Before the 18th century economics was subordinated to the study of political, moral and theological matters.
The philosophers of antiquity who theorized about economic concerns such as Xenophon and Aristotle never developed a coherent theory of price. It was with the medieval theologians that the belief in price as an important social mechanism worth theorizing fully arose.
The concept of the “just price” was the summation of medieval economic thinking.
The mercantilists represented the first real break with political, moral and theological matters in theorizing economic activity. They searched for economic laws in the sphere of circulation (trade and money turnover). Their strategy was buying to sell at a higher price to acquire gold. They were practical businessmen but their theories didn’t have much influence within universities.
William Petty was the first to study economics from the perspective of production. Petty expressed the fundamental principles which would later evolve into classical political economy: that wages, rent, profit and usury are inversely related in the price of a commodity which is determined in the final analysis by expenditure of labour.
Political economy as a unique discipline fully emerged in the 18th century in Britain out of moral philosophy. Adam Smith, the first true economist, was a professor of moral philosophy. The concept of value the classical political economists developed (the labour theory of value also known as LTV) was influenced by their notions of human nature which was rooted in moral philosophy.
The classical 19th century political economist came to the conclusion that “just price” would arise out of competition amongst producers. The concept of “just price” didn’t disappear, the mechanism to establish it just changed.
The notion of the price system could only be fully theorized in a fully commercial society where everyone from the king to the commoner came daily directly into relations with price. Unlike more abstract concepts like capital or value, price is much more concrete.
Marginalism, which fully emerged in the 1870s in continental Europe, was a theoretical competitor with the LTV for conceptualizing market relations. Marginalism used individual psychological desires to explain the demand for goods and the supply of labour which produced those exact same demanded goods. This shifted the focus towards a demand side explanation of supply, demand and price as opposed to the supply side explanation rooted in the actual production process provided by the LTV.
The LTV didn’t totally neglect individual consumer preference but it was secondary to the more important supply and labour variables.
Proto-Marginalistist theories had already begun to emerge long before the marginal revolution of Jevons, Walras and Menger. Samuel Bailey had already totally rejected the LTV in his 1825 work “A Critical Dissertation on the Nature, Measures, and Causes of Value”. He developed an “adding up” theory in which the revenues of land, labour and capital could be determined independently of one another. Karl Marx had criticized Bailey in Chapter 20 of his Theories of Surplus-Value [if you want to see what Marxs thoughts on marginalism would have been look here]. The Scotsman John Rae’s 1834 work “The New Principles of Political Economy” had placed an emphasis on the question of allocation and moved away from a supply based explanation of price to a demand based explanation. Rae’s historical importance was later recolonized by economists such as Irving Fisher and Eugen Böhm von Bawerk.
There exists a certain interesting parallelism between Karl Marx and Eugen Böhm von Bawerk. They both shared a 19th century scientific orientation and attempted to identify what they assumed were the overarching laws which governed the economic process. They both did this at the neglect of the human motivations, psychologies and states of mind involved in this process. The importance of Thorstein Veblen‘s approach to economics is it takes into account the actual historical motivational structures and the actual role of businessmen in the ebbs and flows of prices.
Veblen considered his most important contribution to economics was his style of an anthropological interpretation of history, where the stages of the evolution of society were analysed in terms of catalisation, or mitigation, that the institutions had on the instinct of workmanship as a basic human propensity.
Institutionalists have a much richer notion of allocative efficiency. Wants are not given in a modern economy but emerge in the process of dynamic interaction. All societies have an emergent value structure and it’s an institutionalists job to confront this value system. In mainstream economics the distribution of power that structures values and preferences are taken as given. Institutionalist economists provide a psycho-cultural critique exposing the cultural hegemony of corporate and vested interests in shaping the mentality of social life.