THE ECONOMIC IDEAS OF PLATO AND ARISTOTLE
Both Plato (428/427-348/347 B.C.) and Aristotle (384-322 B.C.) have contributed their ideas to economic thought although their ideas can be considered more as a philosophy of economics than pure economic theory because of their concerns with justice and morality. Nevertheless, their ideas do discuss five major themes relating to economic issues. These themes are: division of labor, incentives (motivations), private property, money and trade. Plato's economic thought comes from his work the Republic and Aristotle's economic ideas are found primarily in his works the Politics, Nicomachean Ethics and Economics (Oeconomica).
Plato and Aristotle have both influenced future economic ideas. For example, Plato's division of labor was a fundamental concept of Adam Smith's (1723-1790) The Wealth of Nations. In fact, Adam Smith's theory "... strongly influenced... the budding Industrial Revolution in the direction of seeking and rewarding greater and greater intensities of labor specialization. And economists and political scientists since Smith by and large accepted intense labor as a cornerstone feature of modern economics". Not only has Plato's contribution to economics been based on his division of labor, but he has also promoted intrinsic and extrinsic motivating factors. Specifically, "Modern economists now recognize incentives as the motive for action in any given society and classify them in ways that are still very similar to Plato's three distinctions, including moral incentives, coercive incentives and remunerative (material) incentives". Plato's three distinctions of incentives will be discussed later in this essay.
Aristotle also was a great influence on economic thought. He is considered to have impacted a philosophy of economics. According to Ricardo Crespo Aristotle "... was the first systematic philosopher, the first philosopher to tackle economic issues, providing a human and social setting for economic reality". Furthermore, Aristotle has influenced contemporary economists such as Amartya Sen. Crespo states that "Sen agrees with Aristotle on a number of issues, including 1) the relation among Economics, Ethics and Politics, 2) the role of wealth in a "good life," 3) the conception of eudaimonia[human fulfillment], and 4) the process of choosing the activities leading to eudaimonia."
The philosopher Scott Meikle has also been impressed with Aristotle's economic thought. Meikle has actually labeled Aristotle's economic writing as "incalculably great." He goes on to state that "It is usually held to be the first analytical contribution to economics... Aristotle's theory of money substantially informed treatments of the subject into the twentieth century, and most schools of modern economic thought have had claims of Aristotelian paternity made on their belief, including Jevonian utility theory, mathematical economics, neo-classical economics, and Marxism." Sir Erich Roll attributed Aristotle's differences between use-value and exchange-value as influencing modern economic thought. Use-value and exchange-value will be discussed later in this essay.
Plato's contribution to economic thought has been primarily in two areas: the division of labor, and intrinsic and extrinsic incentives. Plato in Book II of the Republic introduces his division of labor:
A State, I said, arises, as I conceive, out of the needs of mankind; no one is self-sufficing, but all of us have many wants... Then, as we have many wants, and many persons are needed to supply them, one takes a helper for one purpose and another for another; and when these partners and helpers are gathered together in one habitation the body of inhabitants is termed a State.
One can see that Plato links the creation of a State as the result of a division of labor. Plato now begins to expand his idea of the division of labor that will involve supply and demand. He states:
And they exchange with one another, and one gives, and another receives, under the idea that the exchange will be for their good...[with] the true creator[being] necessity... Now the first and greatest of necessities is food, which is the condition of life and existence... The second is a dwelling, and the third clothing and the like... And now let us see how our city will be able to supply this great demand....
Plato also introduces the concepts of productivity and efficiency where the supply will meet the demand. Again, Plato uses his division of labor to support this:
And will you have a work better done when the workman has many occupations, or when he has only one? When he has only one... we must infer that all things are produced more plentifully and easily and of a better quality when one man does one thing which is natural to him, and does it at the right time, and leaves other things... Then more than our citizens will be required; for the husbandman will not make his own plough or mattock, or other implements of agriculture, if they are to be good for anything. Neither will the builder make his tool — and he too needs many; and in like manner the weaver and shoemaker... Then carpenters, and smiths, and many other artisans, will be sharers in our little State, which is already beginning to grow?.
The reason Plato mentions the growth of a State is to show the possible evil that results basically from the division of labor. In other words, even though the division of labor provides the benefits of efficiency and productivity, nevertheless, greed (the accumulation of wealth) can lead to undesirable consequences. It is interesting to note that in this particular discourse Plato writes about money as a medium of exchange. The implication is that money is responsible for the accumulation of wealth which leads to greed.
Plato writes that eventually a city will need to import goods which will be supplied by merchants (exporters and importers). As a consequence, a market place will be established where goods can be exchanged for money. This, in turn, will create a luxury State where people will want goods above and beyond the necessities of life. Consequently, the city will expand due to this demand of accumulating unlimited wealth. Plato then writes that because of this war will be the result.
In addition to the division of labor Plato also discusses intrinsic and extrinsic motivations (incentives). In Book II of the Republic Plato writes that justice occurs because of the law. Plato continues by writing "Parents and tutors are always telling their sons and their wards that they are to be just; but why? Not for the sake of justice, but for the sake of character and reputation; in the hope of obtaining for him who is reputed just some of those offices, marriages, and the like which Glaucon has enumerated among the advantages accruing to the unjust from the reputation of justice".
In Book III of the Republic Plato continues discussing motivations by writing:
Neither is Phoenix, the tutor of Achilles, to be approved or deemed to have given his pupil good counsel when he told him that he should take the gifts of the Greeks and assist them... but that without a gift he should not lay aside his anger. Neither will we believe or acknowledge Achilles himself to have been such a lover of money that he took Agamemmom's gifts, or that when he had received payment he restored the dead body of Hector, but that without payment he was unwilling to do so....
Another concept that Plato was concerned with relates to private property. Basically, Plato's writings oppose private property. For example, in Book III of the Republic Plato writes that warriors should not own any property except that which is absolutely necessary. Plato also specifically states that warriors should not even own a private house, and in Book V Plato writes that women and guardians should live in a communal environment.
Aristotle lists four different forms of an economy: the king, the provincial governor, the city and the individual. In Book II.1 of the Economics he describes the function of each as follows:
Let us therefore examine royal economy first... It is universal in its scope, but has four special departments — the coinage, exports, imports, and expenditure...
Let us take satrapic economy. Here we find six kinds of revenue —[from land, from the peculiar products of the district, from merchandise, from taxes, from cattle, and from all other sources]... Of these the first and most important is that which comes from land... next in importance is the revenue from peculiar products, from gold, or silver, or copper, or anything else which is found in a peculiar locality; thirdly comes that derived from merchandise; fourthly, the revenue from the cultivation of the soil and from market-dues; fifthly, that which comes from cattle... ; and sixthly, that which is derived from men, which is called the poll-tax...
Thirdly, let us examine the economy of the city. Here the most important source of revenue is from the peculiar products of the country, next comes that derived from merchandise and customs, and lastly that which comes from the ordinary taxes.
Fourthly and lastly, let us take individual economy... It is the least important kind of economy, because the incomings and expenses are small. Here the main source of revenue is the land, next other kinds of regular activity, and thirdly investments of money.
If we compare Aristotle's four different forms of the economy to the modern economy in today's world, we can see that Aristotle's economy lists the components of the Gross Domestic Product which measures a nation's economy. Specifically, the Gross Domestic Product consists of consumption, investments, government spending and net exports. Aristotle covers all these but in a different format.
In Book I.9 of the Politics Aristotle does not object to using money as a medium of exchange in importing and exporting goods. In fact, he states that money in this particular case is both useful and convenient. On the other hand, in Book I.10 of the Politics Aristotle condemns the use of money not used as a medium of exchange. Aristotle, in fact, distinguishes between two types of wealth-getting: household management and retail trade. He labels household management as honorable and necessary while stating that retail trade should be censured. Aristotle uses stronger condemning language for interest when he calls it usury. He calls it the most hated type of wealth-getting. The reason Aristotle condemns interest is because he says that this type of wealth-getting is making money from money.
The problem with Aristotle condemning usury (charging interest) is that he ignores four important factors. First, there is a risk for the lender of not being paid back. Therefore, interest is charged to cover this risk. Second, the lender gives up the use of the money lent. In other words, the lender does not have use of this money for a certain period of time. Third, the interest received by the lender can be re-invested into the economy and, thereby, promote the welfare of the people. Fourth, Aristotle does not distinguish between charging ordinary interest which covers risk and the inconvenience of not having the use of the money and excessive interest which is generally considered usury.
In Book V.5 of the Nicomachean Ethics Aristotle states: "And for the future exchange — that if we do not need a thing now we shall have it if ever we do need it — money is as it were our surety; for it must be possible for us to get what we want by bringing the money". Surprisingly Aristotle did not bring this thought process a step further when he disapproved of usury (interest). In other words, the money lent is not available for a future exchange nor would it be for a "must be possible for us to get what we want by bringing the money." Therefore, interest should have been considered as a compensation for lack of this surety.
Even though Aristotle had some misconceptions of his economic thought, he, nevertheless, had some good insights into modern economic ideas. For example, "In the Politics, Aristotle views labor as a commodity that has value but does not give value... Instead, the value of labor skills is given by the goods they command in the market... Noting that labor skill is a necessary, but not a sufficient, determinant of value... ". This is a modern economic concept of value added.
Aristotle has also contributed to utility theory. Specifically, "Aristotle observes that, as the quantity of the good possessed increases, the use value of that good will begin to decline at some threshold point".
Also, Aristotle understood the law of supply and demand even though he did not use this term. Aristotle was aware "... that demand will fluctuate as the extent of the use of the item is limited or wide-ranging; and that exchange value and demand are affected by the circumstances of rarity or scarcity".
An important factor in modern economics is the concept of private property. Basically, private property is the foundation of economic growth and a strong economy. Aristotle, unlike Plato, believed in private property. In Book II.5 of the Politics Aristotle points out the problems associated with Plato's theory of common property. Aristotle states that one of the disadvantages of communal property is that there will be complaints by those who work harder and receive less benefits against those who work less and receive more benefits. However, what can also be included in this complaint category would be complaints against those who work less and still receive the same benefits as those who work harder.
A second objection that Aristotle brings out as a disadvantage of communal property is that there are more quarrels in such an environment than where there is private property. A third objection that Aristotle has concerning communal property is that Aristotle does not believe that communal property will make the lower class equal with the higher class. Related to this issue are Aristotle's concerns as to the types of laws, government and education that will be implemented. In other words, one class can dominate the other class.
Aristotle also mentions private property in Book I.6 of the Economics. In this particular case private property refers to a householder. Aristotle states:
The householder has four roles in relation to wealth. He ought to be able to acquire it, and to guard it; otherwise there is no advantage in acquiring it... Further he ought to be able to order his possessions aright and make a proper use of them... The various kinds of property ought to be distinguished, and those which are productive ought to be more numerous than the unproductive....
Murray Rothbard highlights Aristotle's reasons for having private property and rejecting Plato's communal property proposal by writing:
... 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 on to others. In contrast, people will devote the greatest interest and care to their own property...
... 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... Aristotle... 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... insight that only private property furnishes people with the opportunity to act morally... The compulsion of communal property would destroy that opportunity.
Even though both Plato and Aristotle have not always been correct in their economic ideas, they, nevertheless, have made a great impact on economic thought. For example, Plato's division of labor has influenced the 18th century economist and philosopher Adam Smith who has been called the "Father of Modern Economics." Another example is Aristotle's idea of usury — the charging of interest. This concept was still applied during the Middle Ages. However, the more modern economic theory of usury is no longer considered charging interest but the charging of excessive interest.
I believe that the greatest contribution that Plato and Aristotle made to economic thought is that they paved the way for the contemplation and discussion of economic issues. Their economic ideas have become the foundation for the expansion of economic thought. However, I believe that Aristotle has had the greater impact in the history of economic thought.
Younkins best summarizes Aristotle's contribution to economic thought as follows:
[Aristotle] foresaw significant elements of Austrian value theory... He held a theory of the importance of value determination in evaluating the efficiency of means in attaining human objectives. He also anticipated the Austrian theory of imputation that holds that the value of productive factors can be obtained via imputation from the market values of final products. Aristotle was the first to draw a distinction between value in use and exchange value. His pre-marginal utility theory also rejected the labor theory of value that later was held by many of the classical economists. In addition, he was the first thinker to analyze the problem of commensurability. Additionally, Aristotle recognized the paradox of value and the operation of the principle of scarcity.
One can see that Aristotle's contribution to economic thought is indeed great. In fact, he has been called "an originator of economic analysis".
1. Wagner, p. 2.
2. Malandra, p. 2.
5. Meikle, p. 1.
6. Meikle, p. 8, Aristotle's Economic Thought as referenced in E. Roll, A History of Economic Thought (London, 1938. 1961) 34-5.
7. Plato, p. 53.
9. ibid., p. 54.
10. ibid., pp. 55-58.
11. ibid., p. 46.
12. ibid., pp. 77-78.
13. Aristotle, Economics, pp. 2134-2135.
14. Aristotle, Nicomachean Ethics, p. 1789.
15. Younkins, p. 2.
18. Aristotle, Economics, p. 2133.
19. Rothbard, p. 2.
20. Younkins, p. 6.
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