being was held
up by the Platonists as the truly existent, the true
essence of man, from which we have all been alienated or cut off.
The nature of man (and of all other entities) in the world is
to be some thing and to exist in time; but in the semantic
twist of the Platonists, the truly existent man is to
be eternal, to live outside of time, and to have no limits. Man’s
condition on earth is therefore supposed to be a state of degradation
and alienation, and his purpose is supposed to be to work his
way back to the “true” limitless and perfect self alleged to be
his original state. Alleged, of course, on the basis of no evidence
whatever – indeed, evidence itself identifies, limits, and
therefore, to the Platonic mind, corrupts.

Plato’s and
Plotinus’s views of man’s allegedly alienated state were highly
influential, as we shall see, in the writings of Karl Marx and
his followers. Another Greek philosopher, emphatically different
from the Aristotelian tradition, who prefigured Hegel and Marx,
was the early pre-Socratic philosopher Heraclitus of Ephesus (c.535–475
BC). He was pre-Socratic in the sense of predating Plato’s great
teacher Socrates (470–399 BC), who wrote nothing but has
come down to us as interpreted by Plato and by several other followers.
Heraclitus, who was aptly given the title “The Obscure” by the
Greeks, taught that sometimes opposites, A and non-A,
can be identical, or, in other words, that a can be non-a.
This defiance of elemental logic can perhaps be excused in someone
like Heraclitus, who wrote before Aristotle developed classical
logic, but it is hard to be so forbearing to his later followers.

The Politics of the Polis

When man
turns the use of his reason from the inanimate world to man himself
and to social organization, it becomes difficult for pure reason
to avoid giving way to the biases and prejudices of the political
framework of the age. This was all too true of the Greeks, including
the Socratics, Plato and Aristotle. Greek life was organized in
small city-states (the polis), some of which were able
to carve out overseas empires. The largest city-state, Athens,
covered an area of only about one thousand square miles, or half
the size of modern Delaware. The key facet of Greek political
life was that the city-state was run by a tight oligarchy of privileged
citizens, most of whom were large landowners. Most of the population
of the city-state were slaves or resident foreigners, who generally
performed the manual labor and commercial enterprise respectively.
The privilege of citizenship was reserved to descendants of citizens.
While Greek city-states fluctuated between outright tyrannies
and democracies, at its most “democratic” Athens, for example,
reserved the privileges of democratic rule to 7% of the population,
the rest of whom were either slaves or resident aliens. (Thus,
in Athens of the fifth century BC, there were approximately 30,000
citizens out of a total population of 400,000.)

As privileged
landowners living off taxes and the product of slaves, Athenian
citizens had the leisure for voting, discussion, the arts and
– in the case of the particularly intelligent – philosophizing.
Although the philosopher Socrates was himself the son of a stonemason,
his political views were ultra-elitist. In the year 404 BC, the
despotic state of Sparta conquered Athens and established a reign
of terror known as the Rule of the Thirty Tyrants. When the Athenians
overthrew this short-lived rule a year later, the restored democracy
executed the aged Socrates, largely on suspicion of sympathy with
the Spartan cause. This experience confirmed Socrates’s brilliant
young disciple, Plato, the scion of a noble Athenian family, in
what would now be called an “ultra-right” devotion to aristocratic
and despotic rule.

A decade
later, Plato set up his Academy on the outskirts of Athens as
a thinktank not only of abstract philosophic teaching and research,
but also as a fountainhead of policy programs for social despotism.
He himself tried three times unsuccessfully to set up despotic
regimes in the city state of Syracuse, while no less than nine
of Plato’s students succeeded in establishing themselves as tyrants
over Greek city-states.

While Aristotle
was politically more moderate than Plato, his aristocratic devotion
to the polis was fully as evident. Aristotle was born
of an aristocratic family in the Macedonian coastal town of Stagira,
and entered Plato’s Academy as a student at the age of 17, in
367 BC. There he remained until Plato’s death 20 years later,
after which he left Athens and eventually returned to Macedonia,
where he joined the court of King Philip and tutored the young
future world conqueror, Alexander the Great. After Alexander ascended
the throne, Aristotle returned to Athens in 335 BC and established
his own school of philosophy at the Lyceum, from which his great
works have come down to us as lecture notes written by himself
or transcribed by his students. When Alexander died in 323 BC,
the Athenians felt free to vent their anger at Macedonians and
their sympathizers, and Aristotle was ousted from the city, dying
shortly thereafter.

Their aristocratic
bent and their lives within the matrix of an oligarchic polis
had a greater impact on the thought of the Socratics than Plato’s
various excursions into theoretical right-wing collectivist utopias
or in his students’ practical attempts at establishing tyranny.
For the social status and political bent of the Socratics colored
their ethical and political philosophies and their economic views.
Thus, for both Plato and Aristotle, “the good” for man was not
something to be pursued by the individual, and neither was the
individual a person with rights that were not to be abridged or
invaded by his fellows. For Plato and Aristotle, “the good” was
naturally not to be pursued by the individual but by the polis.
Virtue and the good life were polis- rather than individual-oriented.
All this means that Plato’s and Aristotle’s thought was statist
and elitist to the core, a statism which unfortunately permeated
“classical” (Greek and Roman) philosophy as well as heavily influencing
Christian and medieval thought. Classical “natural law” philosophy
therefore never arrived at the later elaboration, first in the
Middle Ages and then in the seventeenth and eighteenth centuries,
of the “natural rights” of the individual which may not be invaded
by man or by government.

In the more
strictly economic realm, the statism of the Greeks means the usual
aristocratic exaltation of the alleged virtues of the military
arts and of agriculture, as well as a pervasive contempt for labor
and for trade, and consequently of moneymaking and the seeking
and earning of profit. Thus Socrates, openly despising labor as
unhealthy and vulgar, quotes the king of Persia to the effect
that by far the noblest arts are agriculture and war. And Aristotle
wrote that no good citizens “should be permitted to exercise any
low mechanical employment or traffic, as being ignoble and destructive
to virtue.”

the Greek elevation of the polis over the individual
led to their taking a dim view of economic innovation and entrepreneurship.
The entrepreneur, the dynamic innovator, is after all the locus
of individual ego and creativity, and is therefore the harbinger
of often disturbing social change, as well as economic growth.
But the Greek and Socratic ethical ideal for the individual was
not an unfolding and flowering of inner possibilities, but rather
a public/political creature molded to conform to the demands of
the polis. That kind of social ideal was designed to
promote a frozen society of politically determined status, and
certainly not a society of creative and dynamic individuals and

The First “Economist”: Hesiod and the Problem of Scarcity

No one should
be misled into thinking that the ancient Greeks were “economists”
in the modern sense. In the course of pioneering in philosophy,
their philosophizing on man and his world yielded fragments of
politico-economic or even strictly economic thoughts and insights.
But there were no modern-style treatises on economics per
se. It is true that the term “economics” is Greek, stemming
from the Greek oikonomia, but oikonomia means
not economics in our sense but “household management,” and treatises
on “economics” would discuss what might be called the technology
of household management – useful perhaps, but certainly not
what we would regard today as economics. There is furthermore
a danger, unfortunately not avoided by many able historians of
economic thought, of eagerly reading into fragments of ancient
sages the knowledge gained by modern economics. While we surely
should not overlook any giants of the past, we must also avoid
any “presentist” seizing upon a few obscure sentences to hail
alleged but nonexistent forerunners of sophisticated modern concepts.

The honor
of being the first Greek economic thinker goes to the poet Hesiod,
a Boeotian who lived in the very early ancient Greece of the middle
of the eighth century BC. Hesiod lived in the small, self-sufficient
agricultural community of Ascra, which he himself refers to as
a “sorry place – bad in winter, hard in summer, never good.”
He was therefore naturally attuned to the eternal problem of scarcity,
of the niggardliness of resources as contrasted to the sweep of
man’s goals and desires. Hesiod’s great poem, Works
and Days
, consisted of hundreds of verses designed for
solo recitation with musical accompaniment. But Hesiod was a didactic
poet rather than a mere entertainer, and he often broke out of
his story line to educate his public in traditional wisdom or
in explicit rules for human conduct. Of the 828 verses in the
poem, the first 383 centered on the fundamental economic problem
of scarce resources for the pursuit of numerous and abundant human
ends and desires.

Hesiod adopts
the common religious or tribal myth of the “Golden Age,” of man’s
alleged initial state on earth as an Eden, a Paradise of limitless
abundance. In this original Eden, of course, there was no economic
problem, no problem of scarcity, because all of man’s wants were
instantaneously fulfilled. But now, all is different, and “men
never rest from labor and sorrow by day and from perishing by
night.” The reason for this low state is an all-encompassing scarcity,
the result of man’s ejection from Paradise. Because of scarcity,
notes Hesiod, labor, materials and time have to be allocated efficiently.
Scarcity, moreover, can only be partially overcome by an energetic
application of labor and of capital. In particular, labor –
work – is crucial, and Hesiod analyzes the vital factors
which may induce man to abandon the god-like state of leisure.
The first of these forces is of course basic material need. But
happily, need is reinforced by a social disapproval of sloth,
and by the desire to emulate the consumption standards of one’s
fellows. To Hesiod, emulation leads to the healthy development
of a spirit of competition, which he calls “good conflict,” a
vital force in relieving the basic problem of scarcity.

To keep competition
just and harmonious, Hesiod vigorously excludes such unjust methods
of acquiring wealth as robbery, and advocates a rule of law and
a respect for justice to establish order and harmony within society,
and to allow competition to develop – within a matrix of
harmony and justice. It should already be clear that Hesiod had
a far more sanguine view of economic growth, of labor and of vigorous
competition, than did the far more philosophically sophisticated
Plato and Aristotle three and a half centuries later.

The Pre-Socratics

Man is prone
to error and even folly, and therefore a history of economic thought
cannot confine itself to the growth and development of economic
truths. It must also treat influential error, that is, error that
unfortunately influenced later developments in the discipline.
One such thinker is the Greek philosopher Pythagoras of Samos
(c.582–c.507 BC) who, two centuries after Hesiod, developed
a school of thought which held that the only significant
reality is number. The world not only is number,
but each number even embodies moral qualities and other abstractions.
Thus justice, to Pythagoras and his followers, is the
number four, and other numbers consisted of various moral qualities.
While Pythagoras undoubtedly contributed to the development of
Greek mathematics, his number-mysticism could well have been characterized
by the twentieth century Harvard sociologist Pitirim A. Sorokin
as a seminal example of “quantophrenia” and “metromania.” It is
scarce1y an exaggeration to see in Pythagoras the embryo of the
burgeoning and overweeningly arrogant mathematical economics and
econometrics of the present day.

thus contributed a sterile dead end to philosophy and economic
thought, one that later influenced Aristotle’s pawky and fallacious
attempts to develop a mathematics of justice and of economic exchange.
The next important positive development was contributed by the
pre-Socratic (actually contemporary of Socrates) Democritus (c.460–c.370

This influential
scholar from Abdera was the founder of “atomism” in cosmology,
that is, the view that the underlying structure of reality consists
of interacting atoms. Democritus contributed two important strands
of thought to the development of economics. First, he was the
founder of subjective value theory. Moral values, ethics, were
absolute, Democritus taught, but economic values were necessarily
subjective. “The same thing,” Democritus writes, may be “good
and true for all men, but the pleasant differs from one and another.”
Not only was valuation subjective, but Democritus also saw that
the usefulness of a good will fall to nothing and become negative
if its supply becomes superabundant.

also pointed out that if people restrained their demands and curbed
their desires, what they now possess would make them seem relatively
wealthy rather than impoverished. Here again, the relative nature
of the subjective utility of wealth is recognized. In addition,
Democritus was the first to arrive at a rudimentary notion of
time preference: the Austrian insight that people prefer a good
at present to the prospect of the good arriving in the future.
As Democritus explains, “it is not sure whether the young man
will ever attain old age; hence, the good on hand is superior
to the one still to come.”

In addition
to the adumbration of subjective utility theory, Democritus’s
other major contribution to economics was his pioneering defense
of a system of private property. In contrast to Oriental despotisms,
in which all property was owned or controlled by the emperor and
his subordinate bureaucracy, Greece rested on a society and economy
of private property. Democritus, having seen the contrast between
the private property economy of Athens and the oligarchic collectivism
of Sparta, concluded that private property is a superior form
of economic organization. In contrast to communally owned property,
private property provides an incentive for toil and diligence,
since “income from communally held property gives less pleasure,
and the expenditure less pain.” “Toil,” the philosopher concluded,
“is sweeter than idleness when men gain what they toil for or
know that they will use it.”

Plato’s Right-wing Collectivist Utopia

Plato’s search
for a hierarchical, collectivist utopia found its classic expression
in his most famous and influential work, The
. There, and later in The
, Plato sets forth the outline of his ideal city-state:
one in which right oligarchic rule is maintained by philosopher-kings
and their philosophic colleagues, thus supposedly ensuring rule
by the best and wisest in the community. Underneath the philosophers
in the coercive hierarchy are the “guardians” – the soldiers,
whose role is to aggress against other cities and lands and to
defend their polis from external aggression. Underneath
them are to be the body of the people, the despised producers:
laborers, peasants, and merchants who produce the material goods
on which the lordly philosophers and guardians are to live. These
three broad classes are supposed to reflect a shaky and pernicious
leap if there ever was one – the proper rule over the soul
in each human being. To Plato, each human being is divided into
three parts: “one that craves, one that fights, and one that thinks,”
and the proper hierarchy of rule within each soul is supposed
to be reason first, fighting next, and finally, and the lowest,
grubby desire.

The two ruling
classes – the thinkers and the guardians – that really
count are, in Plato’s ideal state, to be forced to live under
pure communism. There is to be no private property whatsoever
among the elite; all things are to be owned communally, including
women and children. The elite are to be forced to live together
and share common meals. Since money and private possessions, according
to the aristocrat Plato, only corrupt virtue, they are to be denied
to the upper classes. Marriage partners among the elite are to
be selected strictly by the state, which is supposed to proceed
according to the scientific breeding already known in animal husbandry.
If any of the philosophers or guardians find themselves unhappy
about this arrangement, they will have to learn that their personal
happiness means nothing compared to the happiness of the polis
as a whole – a rather murky concept at best. In fact, those
who are not seduced by Plato’s theory of the essential reality
of ideas will not believe that there is such a real living
entity as a polis. Instead, the city-state or community
consists only of living, choosing individuals.

To keep the
elite and the subject masses in line, Plato instructs the philosopher-rulers
to spread the “noble” lie that they themselves are descended from
the gods whereas the other classes are of inferior heritage. Freedom
of speech or of inquiry was, as one might expect, anathema to
Plato. The arts are frowned on, and the life of the citizens was
to be policed to suppress any dangerous thoughts or ideas that
might come to the surface.

in the very course of setting forth his classic apologia for totalitarianism,
Plato contributed to genuine economic science by being the first
to expound and analyze the importance of the division of labor
in society. Since his social philosophy was founded on a necessary
separation between classes, Plato went on to demonstrate that
such specialization is grounded in basic human nature, in particular
its diversity and inequality. Plato has Socrates say in The
Republic that specialization arises because “we are not all
alike; there are many diversities of natures among us which are
adapted to different occupations.”

Since men
produce different things, the goods are naturally traded for each
other, so that specialization necessarily gives rise to exchange.
Plato also points out that this division of labor increases the
production of all the goods. Plato saw no problem, however, in
morally ranking the various occupations, with philosophy of course
ranking highest and labor or trade being sordid and ignoble.

The use of
gold and silver as money greatly accelerated with the invention
of coinage in Lydia in the early seventh century BC and coined
money quickly spread to Greece. In keeping with his distaste for
moneymaking, trade, and private property, Plato was perhaps the
first theorist to denounce the use of gold and silver as money.
He also disliked gold and silver precisely because they served
as international currencies accepted by all peoples. Since these
precious metals are universally accepted and exist apart from
the imprimatur of government, gold and silver constitute a potential
threat to economic and moral regulation of the polis
by the rulers. Plato called for a government fiat currency, heavy
fines on the importation of gold from outside the city-state,
and the exclusion from citizenship of all traders and workers
who deal with money.

One of the
hallmarks of an ordered utopia sought by Plato is that, to remain
ordered and controlled, it must be kept relatively static. And
that means little or no change, innovation or economic growth.
Plato anticipated some present-day intellectuals in frowning on
economic growth, and for similar reasons: notably, fear of collapse
of the domination of the state by the ruling elite. Particularly
difficult in trying to freeze a static society is the problem
of population growth. Quite consistently, therefore, Plato called
for freezing the size of the population of the city-state, keeping
the number of its citizens limited to 5,000 agricultural landlord

Xenophon on Household Management

A disciple
and contemporary of Plato was the Athenian landed aristocrat and
army general, Xenophon (430–354 BC). Xenophon’s economic
writings were scattered throughout such works as an account of
the education of a Persian prince, a treatise on how to increase
government revenue, and a book on “economics” in the sense of
thoughts on the technology of household and farm management. Most
of Xenophon’s adumbrations were the usual Hellenic scorn for labor
and trade, and admiration for agriculture and the military arts,
coupled with a call for a massive increase in government operations
and interventions in the economy. These included improving the
port of Athens, building markets and inns, establishing a governmental
merchant fleet and greatly expanding the number of government-owned

in this roll of commonplace bromides, however, were some interesting
insights into economic matters. In the course of his treatise
on household management, Xenophon pointed out that “wealth” should
be defined as a resource that a person can use and knows how to
use. In this way, something that an owner has neither the ability
nor the knowledge to use cannot really constitute part of his

Another insight
was Xenophon’s anticipation of Adam Smith’s famous dictum that
the extent of the division of labor in society is necessarily
limited by the extent of the market for the products. Thus, in
an important addition to Plato’s insights on the division of labor,
written 20 years after The Republic, Xenophon says that
“In small towns the same workman makes chairs and doors and plows
and tables, and often the same artisan builds houses…” whereas
in the large cities “many people have demands to make upon each
branch of industry,” and therefore “one trade alone, and very
often even less than a whole trade, is enough to support a man.”
In large cities, “we find one man making men’s boots only; and
another, women’s only – one man lives by cuffing out garments,
another by fitting together the pieces.”

Xenophon outlines the important concept of general equilibrium
as a dynamic tendency of the market economy. Thus, he states that
when there are too many coppersmiths, copper becomes cheap and
the smiths go bankrupt and turn to other activities, as would
happen in agriculture or any other industry. He also sees clearly
that an increase in the supply of a commodity causes a fall in
its price.

Aristotle: Private Property and Money

The views
of the great philosopher Aristotle are particularly important
because the entire structure of his thought had an enormous and
even dominant influence on the economic and social thought of
the high and late Middle Ages, which considered itself Aristotelian.

Aristotle, in the Greek tradition, scorned moneymaking and was
scarcely a partisan of laissez-faire, he set forth a
trenchant argument in favor of private property. Perhaps influenced
by the private-property arguments of Democritus, Aristotle delivered
a cogent attack on the communism of the ruling class called for
by Plato. He denounced Plato’s goal of the perfect unity of the
state through communism by pointing out that such extreme unity
runs against the diversity of mankind, and against the reciprocal
advantage that everyone reaps through market exchange. Aristotle
then delivered a point-by-point contrast of private as against
communal property. First, private property is more highly productive
and will therefore lead to progress. Goods owned in common by
a large number of people will receive little attention, since
people will mainly consult their own self-interest and will neglect
all duty they can fob off onto others. In contrast, people will
devote the greatest interest and care to their own property.

Second, one
of Plato’s arguments for communal property is that it is conducive
to social peace, since no one will be envious of, or try to grab
the property of, another. Aristotle retorted that communal property
would lead to continuing and intense conflict, since each will
complain that he has worked harder and obtained less than others
who have done little and taken more from the common store. Furthermore,
not all crimes or revolutions, declared Aristotle, are powered
by economic motives. As Aristotle trenchantly put it, “men do
not become tyrants in order that they may not suffer cold.”

Third, private
property is clearly implanted in man’s nature: His love of self,
of money, and of property, are tied together in a natural love
of exclusive ownership. Fourth, Aristotle, a great observer of
past and present, pointed out that private property had existed
always and everywhere. To impose communal property on society
would be to disregard the record of human experience, and to leap
into the new and untried. Abolishing private property would probably
create more problems than it would solve.

Aristotle wove together his economic and moral theories by providing
the brilliant insight that only private property furnishes people
with the opportunity to act morally, e.g., to practice the virtues
of benevolence and philanthropy. The compulsion of communal property
would destroy that opportunity.

While Aristotle
was critical of moneymaking, he still opposed any limitation –
such as Plato had advocated – on an individual’s accumulation
of private property. Instead, education should teach people voluntarily
to curb their rampant desires and thus lead them to limit their
own accumulations of wealth.

Despite his
cogent defense of private property and opposition to coerced limits
on wealth, the aristocrat Aristotle was fully as scornful of labor
and trade as his predecessors. Unfortunately, Aristotle stored
up trouble for later centuries by coining a fallacious, proto-Galbraithian
distinction between “natural” needs, which should be satisfied,
and “unnatural” wants, which are limitless and should be abandoned.
There is no plausible argument to show why, as Aristotle believes,
the desires filled by subsistence labour or barter are “natural,”
whereas those satisfied by far more productive money exchanges
are artificial, “unnatural” and therefore reprehensible. Exchanges
for monetary gain are simply denounced as immoral and “unnatural,”
specifically such activities as retail trade, commerce, transportation
and the hiring of labour. Aristotle had a particular animus toward
retail trade, which of course directly serves the consumer, and
which he would have liked to eliminate completely.

is scarcely consistent in his economic lucubrations. For although
monetary exchange is condemned as immoral and unnatural, he also
praises such a network of exchanges as holding the city together
through mutual and reciprocal give-and-take.

The confusion
in Aristotle’s thought between the analytic and the “moral” is
also shown in his discussion of money. On the one hand, he sees
that the growth of money greatly facilitated production and exchange.
He sees also that money, the medium of exchange, represents general
demand, and “holds all goods together.” Also money eliminates
the grave problem of “double coincidence of wants,” where each
trader will have to desire the other man’s goods directly. Now
each person can sell goods for money. Furthermore, money serves
as a store of values to be used for purchases in the future.

however, created great trouble for the future by morally condemning
the lending of money at interest as “unnatural.” Since money cannot
be used directly, and is employed only to facilitate exchanges,
it is “barren” and cannot itself increase wealth. Therefore the
charging of interest, which Aristotle incorrectly thought to imply
a direct productivity of money, was strongly condemned as contrary
to nature.

would have done better to avoid such hasty moral condemnation
and to try to figure out why interest is, in fact, universally
paid. Might there not be something “natural,” after all, about
a rate of interest? And if he had discovered the economic reason
for the charging – and the paying – of interest, perhaps
Aristotle would have understood why such charges are moral and
not unnatural.

like Plato, was hostile to economic growth and favored a static
society, all of which fits with his opposition to moneymaking
and the accumulation of wealth. The insight of old Hesiod into
the economic problem as the allocation of scarce means for the
satisfying of alternative wants was virtually ignored by both
Plato and Aristotle, who instead counseled the virtue of scaling
down one’s desires to fit whatever means were available.

Aristotle: Exchange and Value

difficult but influential discussion of exchange suffered grievously
from his persistent tendency to confuse analysis with instant
moral judgment. As in the case of charging interest, Aristotle
did not remain content to complete a study of why exchanges take
place in real life before leaping in with moral pronouncements.
In analyzing exchanges, Aristotle declares that these mutually
beneficial transactions imply a “proportional reciprocity,” but
it is characteristically ambivalent in Aristotle whether all
exchanges are by nature marked by reciprocity, or whether only
proportionately reciprocal exchanges are truly “just.” And of
course Aristotle was never one to raise the question: why do people
voluntarily engage in “unjust” exchanges? In the same way, why
should people voluntarily pay interest charges if they are really

To muddle
matters further, Aristotle, under the influence of the Pythagorean
number-mystics, introduced obscure and obfuscating mathematical
terms into what could have been a straightforward analysis. The
only dubious benefit of this contribution was to give many happy
hours to historians of economic thought attempting to read sophisticated
modern analysis into Aristotle. This problem has been aggravated
by an unfortunate tendency among historians of thought to regard
great thinkers of the past as necessarily consistent and coherent.
That of course is a grievous historiographic error; however great
they may have been, any thinkers can slip into error and inconsistency,
and even write gibberish on occasion. Many historians of thought
do not seem able to recognize that simple fact.

famous discussion of reciprocity in exchange in Book V of his
Nicomachean Ethics is a prime example of descent into
gibberish. Aristotle talks of a builder exchanging a house for
the shoes produced by a shoemaker. He then writes: “The number
of shoes exchanged for a house must therefore correspond to the
ratio of builder to shoemaker. For if this be not so, there will
be no exchange and no intercourse.” Eh? How can there possibly
be a ratio of “builder” to “shoemaker”? Much less an equating
of that ratio to shoes/houses? In what units can men
like builders and shoemakers be expressed?

The correct
answer is that there is no meaning, and that this particular exercise
should be dismissed as an unfortunate example of Pythagorean quantophrenia.
And yet various distinguished historians have read tortured constructions
of this passage to make Aristotle appear to be a forerunner of
the labor theory of value, of W. Stanley Jevons, or of Alfred
Marshall. The labor theory is read into the unsupportable assumption
that Aristotle “must have meant” labor hours put in by the builder
or shoemaker, while Josef Soudek somehow sees here the respective
skills of these producers, skills which are then measured by their
products. Soudek eventually emerges with Aristotle as an ancestor
of Jevons. In the face of all this elaborate wild goose chase,
it is a pleasure to see the verdict of gibberish supported by
the economic historian of ancient Greece, Moses I. Finley, and
by the distinguished Aristotelian scholar H.H. Joachim, who has
the courage to write, “How exactly the values of the producers
are to be determined, and what the ratio between them can mean
is, I must confess, in the end unintelligible to me.”[1]

Another grave
fallacy in the same paragraph in the Ethics did incalculable
damage to future centuries of economic thought. There Aristotle
says that in order for an exchange (any exchange? a just
exchange?) to take place, the diverse goods and services “must
be equated,” a phrase Aristotle emphasizes several times. It is
this necessary “equation” that led Aristotle to bring in the mathematics
and the equal signs. His reasoning was that for A and
B to exchange two products, the value of both products
must be equal, otherwise an exchange would not take place. The
diverse goods being exchanged for one another must be made equal
because only things of equal value will be traded.

The Aristotelian
concept of equal value in exchange is just plain wrong, as the
Austrian School was to point out in the late nineteenth century.
If A trades shoes for sacks of wheat owned by B,
A does so because he prefers the wheat to the shoes, while
B’s preferences are precisely the opposite. If an exchange
takes place, this implies not an equality of values, but rather
a reverse inequality of values in the two parties making
the exchange. If I buy a newspaper for 30 I do so because I prefer
the acquisition of the newspaper to keeping the 30 cents, whereas
the newsagent prefers getting the money to keeping the newspaper.
This double inequality of subjective valuations sets the necessary
precondition for any exchange.

If the equation
of ratio of builder to laborer is best forgotten, other parts
of Aristotle’s analysis have been seen by some historians as predating
parts of the economics of the Austrian School. Aristotle clearly
states that money represents human need or demand, which provides
the motivation for exchange, and “which holds all things together.”
Demand is governed by the use-value or desirability of a good.
Aristotle follows Democritus in pointing out that after the quantity
of a good reaches a certain limit, after there is “too much,”
the use value will plummet and become worthless. But Aristotle
goes beyond Democritus in pointing out the other side of the coin:
that when a good becomes scarcer, it will become subjectively
more useful or valuable. He states in the Rhetoric that
“what is rare is a greater good than what is plentiful. Thus gold
is a better thing than iron, though less useful.” These statements
provide an intimation of the correct influence of different levels
of supply on the value of a good, and at least a hint of the later
fully formed Austrian marginal utility theory of value, and its
solution of the “paradox” of value.

These are
interesting allusions and suggestions; but a few fragmentary sentences
scattered throughout different books hardly constitute a fully
fledged precursor of the Austrian School. But a more interesting
harbinger of Austrianism has only come to the attention of historians
in recent years: the groundwork for the Austrian theory of marginal
productivity – the process by which the value of final products
is imputed to the means, or factors, of production.

In his little-known
work, the Topics, as well as in his later Rhetoric,
Aristotle engaged in a philosophical analysis of the relationship
between human ends and the means by which people pursue them.
These means, or “instruments of production,” necessarily derive
their value from the final products useful to man, “the instruments
of action.” The greater the desirability, or subjective value,
of a good, the greater the desirability, or value of the means
to arrive at that product. More important, Aristotle introduces
the marginal element into this imputation by arguing that if the
acquisition or addition of a good A to an already desirable
good C creates a more desirable result than the addition
of good B, then A is more highly valued than
B. Or, as Aristotle put it: “judge by means of an addition,
and see if the addition of A to the same thing as B makes the
whole more desirable than the addition of B.” Aristotle also introduces
an even more specifically pre-Austrian, or pre-Bhm-Bawerkian,
concept by stressing the differential value of the loss,
rather than the addition of a good. Good A will be more
valuable than B, if the loss of A is considered
to be worse than the loss of B. As Aristotle clearly
phrased it: “That is the greater good whose contrary is the greater
evil, and whose loss affects us more.”

also took note of the importance of the complementarity of economic
factors of production in imputing their value. A saw, he pointed
out, is more valuable than a sickle in the art of carpentry, but
it is not more valuable everywhere and in all pursuits. He also
pointed out that a good with many potential uses will be more
desirable, or valuable, than a good with only one use.

Critics of
the economic importance of Aristotle’s analysis charge that, with
the exception of the saw-and-sickle passage, Aristotle made no
economic application of his broad philosophical treatment of imputation.
But this charge misses the crucial Austrian point – made
with particular force and elaboration by the twentieth century
Austrian economist Ludwig von Mises – that economic theory
is but a part, a subset, of a broader, “praxeological” analysis
of human action. By analyzing the logical implications of the
employment of means to the pursuit of ends in all human action,
Aristotle brilliantly began to lay the groundwork for the Austrian
theory of imputation and marginal productivity over two millennia

The Collapse After Aristotle

It is remarkable
that the great burst of economic thinking in the ancient world
covered only two centuries – the fifth and the fourth BC
– and only in one country, Greece. The rest of the ancient
world, and even Greece before and after these centuries, was essentially
a desert of economic thought. Nothing of substance came out of
the great ancient civilizations in Mesopotamia and India, and
very little except political thought in the many centuries-long
civilization of China. Remarkably, little or no economic thought
emerged out of those civilizations, even though the economic institutions
– trade, credit, mining, crafts, etc. – were often far
advanced, and even more so than in Greece. Here is an important
indication that, contrary to Marxists and other economic determinists,
economic thought and ideas do not simply emerge as a reflex of
the development of economic institutions.

There is
no way that historians of thought can ever completely penetrate
the mysteries of creativity in the human soul, and thus completely
explain this relatively brief flowering of human thought. But
it is surely no accident that it was the Greek philosophers who
provided us with the first fragments of systematic economic theory.
For philosophy, too, was virtually non-existent in the rest of
the ancient world or before this era in Greece. The essence of
philosophic thought is that it penetrates the ad hoc
vagaries of day-to-day life in order to arrive at truths that
transcend the daily accidents of time and place. Philosophy arrives
at truths about the world and about human life that are absolute,
universal and eternal – at least while the world and humanity
last. It arrives, in short, at a system of natural laws. But economic
analysis is a subset of such investigation, because genuine economic
theory can only advance beyond shifting day-to-day events by penetrating
truths about human action which are absolute, unchanging and eternal,
which are unaffected by changes of time and place. Economic thought,
at least correct economic thought, is itself a subset of natural
laws in its own branch of investigation.

If we remember
the snatches of economic thought contributed by the Greeks –
Hesiod on scarcity; Democritus on subjective value and utility,
the influence of supply and demand on value, and on time-preference;
Plato and Xenophon on the division of labor; Plato on the functions
of money; Aristotle on supply and demand, money, exchange, and
the imputation of value from ends to means – we see that
all of these men were focusing on the logical implications of
a few broadly empirical axioms of human life: the existence of
human action, the eternal pursuit of goals by employing scarce
means, the diversity and inequality among men. These axioms are
certainly empirical, but they are so broad and pervasive that
they apply to all of human life, at any time and place. Once articulated
and set forth, they impel assent to their truth by a shock of
recognition: once articulated, they become evident to
the human mind. Since these axioms are then established as certain
and apodictic, the processes of logic – themselves universal
and apodictic and transcending time and place – can be used
to arrive at absolutely true conclusions.

While this
method of reasoning – of philosophy and of economics –
is both empirical, being derived from the world, and true, it
runs against the grain of modem philosophies of science. In modern
positivism, or neopositivism, for example, “evidence” is much
narrower, fleeting and open to change. In much of modem economics,
using the positivist method, “empirical evidence” is a congeries
of isolated and narrow economic events, each of which is conceived
as homogeneous bits of information, supposedly used to “test,”
to confirm or refute, economic hypotheses. These bits, like laboratory
experiments, are supposed to result in “evidence” to test a theory.
Modern positivism is unequipped to understand or handle a system
of analysis – whether classical Greek philosophy or economic
theory – grounded on deductions from fundamental axioms so
broadly empirical as to be virtually self-evident – evident
to the self – once they are articulated. Positivism fails
to understand that the results of laboratory experiments are only
“evidence” because they too make evident to the scientists
(or to others who follow the experiments), that is, make evident
to the self facts or truths not evident before. The deductive
processes of logic and mathematics do the same thing: they compel
assent by making things evident to people which were not evident
before. Correct economic theory, which we have named as “praxeological”
theory, is another way by which truths are made evident to the
human mind.

Even politics,
which some scoff at as not purely or strictly economics, impinges
heavily on economic thought. Politics is of course an aspect of
human action, and much of it has a crucial impact on economic
life. Eternal natural law truths about economic aspects of politics
may be and have been arrived at, and cannot be neglected in a
study of the development of economic thought. When Democritus
and Aristotle defended a regime of private property and Aristotle
demolished Plato’s portrayal of an ideal communism, they were
engaging in important economic analysis of the nature and consequences
of alternative systems of control and ownership of property.

was the culmination of ancient economic thought as he was of classical
philosophy. Economic theorizing collapsed after the death of Aristotle,
and later Hellenistic and Roman epochs were virtually devoid of
economic thought. Again, it is impossible to explain fully the
disappearance of economic thought, but surely one reason must
have been the disintegration of the once proud Greek polis
after the time of Aristotle. The Greek city-states were subjected
to conquest and disintegration beginning with the empire of Alexander
the Great during the life of his former mentor Aristotle. Eventually
Greece, much diminished in wealth and economic prosperity, became
absorbed by the Roman Empire.

Small wonder,
then, that the only references to economic affairs should be counsels
of despair, with various Greek philosophers futilely urging their
followers to solve the problem of aggravated scarcity by drastically
curbing their wants and desires. In short, if you’re miserable
and poverty-stricken, accept your lot as man’s inevitable fate
and try to want no more than you have. This counsel of hopelessness
and despair was preached by Diogenes (412–323 BC) the founder
of the school of Cynics, and by Epicurus (343–270 BC), the
founder of the Epicureans. Diogenes and the Cynics pursued this
culture of poverty to such length as to adopt the name and the
life of dogs; Diogenes himself made his home in a barrel. Consistent
with his outlook, Diogenes denounced the hero Prometheus, who
in Greek myth stole the gift of fire from the gods and thus made
possible innovation, the growth of human knowledge, and the progress
of mankind. Prometheus, wrote Diogenes, was properly punished
by the gods for this fateful deed.

As Bertrand
Russell summed up:

is the last Greek philosopher who faces the world cheerfully;
after him, all have, in one form or another, a philosophy of
retreat. The world is bad; let us learn to be independent of
it. External goods are precarious; they are the gift of fortune,
not the reward of our own efforts.

The most
interesting and influential school of Greek philosophers after
Aristotle was the Stoics, founded by Zeno of Citium (c.336–264
BC), who appeared about the year 300 BC in Athens to teach at
a painted porch (stoa poikile) after which he and his
followers were called Stoics. While the Stoics began as an offshoot
of Cynicism, preaching the quenching of desire for worldly goods,
it took on a new and more optimistic note with Stoicism’s second
great founder, Chrysippus (281–208 BC). Whereas Diogenes
had preached that the love of money was the root of all evil,
Chrysippus countered with the quip that the “wise man will turn
three somersaults for an adequate fee.” Chrysippus was also sound
on the inherent inequality and diversity of man: “Nothing,” he
pointed out, “can prevent some seats in the theatre from being
better than others.”

But the most
important contribution of Stoic thought was in ethical, political
and legal philosophy, for it was the Stoics who first developed
and systematized, especially in the legal sphere, the concept
and the philosophy of natural law. It was precisely because Plato
and Aristotle were circumscribed politically by the Greek polis
that their moral and legal philosophy became closely intertwined
with the Greek city-state. For the Socratics, the city-state,
not the individual, was the locus of human virtue. But the destruction
or subjugation of the Greek polis after Aristotle freed
the thought of the Stoics from its admixture with politics. The
Stoics were therefore free to use their reason to set forth a
doctrine of natural law focusing not on the polis but
on each individual, and not on each state but on all states everywhere.
In short, in the hands of the Stoics, natural law became absolute
and universal, transcending political barriers or fleeting limitations
of time and place. Law and ethics, the principles of justice,
became transcultural and transnational, applying to all human
beings everywhere. And since every man possesses the faculty of
reason, he can employ right reason to understand the truths of
the natural law. The important implication for politics is that
the natural law, the just and proper moral law discovered by man’s
right reason, can and should be used to engage in a moral critique
of the positive man-made laws of any state or polis.
For the first time, positive law became continually subject to
a transcendent critique based on the universal and eternal nature
of man.

The Stoics
were undoubtedly aided in arriving at their cosmopolitan disregard
for the narrow interests of the polis by the fact that
most of them were Easterners who had come from outside the Greek
mainland. Zeno, the founder, described as “tall, gaunt, and swarthy,”
came from Citium on the island of Cyprus. Many, including Chrysippus,
came from Tarsus, in Cilicia, on the Asia Minor mainland near
Syria. Later Greek Stoics were centered in Rhodes, an island off
Asia Minor.

lasted 500 years, and its most important influence was transmitted
from Greece to Rome. The later Stoics, during the first two centuries
after the birth of Christ, were Roman rather than Greek. The great
transmitter of Stoic ideas from Greece to Rome was the famous
Roman statesman, jurist, and orator Marcus Tullius Cicero (106–43
BC). Following Cicero, Stoic natural law doctrines heavily influenced
the Roman jurists of the second and third centuries AD, and thus
helped shape the great structures of Roman law which became pervasive
in Western civilization. Cicero’s influence was assured by his
lucid and sparkling style, and by the fact that he was the first
Stoic to write in Latin, the language of Roman law and of all
thinkers and writers in the West down to the end of the seventeenth
century. Moreover, Cicero’s and other Latin writings have been
far better preserved than the fragmentary remains we have from
the Greeks.

writings were heavily influenced by the Greek Stoic leader, the
aristocratic Panaetius of Rhodes (c.185–110 BC) and as a
young man he traveled there to study with his follower, Posidonius
of Rhodes (135–51 BC), the greatest Stoic of his age. There
is no better way to sum up Cicero’s Stoic natural law philosophy
than by quoting what one of his followers called his “almost divine
words.” Paraphrasing and developing the definition and insight
of Chrysippus, Cicero wrote:

There is
a true law, right reason, agreeable to nature, known to all
men, constant and eternal, which calls to duty by its precepts,
deters from evil by its prohibition – This law cannot be departed
from without guilt – Nor is there one law at Rome and another
at Athens, one thing now and another afterward; but the same
law, unchanging and eternal, binds all races of man and all
times; and there is one common, as it were, master and ruler
– God, the author, promulgator and mover of this law. Whoever
does not obey it departs from [his true] self, contemns the
nature of man and inflicts upon himself the greatest penalties

Cicero also
contributed to Western thought a great anti-statist parable which
resounded through the centuries, a parable that revealed the nature
of rulers of state as nothing more than pirates writ large. Cicero
told the story of a pirate who was dragged into the court of Alexander
the Great. When Alexander denounced him for piracy and brigandage
and asked the pirate what impulse had led him to make the sea
unsafe with his one little ship, the pirate trenchantly replied,
“the same impulse which has led you [Alexander] to make the whole
world unsafe.”

But despite
their important contributions to moral and legal philosophy, neither
the Stoics nor other Romans contributed anything else of significance
to economic thought. Roman law, however, heavily influenced and
pervaded later legal developments in the West. Roman private law
elaborated, for the first time in the West, the idea of property
rights as absolute, with each owner having the right to use his
property as he saw fit. From this stemmed the right to make contracts
freely, with contracts interpreted as transfers of titles to property.
Some Roman jurists declared that property rights were required
by the natural law. The Romans also founded the law merchant,
and Roman law strongly influenced the common law of the English-speaking
countries and the civil law of the continent of Europe.

Taoism in Ancient China

The only
other body of ancient thought worth mentioning is the schools
of political philosophy in ancient China. Though remarkable for
its insights, ancient Chinese thought had virtually no impact
outside the isolated Chinese Empire in later centuries, and so
will be dealt with only briefly.

The three
main schools of political thought: the Legalists, the Taoists,
and the Confucians, were established from the sixth to the fourth
centuries BC. Roughly, the Legalists, the latest of the three
broad schools, simply believed in maximal power to the state,
and advised rulers how to increase that power. The Taoists were
the world’s first libertarians, who believed in virtually no interference
by the state in economy or society, and the Confucians were middle-of-the-roaders
on this critical issue. The towering figure of Confucius (551–479
BC), whose name was actually Ch’iu Chung-ni, was an erudite man
from an impoverished but aristocratic family of the fallen Yin
dynasty, who became Grand Marshal of the state of Sung. In practice,
though far more idealistic, Confucian thought differed little
from the Legalists, since Confucianism was largely dedicated to
installing an educated philosophically minded bureaucracy to rule
in China.

By far the
most interesting of the Chinese political philosophers were the
Taoists, founded by the immensely important but shadowy figure
of Lao Tzu. Little is known about Lao Tzu’s life, but he was apparently
a contemporary and personal acquaintance of Confucius. Like the
latter he came originally from the state of Sung and was a descendant
of lower aristocracy of the Yin dynasty. Both men lived in a time
of turmoil, wars and statism, but each reacted very differently.
For Lao Tzu worked out the view that the individual and his happiness
was the key unit of society. If social institutions hampered the
individual’s flowering and his happiness, then those institutions
should be reduced or abolished altogether. To the individualist
Lao Tzu, government, with its “laws and regulations more numerous
than the hairs of an ox,” was a vicious oppressor of the individual,
and “more to be feared than fierce tigers.” Government, in sum,
must be limited to the smallest possible minimum; “inaction” became
the watchword for Lao Tzu, since only inaction of government can
permit the individual to flourish and achieve happiness. Any intervention
by government, he declared, would be counterproductive, and would
lead to confusion and turmoil. The first political economist to
discern the systemic effects of government intervention, Lao Tzu,
after referring to the common experience of mankind, came to his
penetrating conclusion: “The more artificial taboos and restrictions
there are in the world, the more the people are impoverished …
The more that laws and regulations are given prominence, the more
thieves and robbers there will be.”

The worst
of government interventions, according to Lao Tzu, was heavy taxation
and war. “The people hunger because theft superiors consume an
excess in taxation” and, “where armies have been stationed, thorns
and brambles grow. After a great war, harsh years of famine are
sure to follow.”

The wisest
course is to keep the government simple and inactive, for then
the world “stabilizes itself.”

As Lao Tzu
put it: “Therefore, the Sage says: I take no action yet the people
transform themselves, I favor quiescence and the people right
themselves, I take no action and the people enrich themselves…”

Deeply pessimistic,
and seeing no hope for a mass movement to correct oppressive government,
Lao Tzu counseled the now familiar Taoist path of withdrawal,
retreat, and limitation of one’s desires.

Two centuries
later, Lao Tzu’s great follower Chuang Tzu (369–c.286 BC)
built on the master’s ideas of laissez-faire to push
them to their logical conclusion: individualist anarchism. The
influential Chuang Tzu, a great stylist who wrote in allegorical
parables, was therefore the first anarchist in the history of
human thought. The highly learned Chuang Tzu was a native of the
state of Meng (now probably in Honan province), and also descended
from the old aristocracy. A minor official in his native state,
Chuang Tzu’s fame spread far and wide throughout China, so much
so that King Wei of the Ch’u kingdom sent an emissary to Chuang
Tzu bearing great gifts and urging him to become the king’s chief
minister of state. Chuang Tzu’s scornful rejection of the king’s
offer is one of the great declarations in history on the evils
underlying the trappings of state power and the contrasting virtues
of the private life:

A thousand
ounces of gold is indeed a great reward, and the office of chief
minister is truly an elevated position. But have you, sir, not
seen the sacrificial ox awaiting the sacrifices at the royal
shrine of state? It is well cared for and fed for a few years,
caparisoned with rich brocades, so that it will be ready to
be led into the Great Temple. At that moment, even though it
would gladly change places with any solitary pig, can it do
so? So, quick and be off with you! Don’t sully me. I would rather
roam and idle about in a muddy ditch, at my own amusement, than
to be put under the restraints that the ruler would impose.
I will never take any official service, and thereby I will [be
free] to satisfy my own purposes.

Chuang Tzu
reiterated and embellished Lao Tzu’s devotion to laissez-faire
and opposition to state rule: “There has been such a thing as
letting mankind alone; there has never been such a thing as governing
mankind [with success].” Chuang Tzu was also the first to work
out the idea of “spontaneous order,” independently discovered
by Proudhon in the nineteenth century, and developed by F.A. von
Hayek of the Austrian School in the twentieth. Thus, Chuang Tzu:
“Good order results spontaneously when things are let alone.”

But while
people in their “natural freedom” can run their lives very well
by themselves, government rules and edicts distort that nature
into an artificial Procrustean bed. As Chuang Tzu wrote, “The
common people have a constant nature; they spin and are clothed,
till and are fed – it is what may be called their ‘natural freedom.'”
These people of natural freedom were born and died themselves,
suffered from no restrictions or restraints, and were neither
quarrelsome nor disorderly. If rulers were to establish rites
and laws to govern the people, “it would indeed be no different
from stretching the short legs of the duck and trimming off the
long legs of the heron” or “haltering a horse.” Such rules would
not only be of no benefit, but would work great harm. In short,
Chuang Tzu concluded, the world “does simply not need governing;
in fact it should not be governed.”

Chuang Tzu,
moreover, was perhaps the first theorist to see the state as a
brigand writ large: “A petty thief is put in jail. A great brigand
becomes a ruler of a State.” Thus, the only difference between
state rulers and out-and-out robber chieftains is the size of
their depredations. This theme of ruler-as-robber was to be repeated,
as we have seen, by Cicero, and later by Christian thinkers in
the Middle Ages, though of course these were arrived at independently.

Taoist thought
flourished for several centuries, culminating in the most determinedly
anarchistic thinker, Pao Ching-yen, who lived in the early fourth
century AD, and about whose life nothing is known. Elaborating
on Chuang-Tzu, Pao contrasted the idyllic ways of ancient times
that had had no rulers and no government with the misery inflicted
by the rulers of the current age. In the earliest days, wrote
Pao, “there were no rulers and no officials. [People] dug wells
and drank, tilled fields and ate. When the sun rose, they went
to work; and when it set, they rested. Placidly going their ways
with no encumbrances, they grandly achieved their own fulfillment.”
In the stateless age, there was no warfare and no disorder:

Where knights
and hosts could not be assembled there was no warfare afield
– Ideas of using power for advantage had not yet burgeoned.
Disaster and disorder did not occur. Shields and spears were
not used; city walls and moats were not built – People munched
their food and disported themselves; they were carefree and

Into this
idyll of peace and contentment, wrote Pao Ching-yen, there came
the violence and deceit instituted by the state. The history of
government is the history of violence, of the strong plundering
the weak. Wicked tyrants engage in orgies of violence; being rulers
they “could give free rein to all desires.” Furthermore, the government’s
institutionalization of violence meant that the petty disorders
of daily life would be greatly intensified and expanded on a much
larger scale. As Pao put it:

among the ordinary people are merely trivial matters, for what
scope of consequences can a contest of strength between ordinary
fellows generate? They have no spreading lands to arouse avarice
… they wield no authority through which they can advance their
struggle. Their power is not such that they can assemble mass
followings, and they command no awe that might quell [such gatherings]
by their opponents. How can they compare with a display of the
royal anger, which can deploy armies and move battalions, making
people who hold no enmities attack states that have done no

To the common
charge that he has overlooked good and benevolent rulers, Pao
replied that the government itself is a violent exploitation of
the weak by the strong. The system itself is the problem,
and the object of government is not to benefit the people, but
to control and plunder them. There is no ruler who can compare
in virtue with a condition of non-rule.

Pao Ching-yen
also engaged in a masterful study in political psychology by pointing
out that the very existence of institutionalized violence by the
state generates imitative violence among the people. In a happy
and stateless world, declared Pao, the people would naturally
turn to thoughts of good order and not be interested in plundering
their neighbors. But rulers oppress and loot the people and “make
them toil without rest and wrest away things from them endlessly.”
In that way, theft and banditry are stimulated among the unhappy
people, and arms and armor, intended to pacify the public, are
stolen by bandits to intensify their plunder. “All these things
are brought about because there are rulers.” The common idea,
concluded Pao, that strong government is needed to combat disorders
among the people, commits the serious error of confusing cause
and effect.

The only
Chinese with notable views in the more strictly economic realm
was the distinguished second century BC historian, Ssu-ma Ch’ien
(145–c.90 BC). Ch’ien was an advocate of laissez-faire,
and pointed out that minimal government made for abundance of
food and clothing, as did the abstinence of government from competing
with private enterprise. This was similar to the Taoist view,
but Ch’ien, a worldly and sophisticated man, dismissed the idea
that people could solve the economic problem by reducing desires
to a minimum. People, Ch’ien maintained, preferred the best and
most attainable goods and services, as well as ease and comfort.
Men are therefore habitual seekers after wealth.

Since Ch’ien
thought very little of the idea of limiting one’s desires, he
was impelled, far more than the Taoists, to investigate and analyze
free market activities. He therefore saw that specialization and
the division of labor on the market produced goods and services
in an orderly fashion:

Each man
has only to be left to utilize his own abilities and exert his
strength to obtain what he wishes – When each person works
away at his own occupation and delights in his own business,
then like water flowing downward, goods will naturally flow
ceaselessly day and night without being summoned, and the people
will produce commodities without having been asked.

To Ch’ien,
this was the natural outcome of the free market. “Does this not
ally with reason? Is it not a natural result?” Furthermore, prices
are regulated on the market, since excessively cheap or dear prices
tend to correct themselves and reach a proper level.

But if the
free market is self-regulating, asked Ch’ien perceptively, “what
need is there for government directives, mobilizations of labor,
or periodic assemblies?” What need indeed?

Ssu-ma Ch’ien
also set forth the function of entrepreneurship on the market.
The entrepreneur accumulates wealth and functions by anticipating
conditions (i.e., forecasting) and acting accordingly. In short,
he keeps “a sharp eye out for the opportunities of the times.”

Ch’ien was one of the world’s first monetary theorists. He pointed
out that increased quantity and a debased quality of coinage by
government depreciates the value of money and makes prices rise.
And he saw too that government inherently tended to engage in
this sort of inflation and debasement.


[1] H.H. Joachim, Aristotle:
The Nichomachean Ethics
(Oxford: The Clarendon Press,
1951), p. 50. Also see Moses I. Finley, “Aristotle and Economic
Analysis,” in Studies
in Ancient Society
(London: Routledge and Kegan Paul,
1974), pp. 32–40.


The only
book covering all ancient economic thought in countries including
Mesopotamia, India and China is Joseph J. Spengler, Origins
of Economic Thought and Justice
(Carbondale, Ill., Southern
Illinois University Press, 1980). Although Professor Spengler
probably would not have agreed with this assessment, his book
demonstrates that virtually nothing of interest emerged out of
the economic thought of these ancient civilizations. The exception
is Chinese political philosophy (particularly Taoism), on which
the definitive work is the illuminating Kung-chuan Hsiao, A
History of Chinese Political Thought, Vol. One: From the Beginnings
to the Sixth Century A.D.
(Princeton, NJ: Princeton University
Press, 1979). On a Chinese advocate of laissez-faire,
see Joseph J. Spengler, “Ssu-ma Ch’ien, Unsuccessful Exponent
of Laissez Faire,” Southern Economic Journal (Jan. 1964),
pp. 223–43.

The only
histories of economic thought that do justice to the Greek contribution
are Spiegel, The
Growth of Economic Thought
and Barry Gordon, Economic
Analysis Before Adam Smith
(New York: Barnes & Noble,
1975). Spiegel is particularly good on Democritus, and Gordon
is good on Hesiod and deals extensively with Greek economic thought.
Gordon is also unique in dealing fully with Jewish economic thought.
His title is misleading, however, since the book stops with the
late scholastics, considerably before the time of Adam Smith.

S. Todd Lowry,
“Recent Literature on Ancient Greek Economic Thought,” Journal
of Economic Literature, 17 (March 1979), pp. 65–86,
provides a comprehensive annotated bibliographical review of Greek
economic thought. Also see Lowry, The
Archaeology of Economic Ideas: The Classical Greek Tradition

(Durham, NC: Duke University Press, 1987). The Oxford W.D. Ross
edition of the works of Aristotle is the standard one. On the
fascinating controversy on the meaning of Aristotle’s equation
of exchange, Josef Soudek’s lengthy, scholarly, but totally wrongheaded
reading of Jevons into Aristotle is in Josef Soudek, “Aristotle’s
Theory of Exchange: An Inquiry into the Origin of Economic Analysis,”
Proceedings of the American Philosophical Society 96
(Feb. 1952), pp. 45–75, while Barry Gordon plumps
for Aristotle as a proto-Marshallian: “Aristotle and the Development
of Value Theory,” Quarterly Journal of Economics, 78
(Feb. 1964), pp. 115–28. Far better are two scholars who
had the courage to see the equation of exchange as nonsense: the
great interpreter of Aristotle, H.H. Joachim, in his Aristotle:
The Nichomachean Ethics
(Oxford: The Clarendon Press,
1951), especially 148–51, and the ancient historian
Moses I. Finley, in his “Aristotle and Economic Analysis,” Past
and Present (May 1970), pp. 3–25, reprinted in Finley
(ed), Studies
in Ancient Society
(London: Routledge & Kegan Paul,
1974), pp. 26–52.

A detailed
critique of the various Latin translations of Aristotle’s discussion
of economic value is in Odd Langholm, Price
and Value in the Aristotelian Tradition
(Bergen: Universitetsforlaget,

Joseph J.
Spengler, in his excellent “Aristotle on Economic Imputation and
Related Matters,” Southern Economic Journal, 21 (April
1955), pp. 371–89, shows that Aristotle’s imputation theory
was a forerunner of praxeological and Austrian imputation theory
of the nineteenth and twentieth centuries. Spengler himself, however,
undervalued the results of his own inquiry, since he didn’t realize
that Aristotle’s imputation theory was an important contribution
to action analysis and praxeology even if it did not deal with
strictly economic matters.

Also on Aristotle
as a pre-Austrian, see Emil Kauder, “Genesis of the Marginal Utility
Theory: From Aristotle to the end of the Eighteenth Century,”
Economic Journal, 43 (Sept. 1953), pp. 638–50.

On Plato
as totalitarian, see the hard-hitting and highly influential work
by a leading modern philosopher, Karl R. Popper, The
Open Society and Its Enemies
(3rd rev. ed., 2 vols, Princeton,
NJ: Princeton University Press, 1957). Unfortunately, Popper confuses
the political totalitarianism of Plato with the spurious
tyranny allegedly implied by the fact that Plato believed in absolute
truth and in rational ethics. To a modern, wishy-washy ad
hoc metaphysician like Popper, any firm belief in
truth, in black and white, smacks of “dogmatism” and “despotism.”
Setting the philosophic record straight in defense of Plato, in
reply were John Wild, Plato’s
Modern Enemies and the Theory of Natural Law
University of Chicago Press, 1953), and Ronald B. Levinson,
Defense of Plato
(Cambridge: Harvard University Press,
1953). For an attack on Plato’s totalitarianism and an exposition
of the sophists, the opponents of Socratic philosophy, as classical
liberals in politics, see Eric A. Havelock, The
Liberal Temper in Greek Politics
(New Haven: Yale University
Press, 1957). On the other hand, for a more recent article confirming
the view that the Greek polis was inherently statist,
had no conception of classical liberalism or individual freedom,
and was grounded on the labor of slaves, see Paul A. Rahe, “The
Primacy of Politics in Classical Greece,” American Historical
Review (April 1984), pp. 26–93. On Plato and the division
of labor, see Williamson M. Evers, “Specialization
and the Division of Labor in the Social Thought of Plato and Rousseau
The Journal of Libertarian Studies, 4 (Winter, 1980),
pp. 45–64; Vernard Foley, “The Division of Labor in Plato
and Smith,” History of Political Economy, 6
(Summer 1974), pp. 220–42: Paul J. McNulty, “A Note on the
Division of Labor in Plato and Smith,” History of Political
Economy, 7 (Autumn 1975), pp. 372–8; and Foley, “Smith
and the Greeks: A Reply to Professor McNulty’s Comments,” ibid.,
pp. 379–89.

On the influence
of Plotinus and man’s alleged inherent alienation to overcome
through history, see the illuminating discussion in Leszek Kolakowksi,
Currents of Marxism, I: The Founders
(New York: Oxford
University Press, 1981), pp. 11–23.

eloquent quotation on the definition of the natural law may be
found, among other places, in Michael Bertram Crowe, The
Changing Profile of the Natural Law
(The Hague: Martinus
Nijhoff, 1977), pp. 37–8, Crowe including natural law theorists
among the Greeks and Romans; and his parable of Alexander and
the pirate in Cicero’s On
the Commonwealth
(Columbus: Ohio State University Press,
1929), Book III, SIV, p. 210.

N. Rothbard
(1926–1995) was the author of Man,
Economy, and State
, Conceived
in Liberty
, What
Has Government Done to Our Money
, For
a New Liberty
, The
Case Against the Fed
, and many
other books and articles
. He
was also the editor – with Lew Rockwell – of The
Rothbard-Rockwell Report

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