History of economic thought

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Economics as an independent science began in the late eighteenth century with the work of Adam Smith, The Wealth of Nations. [1]. During the following two centuries there were major developments in methodology and scope.


Nineteenth century economists applied deductive reasoning to axioms considered to be self-evident, and simplifying assumptions thought to capture the essential features of economic activity. That methodology yielded concepts such as elasticity and utility, tools such as marginal analysis, and theorems such as the law of comparative costs. An extension of the relationships governing transactions between consumers and producers was considered to provide all that was necessary to understand the behaviour of the national economy.


The development, in the early twentieth century, of systems of economic statistics enabled economists to use inductive reasoning to test theoretical findings against observed economic behaviour, and to develop new theories. Independently of that change, the concept emerged of the national economy as a closed interactive system. Such a system was found to behave in ways that could not be derived by aggregating the behaviour of its components. Analysis of the new concept provided explanations of recessions, unemployment and inflation that were not previously available. The application of empirical data and inductive reasoning to the new concept enabled those theories to be refined, and led to the development of forecasting models that could be used as tools of economic management.


The late twentieth- and early twenty-first centuries have seen further theoretical and empirical refinements and significant advances in the techniques of economic management

Classical economy

The "Classical" [2] period of economic thought began in 1776 with the publication of Adam Smith's The Wealth of Nations [1]. Written during the gentle era of Enlightenment, the laissez-faire policies of Adam Smith did not anticipate the economic and social upheavals that the industrial era was about to unleash. Only 13 years later the French court was bankrupt and the French people took to the streets and beheaded their king; it was the French Revolution.

Among the economists who tried to understand the new phenomena three were outstanding: Jean-Baptiste Say[3] , Thomas Robert Malthus[4] and David Ricardo[5]. They all had different visions for political economy after Smith. Of those, Ricardo was the most succesful and influential and laid the basis for the Classical Economy [2] that would become the mainstream economy thought for the whole of the XIX century

Thomas Robert Malthus[4] (1766-1834) is most famous for his "Essay on the Principle of Population" [6] where he formulated the theory that population expanded at a geometric rate (or exponentially) while food production could only increase arithmetically. At a certain point, the population increase would outrun the food supply, and result in general misery. Malthus was one of the major inspirations for Darwin’s theory of Natural Selection, and his echoes can be found in today’s environmental literature that warn of depleting resources.

David Ricardo [5] (1772-1823) was perhaps the most important of the XIXth century political economists. He combined Smith's labour theory of value with Malthus's population dynamics in a system which showed that capitalist economies would eventually result in a steady state of universal misery. On his On the Principles of Political Economy and Taxation [7] Ricardo set the theoretical fundaments of the Classical Economy.

Ricardo's system depended on the idea of the marginal productivity of land, and was the inventor of the "marginal" concept. His idea was that the value of agricultural products (and hence food) was based on the amount of labour required to produce on the least fertile parcel of land. Hence the "Law of diminishing marginal productivity". Landlords owning land that was more fertile, and who could produce more for a given amount of land, obtained "rents". His conclusion was that the future was in buying land. He, of course, did not predict the tremendous increase in technology and productive capacity brought about by the capitalist system.

Ricardo was also responsible for the idea of comparative advantage in international trade [5]. His classic example was between wine and clothing and England and Portugal. Portugal was more efficient than England in producing both cloth and wine, but England had a comparative advantage in cloth production. He showed that it would be advantageous for Portugal to specialize in wine and England to specialize in cloth, and to trade with each other. This resulted in more wine and cloth all around.

Marxism

Karl Marx[8] is the most famous of Ricardo's followers. Writing during the mid-19th century, Karl Marx saw capitalism as an evolutionary phase in economic development. He believed that capitalism was inherently exploitation of the workers, who really produced all wealth, He predicted capitalism would ultimately destroy itself and be succeeded by a socialist system without private property. Marx had little impact on the development of pure economic theory because his theory added little to Ricardo's, though he came to different conclusions. Marx placed little emphasis on the diminishing marginal productivity of land, but more importance on the falling rate of profit. To Marx, capitalist competition would lead to the impoverishment of the "proletariat" or working class and a falling rate of profit. The ultimate resolution would be a communist revolution with the workers seizing power. Soon after the death of Marx, a Marxian school of economics [9] emerged under the leadership of Marx's inner circle of companions and co-writers, notably Friedrich Engels[10] and Karl Kautsky [11] , both of whom were German.

The marginalist revolution

The German Hermann Heinrich Gossen (1810-1859) was the first one to formulate in 1854, "The Second Gossen Law" or "the law of diminishing marginal utility", which was actually the first "marginalist law"; but Gossen's work was dismissed by his conteporaries and remained completely unknown until 1878. [12]

In the 1870s, three economists became responsible for what is called the "Marginalist Revolution" [13] - William Stanley Jevons [14] , Carl Menger [15] and Léon Walras [16] . They, independently of each other, developed a new theory of value based on utility. The three are responsible for the concept of marginal utility [17] , and the derivation of a downward sloping demand curve [18]. The Marginalist Revolution would eventually put an end to the The Classical Scholl [2] and the era of the Neoclassical School [19], which lasts to today, began. This made possible the logical analysis of the "Producers's Decision" [20] or how and why "producer" transforms factors of production into finished goods.

The Italians contributed much for the construction of the Marginalist Revolution. The bulk of the Lausanne School came from Italy -- Vilfredo Pareto, Enrico Barone, Giovanni Antonelli, Pasquale Boninsegni, etc. Some economists, such as Henry Schultz, preferred to call it simply the "Italian School". The Neoclassical economist Maffeo Pantaleoni, the Italian "Marshallian", can be considered part of this group.

Alfred Marshall [21] (1900-1920) was responsible for the combination of "demand" [18] and "supply" [22],where demand was based on "marginal utility"[23]. He was responsible for developing numerous concepts still used in economics, including: demand [18] and supply [22] curves or schedules and their equilibrium, "elasticity of demand" [24], consumer surplus, the distinction between short- and long-period, etc. Modern microeconomics [25] [26], the study of individual economic agents and individual markets, is a continuation and elaboration of his work.

For more information, see: Microeconomics.

Marshall's work was only the beginning. His work was refined and further developed, and continues to be extended to this day. Neoclassical economists have built a truly astounding logical edifice into a "Production Function" [27] that rival Newtonian mechanics in completeness and rigour. The basis of neo-classical economics is maximisation under constraint, and this constantly involves the "marginal concept" [23]. The tools developed by economists are even now beginning to be used by other social sciences such as anthropology, sociology and even psychology.

For more information, see: Marginalist Revolution.



The monetarist "counterrevolution"

While the Keynesian-Neoclassical synthesis took over the profession, an unregenerate rearguard of neo-classical economists centred at the University of Chicago continued to exist. See Chicago School of Economics They never accepted the idea of involuntary unemployment or government intervention to ensure full employment, and strongly believed in the virtues of markets and laissez-faire. The most famous economist of the Chicago School is Milton Friedman. He was mainly responsible for what is known as the Monetarist counterrevolution of the 1970s.

With the perceived failure of Keynesian economics to explain and correct the "stagflation" of the 1970's, the free market prescriptions of monetarism became much more popular, and were eventually espoused by many right wing governments in the 1980's (Reagan, Thatcher, Mulroney), and, perhaps more importantly, by the central banks of most industrialized countries.

The Chicago School of Microeconomics

The Chicago School of Economics not only challenged established theories in macroeconomics, they pioneered the expansion of microeconomics to include many unexpected topics, such as marriage and divorce, criminal behavior, and slavery. The main tool was price theory as developed by Alfred Marshall. [25]

Thematic schools

Thematic Schools refer to those schools of economic thought which concentrate on the study of some particluar aspect of economics. The most important themes studied by the Thematic Schools are: Business Cycle Theory, Land economics (somewhat neglected), Empirics and Econometrics, Imperfect Competition, Economic Development, Uncertainty and Information, Game Theory and Finance Theory.

For more information, see: Thematic schools.


Economics subdisciplines

Modern Economic Theory is divided in two main branches: Microeconomics which is concerned with the actions of "individual economic agents" and Macroeconomics which studies the aggregate economy.


External links

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See also

References

  1. ↑ 1.0 1.1 SMITH, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. Modern Library, 1ª edition, 2000, ISBN 0679783369
  2. ↑ 2.0 2.1 2.2 Classical School Cite error: Invalid <ref> tag; name "CLASSICALHET" defined multiple times with different content Cite error: Invalid <ref> tag; name "CLASSICALHET" defined multiple times with different content
  3. ↑ Jean-Baptiste Say
  4. ↑ 4.0 4.1 Thomas Robert Malthus
  5. ↑ 5.0 5.1 5.2 David Ricardo
  6. ↑ "Essay on the Principle of Population"
  7. ↑ RICARDO, David. On the Principles of Political Economy and Taxation
  8. ↑ Karl Marx
  9. ↑ Marxian school of economics]
  10. ↑ Friedrich Engels
  11. ↑ Karl Kautsky
  12. ↑ Hermann Heinrich Gossen
  13. ↑ The Marginalist Revolution
  14. ↑ William Stanley JEVONS, 1835-1882
  15. ↑ Carl MENGER, 1841-1921
  16. ↑ Marie Esprit Léon WALRAS (1834-1910)
  17. ↑ Marginal Utility Animated graph
  18. ↑ 18.0 18.1 18.2 Demand Functions and Demand Curves
  19. ↑ Neoclassical School
  20. ↑ "Producers's Decision"
  21. ↑ Alfred Marshall
  22. ↑ 22.0 22.1 Supply Functions and Supply Curve
  23. ↑ 23.0 23.1 Marginal Utility and Optimization
  24. ↑ "Elasticity of demand"
  25. ↑ 25.0 25.1 MICROECONOMICS: Most important concepts explained in detail. Text and workable problems. WARNING: Internet Explorer will not work! Get "Firefox" or "Netscape" for free. Requires "Adobe Acrobat Reader" as a helper to your web browser. You will need "Excel 97" or higher running on your computer to use the spreadsheets.
  26. ↑ RUBINSTEIN, Ariel. Lecture notes in microeconomic theory : the economic agent. Princeton: Princeton University Press, 2006.
  27. ↑ "Production Function"
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Bibliography

Historical Classics

Modern economics

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