History of economic thought
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The history of economic thought is the study of the philosophies of the different thinkers and theories in the subjects that later became
This field encompasses many disparate schools of economic thought. Ancient Greek writers such as the philosopher Aristotle examined ideas about the art of wealth acquisition, and questioned whether property is best left in private or public hands. In the Middle Ages, Thomas Aquinas argued that it was a moral obligation of businesses to sell goods at a just price.[1]
In the Western world, economics was not a separate discipline, but part of philosophy until the 18th–19th century Industrial Revolution and the 19th century Great Divergence, which accelerated economic growth.[2]
Ancient economic thought (before 500 AD)
Ancient Greece
China
India
Hindu texts Vedas (1700 BCE - 1100 BCE) contain economic ideas but Atharvaveda (1200 BCE) is most vocal about such ideas.[7]
Chanakya (born 350 BC) of the Maurya Empire, authored the Arthashastra along with several Indian sages, a treatise on statecraft, economic policy and military strategy.[8]
The Arthashastra posits the theory that there are four necessary fields of knowledge: the Vedas, the
Greco-Roman world
Xenophon's (c. 430–354 BC) Oeconomicus (c. 360 BC) is a dialogue principally about household management and agriculture.
"It is clearly better that property should be private", wrote Aristotle, "but the use of it common; and the special business of the legislator is to create in men this benevolent disposition." In Politics Book I, Aristotle discusses the general nature of households and market exchanges. For him there is a certain "art of acquisition" or "wealth-getting", which is necessary and honourable for one's household, while exchange on the retail trade for simply accumulation is "justly censured, for it is dishonorable".[14] Writing of the people, Aristotle stated that they as a whole thought acquisition of wealth (chrematistike) as being either the same as, or a principle of oikonomia ("household management" – oikonomos),[15][16] with oikos meaning "house" and with (themis meaning "custom") nomos meaning "law".[17] Aristotle himself highly disapproved of usury and cast scorn on making money through a monopoly.[18]
Aristotle discarded Plato's credit theory of money for metallism, the theory that money derives its value from the purchasing power of the commodity upon which it is based:
Indeed, riches is assumed by many to be only a quantity of coin, because the arts of getting wealth and retail trade are concerned with coin. Others maintain that coined money is a mere sham, a thing not natural, but conventional only, because, if the users substitute another commodity for it, it is worthless, and because it is not useful as a means to any of the necessities of life, and, indeed, he who is rich in coin may often be in want of necessary food. But how can that be wealth of which a man may have a great abundance and yet perish with hunger, like
Midas in the fable, whose insatiable prayer turned everything that was set before him into gold?.— Aristotle[19]
Middle Ages
Thomas Aquinas
Aquinas discusses a number of topics in the format of questions and replies, substantial tracts dealing with Aristotle's theory. Questions 77 and 78 concern economic issues, primarily what a just price might be, and the fairness of a seller dispensing faulty goods. Aquinas argued against any form of cheating and recommended always paying compensation in lieu of service obtained as it utilized resources. Whilst human laws might not impose sanctions for unfair dealing, divine law did, in his opinion.
Duns Scotus
One of Aquinas' main critics
Jean Buridan
Ibn Khaldun
| It should be known that at the beginning of a dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.[21] |
| Ibn Khaldun on taxes and the ideals of Governance
|
Until
Nicole Oresme
French philosopher and priest Nicolas d'Oresme (1320–1382) wrote De origine, natura, jure et mutationibus monetarum, about the origin, nature, law, and alterations of money. It is one of the earliest manuscripts on the concept of money. His treatise argues how money or currency belongs to the public, and that the government or sovereign of the economy has no right to control the value of the currency just so that they can profit from it.
Antonin of Florence
Saint
Mercantilism and international trade (16th to 18th century)
Mercantilism dominated Europe from the 16th to the 18th century.[25] Despite the localism of the Middle Ages, the waning of feudalism saw new national economic frameworks begin to strengthen. After the 15th century voyages of Christopher Columbus and other explorers opened up new opportunities for trade with the New World and Asia, newly-powerful monarchies wanted a more powerful military state to boost their status. Mercantilism was a political movement and an economic theory that advocated the use of the state's military power to ensure that local markets and supply sources were protected, spawning protectionism.
Mercantile theorists held that international trade could not benefit all countries at the same time. Money and precious metals were the only source of riches in their view, and limited resources must be allocated between countries, therefore tariffs should be used to encourage exports, which bring money into the country, and discourage imports which send it abroad. In other words, a positive balance of trade ought to be maintained through a surplus of exports, often backed by military might. Despite the prevalence of the model, the term mercantilism was not coined until 1763, by Victor de Riqueti, marquis de Mirabeau (1715–1789), and popularized by Adam Smith in 1776, who vigorously opposed it.
School of Salamanca
In the 16th century the Jesuit School of Salamanca in Spain developed economic theory to a high level, only to have their contributions[clarification needed], namely the development of an early form of monetarism in response to the introduction of New World gold into the Spanish economy, forgotten until the 20th century.
Sir Thomas More
In 1516 English humanist Sir
Nicolaus Copernicus
In 1517 Polish astronomer Nicolaus Copernicus (1473–1543) published the first known argument for the quantity theory of money. In 1519 he also published the first known form of Gresham's Law: "Bad money drives out good".
Jean Bodin
In 1568
Barthélemy de Laffemas
In 1598 French mercantilist economist Barthélemy de Laffemas (1545–1612) published Les Trésors et richesses pour mettre l'Estat en splendeur, which blasted those who frowned on French silks because the industry created employment for the poor, the first known mention of underconsumption theory, which was later refined by John Maynard Keynes.
Leonardus Lessius
In 1605 Flemish
Edward Misselden and Gerard Malynes
In 1622 English merchants
Thomas Mun
English economist Thomas Mun (1571–1641) describes early mercantilist policy in his book England's Treasure by Foreign Trade, which was not published until 1664, although it was widely circulated in manuscript form during his lifetime. A member of the East India Company, he wrote about his experiences in A Discourse of Trade from England unto the East Indies (1621).
Sir William Petty
In 1662 English economist Sir William Petty (1623–1687) began publishing short works applying the rational scientific tradition of Francis Bacon to economics, requiring that it only use measurable phenomena and seek quantitative precision, coining the term "political arithmetic", introducing statistical mathematics, and becoming the first scientific economist.
Philipp von Hörnigk
"To inspect the country's soil with the greatest care, and not to leave the agricultural possibilities of a single corner or clod of earth unconsidered... All commodities found in a country, which cannot be used in their natural state, should be worked up within the country... Attention should be given to the population, that it may be as large as the country can support... gold and silver once in the country are under no circumstances to be taken out for any purpose... The inhabitants should make every effort to get along with their domestic products... [Foreign commodities] should be obtained not for gold or silver, but in exchange for other domestic wares... and should be imported in unfinished form, and worked up within the country... Opportunities should be sought night and day for selling the country's superfluous goods to these foreigners in manufactured form... No importation should be allowed under any circumstances of which there is a sufficient supply of suitable quality at home."
Nationalism, self-sufficiency and national power were the basic policies proposed.[26]
Jean-Baptiste Colbert and Pierre Le Pesant, Sieur de Boisguilbert
In 1665–1683
In 1695 French economist Pierre Le Pesant, sieur de Boisguilbert (1646–1714) wrote a plea to Louis XIV to end Colbert's mercantilist program, containing the first notion of an economical market, becoming the first economist to question mercantile economic policy and value the wealth of a country by its production and exchange of goods instead of its assets.
Charles Davenant
In 1696 British mercantilist Tory Member of parliament Charles Davenant (1656–1714) published Essay on the East India Trade, displaying the first understanding of consumer demand and perfect competition.
Sir James Steuart
In 1767 Scottish mercantilist economist
Mughal Emperor Aurangzeb
Emperor
Pre-Classical (17th and 18th century)
The British Enlightenment
In the 17th century Britain went through troubling times, enduring not only political and religious division in the
The upheaval was accompanied by a number of major scientific advances, including Robert Boyle's discovery of the gas pressure constant (1660) and Sir Isaac Newton's publication of Philosophiae Naturalis Principia Mathematica (1687), which described Newton's laws of motion and his universal law of gravitation.
All these factors spurred the advancement of economic thought. For instance,
John Locke
John Locke (1632–1704) was born near Bristol, and educated in London and Oxford. He is considered one of the most significant philosophers of his era mainly for his critique of Thomas Hobbes' defense of absolutism in Leviathan (1651) and of his social contract theory. Locke believed that people contracted into society, which was bound to protect their property rights.[33] He defined property broadly to include people's lives and liberties, as well as their wealth. When people combined their labor with their surroundings, that created property rights. In his words from his Second Treatise on Civil Government (1689):
"God hath given the world to men in common... Yet every man has a property in his own person. The labour of his body and the work of his hands we may say are properly his. Whatsoever, then, he removes out of the state that nature hath provided and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property."[34]
Locke argued that not only should the government cease interference with people's property (or their "lives, liberties and estates"), but also that it should positively work to ensure their protection. His views on
Dudley North
David Hume
David Hume (1711–1776) agreed with North's philosophy and denounced mercantilist assumptions. His contributions were set down in Political Discourses (1752), and later consolidated in his Essays, Moral, Political, Literary (1777). Adding to the argument that it was undesirable to strive for a favourable balance of trade, Hume argued that it is, in any case, impossible.
Hume held that any surplus of exports would be paid for by imports of gold and silver. This would increase the money supply, causing prices to rise. That in turn would cause a decline in exports until the balance with imports is restored.
Bernard Mandeville
Bernard Mandeville, (1670–1733), was an Anglo-Dutch philosopher, political economist and satirist. His main thesis is that the actions of men cannot be divided into lower and higher. The higher life of man is a mere fiction introduced by philosophers and rulers to simplify government and the relations of society. In fact, virtue (which he defined as "every performance by which man, contrary to the impulse of nature, should endeavour the benefit of others, or the conquest of his own passions, out of a rational ambition of being good") is actually detrimental to the state in its commercial and intellectual progress. This is because it is the vices (i.e., the self-regarding actions of men) which alone, by means of inventions and the circulation of capital (economics) in connection with luxurious living, stimulate society into action and progress.
Francis Hutcheson
Francis Hutcheson (1694–1746), the teacher of Adam Smith from 1737 to 1740[36] is considered the end of a long tradition of thought on economics as "household or family (οἶκος) management",[37] [38] [39] stemming from Xenophon's work Oeconomicus.[40] [41]
The Physiocrats and the circular flow
Similarly disenchanted with regulation on trade inspired by mercantilism, the Frenchman
In August 1774 King
Classical (18th and 19th century)
Ferdinando Galiani and On Money
In 1751,
Adam Smith and The Wealth of Nations
Adam Smith (1723–1790) is popularly seen as the father of modern political economy. His 1776 publication
Smith was a Scottish moral philosopher, whose first book was The Theory of Moral Sentiments (1759). He argued in it that people's ethical systems develop through personal relations with other individuals, that right and wrong are sensed through others' reactions to one's behaviour. This gained Smith more popularity than his next work, The Wealth of Nations, which the general public initially ignored.[44] Yet Smith's political economic magnum opus was successful in circles that mattered.
Adam Smith's Invisible Hand
| "It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."[45] |
| Adam Smith's famous statement on self-interest |
Smith argued for a "system of natural liberty"[46] where individual effort was the producer of social good. Smith believed even the selfish within society were kept under restraint and worked for the good of all when acting in a competitive market. Prices are often unrepresentative of the true value of goods and services. Following John Locke, Smith thought true value of things derived from the amount of labour invested in them.
Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniencies, and amusements of human life. But after the division of labour has once thoroughly taken place, it is but a very small part of these with which a man's own labour can supply him. The far greater part of them he must derive from the labour of other people, and he must be rich or poor according to the quantity of that labour which he can command, or which he can afford to purchase. The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities. The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.
— [47]
When the butchers, the brewers and the bakers acted under the restraint of an open market economy, their pursuit of self-interest, thought Smith, paradoxically drives the process to correct real life prices to their just values. His classic statement on competition goes as follows.
When the quantity of any commodity which is brought to market falls short of the effectual demand, all those who are willing to pay... cannot be supplied with the quantity which they want... Some of them will be willing to give more. A competition will begin among them, and the market price will rise... When the quantity brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of the rent, wages and profit, which must be paid to bring it thither... The market price will sink...[48]
Limitations
Smith's vision of a free market economy, based on secure property, capital accumulation, widening markets and a division of labour contrasted with the mercantilist tendency to attempt to "regulate all evil human actions."[46] Smith believed there were precisely three legitimate functions of government. The third function was...
...erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual or small number of individuals, to erect and maintain... Every system which endeavours... to draw towards a particular species of industry a greater share of the capital of the society than what would naturally go to it... retards, instead of accelerating, the progress of the society toward real wealth and greatness.
In addition to the necessity of public leadership in certain sectors Smith argued, secondly, that cartels were undesirable because of their potential to limit production and quality of goods and services.[49] Thirdly, Smith criticised government support of any kind of monopoly which always charges the highest price "which can be squeezed out of the buyers".[50] The existence of monopoly and the potential for cartels, which would later form the core of competition law policy, could distort the benefits of free markets to the advantage of businesses at the expense of consumer sovereignty.
William Pitt the Younger
Edmund Burke
Adam Smith expressed an affinity to the opinions of Irish MP Edmund Burke (1729–1797), known widely as a political philosopher:
"Burke is the only man I ever knew who thinks on economic subjects exactly as I do without any previous communication having passed between us.[52]
Burke was an established political economist himself, known for his book
Jeremy Bentham
Jean-Baptiste Say
Say agreed that a part of income is saved by households, but in the long term, savings are invested. Investment and consumption are the two elements of demand, so that production is demand, therefore it is impossible for production to outrun demand, or for there to be a "general glut" of supply. Say also argued that money was neutral, because its sole role is to facilitate exchanges, therefore, people demand money only to buy commodities; "money is a veil".[56]
David Ricardo
If population grows, it becomes necessary to cultivate additional land, whose fertility is lower than that of already cultivated fields, because of the law of decreasing productivity. Therefore, the cost of the production of the wheat increases, as well as the price of the wheat: The rents increase also, the wages, indexed to inflation (because they must allow workers to survive) as well. Profits decrease, until the capitalists can no longer invest. The economy, Ricardo concluded, is bound to tend towards a
Jean Charles Léonard de Sismondi
Jean Charles Léonard de Sismondi(1773–1842) was the earliest author of systemic Crisis theory.
John Stuart Mill
John Stuart Mill (1806–1873) was the dominant figure of political economic thought of his time, as well as a Member of parliament for the seat of Westminster, and a leading political philosopher. Mill was a child prodigy, reading Ancient Greek from the age of 3, and being vigorously schooled by his father James Mill.[59] Jeremy Bentham was a close mentor and family friend, and Mill was heavily influenced by David Ricardo. Mill's textbook, first published in 1848 and titled Principles of Political Economy was essentially a summary of the economic thought of the mid-nineteenth century.[60]
Principles of Political Economy (1848) was used as the standard text by most universities well into the beginning of the twentieth century.[citation needed] On the question of economic growth Mill tried to find a middle ground between Adam Smith's view of ever-expanding opportunities for trade and technological innovation and Thomas Malthus' view of the inherent limits of population. In his fourth book Mill set out a number of possible future outcomes, rather than predicting one in particular.[56]
Classical political economy
The classical economists were referred to as a group for the first time by
They wondered about population growth, because demographic transition had begun in Great Britain at that time. They also asked many fundamental questions, about the source of value, the causes of economic growth and the role of money in the economy. They supported a free-market economy, arguing it was a natural system based upon freedom and property. However, these economists were divided and did not make up a unified current of thought.
A notable current within classical economics was
Marxian critique of political economy
Marx uses the word commodity in an extensive
Marx believed that a
Henry George and Georgism
Henry George (1839–1897) is popularly recognized as the intellectual inspiration for the economic philosophy now known as
The London School of Economics
In 1895 the London School of Economics (LSE) was founded by
In the 1930s LSE member
Neoclassical (19th and early 20th century)
Neoclassical economics developed in the 1870s. There were three main independent schools. The
Anglo-American neoclassical
American economist
William Stanley Jevons
In 1871 Menger's English counterpart Stanley Jevons (1835–1882) independently published Theory of Political Economy (1871), stating that at the margin the satisfaction of goods and services decreases. An example of the Theory of Diminishing Marginal Utility is that for every orange one eats, one gets less pleasure until one stops eating oranges completely.[54]
Alfred Marshall
"(1) Use mathematics as shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can't succeed in 4, burn 3. This I do often."
New institutional schools
In 1972 American economists Harold Demsetz (1930–2019) and Armen Alchian (1914–2013) published Production, Information Costs and Economic Organization, founding New Institutional Economics, an updating of the works of Ronald Coase (1910–2013) with mainstream economics.[54]
Continental neoclassical
Léon Walras
In 1874 again working independently, French economist Léon Walras (1834–1910) generalized marginal theory across the economy in Elements of Pure Economics: Small changes in people's preferences, for instance shifting from beef to mushrooms, would lead to a mushroom price rise, and beef price fall; this stimulates producers to shift production, increasing mushrooming investment, which would increase market supply and a new price equilibrium between the products, e.g. lowering the price of mushrooms to a level between the two first levels. For many products across the economy the same would happen if one assumes markets are competitive, people choose on the basis of self-interest, and there is no cost for shifting production.[54]
The Austrian school of economics
While economics at the end of the nineteenth century and the beginning of the twentieth was dominated increasingly by mathematical analysis, the followers of
Carl Menger
In 1871 Austrian School economist
Francis Ysidro Edgeworth
In 1881 Irish economist Francis Ysidro Edgeworth (1845–1926) published Mathematical Psychics: An Essay on the Application of Mathematics to the Moral Sciences, which introduced indifference curves and the generalized utility function, along with Edgeworth's Limit Theorem, extending the Bertrand Model to handle capacity constraints, and proposing Edgeworth's Paradox for when there is no limit to what the firms can sell.[54]
Friedrich Hayek
In echoes of Smith's "system of natural liberty", Hayek argued that the market is a "spontaneous order" and actively disparaged the concept of "
Alternative schools (19th century)
Business cycle theory
In the early 19th century German-born English astronomer Sir William Herschel (1738–1822) noted a connection between 11-year sunspot cycles and wheat prices. In 1860 French economist Clément Juglar (1819–1905) posited business cycles seven to eleven years long. In 1925 the Soviet economist Nikolai Kondratiev (1892–1938) proposed the existence of Kondratiev waves in Western capitalist economies fifty to sixty years long.
German historical school of economics
In the mid-1840s German economist
Thorstein Veblen and the American Way
The World Wars, Russian and German Revolutions, and Great Depression (early to mid 20th century)
At the outbreak of
After World War I, Europe and the Soviet Union lay in ruins, and the British Empire was nearing its end, leaving the United States as the preeminent global economic power. Before World War II, American economists had played a minor role. During this time
Econometrics
In the 1930s Norwegian economist
Means and corporate governance
The
In 1967 Berle and Means issued a revised edition of their work, in which the preface added a new dimension. It was not only the separation of controllers of companies from the owners as shareholders at stake. They posed the question of what the corporate structure was really meant to achieve:
"Stockholders toil not, neither do they spin, to earn [dividends and share price increases]. They are beneficiaries by position only. Justification for their inheritance... can be founded only upon social grounds... that justification turns on the distribution as well as the existence of wealth. Its force exists only in direct ratio to the number of individuals who hold such wealth. Justification for the stockholder's existence thus depends on increasing distribution within the American population. Ideally, the stockholder's position will be impregnable only when every American family has its fragment of that position and of the wealth by which the opportunity to develop individuality becomes fully actualized."[75]
Industrial organization economics
In 1933 American economist Edward Chamberlin (1899–1967) published The Theory of Monopolistic Competition. The same year British economist Joan Robinson (1903–1983) published The Economics of Imperfect Competition. Together they founded Industrial Organization Economics. Chamberlin also founded Experimental Economics.
Linear programming
In 1939 Russian economist Leonid Kantorovich (1912–1986) developed Linear Programming for the optimal allocation of resources, receiving the 1975 Nobel Economics Prize.
Ecology and energy
By the twentieth century, the industrial revolution had led to an exponential increase in the human consumption of resources. The increase in health, wealth and population was perceived as a simple path of progress. However, in the 1930s economists began developing models of non-renewable resource management (see Hotelling's rule) and the sustainability of welfare in an economy that uses non-renewable resources.
Concerns about the environmental and social impacts of industry had been expressed by some
Ecological economics
Ecological economics was founded in the works of Kenneth E. Boulding, Nicholas Georgescu-Roegen, Herman Daly and others. The disciplinary field of ecological economics also bears some similarity to the topic of green economics.[81]
According to ecological economist Malte Faber, ecological economics is defined by its focus on nature, justice, and time. Issues of
Energy accounting
Institutional economics
In 1919 Yale economist
Arthur Cecil Pigou
In 1920 Alfred Marshall's student Arthur Cecil Pigou (1877–1959) published Wealth and Welfare, which insisted on the possibility of market failures, claiming that markets are inefficient in the case of economic externalities, and the state must interfere to prevent them. However, Pigou retained free market beliefs, and in 1933, in the face of the economic crisis, he explained in The Theory of Unemployment that the excessive intervention of the state in the labor market was the real cause of massive unemployment because the governments had established a minimal wage, which prevented wages from adjusting automatically. This was to be the focus of attack from Keynes. In 1943 Pigou published the paper The Classical Stationary State, which popularized the Pigou (Real Balance) Effect, the stimulation of output and employment during deflation by increasing consumption due to a rise in wealth
Market socialism
In response to the
The Stockholm school of economics
In the 1930s the
In 1933 Ohlin and Heckscher proposed the
In 1957 Myrdal published his theory of
French Regulation school
This school includes economists like Michel Aglietta (1938), André Orléan (1950), Robert Boyer (1943), Benjamin Coriat (1948) and Alain Lipietz (1947). It is one of the two heterodox schools in France, the other being l'école des conventions. Their interests revolves around accounting for the regime of regulation of specific historic stage of capitalism. They have mainly analysed the fordist mode of regulation, who corresponds to the after war period. Production as organised scientifically and products weren't diversified. This corresponds with a homogenous consumption of goods. The economy was production led, where firms first produce the optimal amount of a type of good in the cheapest manner possible, destined to be mass consumed. Their inquiry consists of explaining how a stable mode of regulation can emerge in a capitalist economy, which inherently contains crises. Whereas orthodox economists tend to explain the causes of crises and disequilibriums in a supposedly self-regulating economy.
The American Economic Association
In 1885 the
Keynesianism (20th century)
The book was an enormous success, and though it was criticized for false predictions by a number of people,[94] without the changes he advocated, Keynes's dark forecasts matched the world's experience through the Great Depression which began in 1929, and the descent into World War II in 1939. World War I had been touted as the "war to end all wars", and the absolute failure of the peace settlement generated an even greater determination to not repeat the same mistakes. With the defeat of Fascism, the Bretton Woods Conference was held in July 1944 to establish a new economic order, in which Keynes was again to play a leading role.[95]
The General Theory
During the Great Depression, Keynes published his most important work, The General Theory of Employment, Interest and Money (1936). The Great Depression had been sparked by the Wall Street Crash of 1929, leading to massive rises in unemployment in the United States, leading to debts being recalled from European borrowers, and an economic domino effect across the world. Orthodox economics called for a tightening of spending, until business confidence and profit levels could be restored. Keynes by contrast, had argued in A Tract on Monetary Reform (1923) (which argues for a stable currency) that a variety of factors determined economic activity, and that it was not enough to wait for the long run market equilibrium to restore itself. As Keynes famously remarked:
"...this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."[96]
On top of the
Keynes argued that employment depends on total spending, which is composed of consumer spending and business investment in the private sector. Consumers only spend "passively", or according to their income fluctuations. Businesses, on the other hand, are induced to invest by the expected rate of return on new investments (the benefit) and the rate of interest paid (the cost). So, said Keynes, if business expectations remained the same, and government reduces interest rates (the costs of borrowing), investment would increase, and would have a multiplied effect on total spending. Interest rates, in turn, depend on the quantity of money and the desire to hold money in bank accounts (as opposed to investing). If not enough money is available to match how much people want to hold, interest rates rise until enough people are put off. So if the quantity of money were increased, while the desire to hold money remained stable, interest rates would fall, leading to increased investment, output and employment. For both these reasons, Keynes therefore advocated low interest rates and easy credit, to combat unemployment.
But Keynes believed in the 1930s, conditions necessitated public sector action.
The Cambridge Circus
During World War II Keynes acted as adviser to
One of Keynes's pupils at Cambridge was Joan Robinson (1903–1983), a member of Keynes's Cambridge Circus, who contributed to the notion that competition is seldom perfect in a market, an indictment of the theory of markets setting prices. In The Production Function and the Theory of Capital (1953) Robinson tackled what she saw to be some of the circularity in orthodox economics. Neoclassicists assert that a competitive market forces producers to minimize the costs of production. Robinson said that costs of production are merely the prices of inputs, like capital. Capital goods get their value from the final products. And if the price of the final products determines the price of capital, then it is, argued Robinson, utterly circular to say that the price of capital determines the price of the final products. Goods cannot be priced until the costs of inputs are determined. This would not matter if everything in the economy happened instantaneously, but in the real world, price setting takes time – goods are priced before they are sold. Since capital cannot be adequately valued in independently measurable units, how can one show that capital earns a return equal to the contribution to production?
Alfred Eichner (1937–1988) was an American post-Keynesian economist who challenged the neoclassical price mechanism and asserted that prices are not set through supply and demand but rather through mark-up pricing. Eichner is one of the founders of the post-Keynesian school of economics and was a professor at Rutgers University at the time of his death. Eichner's writings and advocacy of thought, differed with the theories of John Maynard Keynes, who was an advocate of government intervention in the free market and proponent of public spending to increase employment. Eichner argued that investment was the key to economic expansion. He was considered an advocate of the concept that government incomes policy should prevent inflationary wage and price settlements in connection to the customary fiscal and monetary means of regulating the economy.
Richard Kahn (1905–1989) was a member of the Cambridge Circus who in 1931 proposed the Multiplier.
Piero Sraffa (1898–1983) came to England from Fascist Italy in the 1920s, and became a member of the Cambridge Circus. In 1960 he published a small book called Production of Commodities by Means of Commodities, which explained how technological relationships are the basis for production of goods and services. Prices result from wage-profit tradeoffs, collective bargaining, labour and management conflict and the intervention of government planning. Like Robinson, Sraffa was showing how the major force for price setting in the economy was not necessarily market adjustments.
New Keynesian macroeconomics
In 1977
In 1985
In 1987 British economist
In 1997 American economist
Sidney Weintraub, Paul Davidson and Post-Keynesian economics
In 1975 American economists
The credit theory of money
In 1913 English economist-diplomat Alfred Mitchell-Innes (1864–1950) published What is Money?, which was reviewed favorably by John Maynard Keynes, followed in 1914 by The Credit Theory of Money, advocating the Credit Theory of Money, which economist L. Randall Wray called "The best pair of articles on the nature of money written in the twentieth century."[102]
The Chicago school of economics (20th century)
The government-interventionist monetary and fiscal policies that the postwar Keynesian economists recommended came under attack by a group of theorists working at the
In the 1960s
In 1973 Coase disciple Richard Posner (1939–) published Economic Analysis of Law, which became a standard textbook, causing him to become the most cited legal scholar of the 20th century. In 1981 he published The Economics of Justice, which claimed that judges have been interpreting common law as it they were trying to maximize economic welfare.
Milton Friedman (1912–2006) of the Chicago School of Economics is one of the most influential economists of the late 20th century, receiving the Nobel Prize in Economics in 1976. He is known for A Monetary History of the United States (1963), in which he argued that the Great Depression was caused by the policies of the Federal Reserve. Friedman argues that laissez-faire government policy is more desirable than government intervention in the economy. Governments should aim for a neutral monetary policy oriented toward long-run economic growth, by gradual expansion of the money supply. He advocates the quantity theory of money, that general prices are determined by money. Therefore, active monetary (e.g. easy credit) or fiscal (e.g. tax and spend) policy can have unintended negative effects. In Capitalism and Freedom (1962), Friedman wrote:
"There is likely to be a lag between the need for action and government recognition of the need; a further lag between recognition of the need for action and the taking of action; and a still further lag between the action and its effects."[107]
Friedman was also known for his work on the consumption function, the Permanent Income Hypothesis (1957), which Friedman referred to as his best scientific work.[108] This work contended that rational consumers would spend a proportional amount of what they perceived to be their permanent income. Windfall gains would mostly be saved. Tax reductions likewise, as rational consumers would predict that taxes would have to rise later to balance public finances. Other important contributions include his critique of the Phillips Curve, and the concept of the natural rate of unemployment (1968).[54]
New classical macroeconomics and synthesis
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In the early 1970s American Chicago School economist
Lucas' model was superseded as the standard model of New Classical Macroeconomics by the
In 1982 Kydland and Prescott also founded the theory of Dynamic Stochastic General Equilibrium (DSGE), large systems of microeconomic equations combined into models of the general economy, which became central to the New Neoclassical Synthesis, incorporating theoretical elements such as sticky prices from New Keynesian Macroeconomics. They shared the 2004 Nobel Economics Prize.[54]
Efficient market hypothesis
In 1965 Chicago School economist Eugene Fama (1939–) published The Behavior of Stock Market Prices, which found that stock market prices follow a random walk, proposing the Efficient Market Hypothesis, that randomness is characteristic of a perfectly functioning financial market. The same year Paul Samuelson published a paper concluding the same thing with a mathematical proof, sharing the credit. Earlier in 1948 Holbrook Working (1895–1985) published a paper saying the same thing, but not in a mathematical form. In 1970 Fama published Efficient Capital Markets: A Review of Theory and Empirical Work, proposing that efficient markets can be strong, semi-strong, or weak, and also proposing the Joint Hypothesis Problem, that the idea of market efficiency can not be rejected without also rejecting the market mechanism.
Games, evolution and growth (20th century)
In 1898 Thorstein Veblen published Why is Economics not an Evolutionary Science, which coins the term Evolutionary economics, making use of anthropology to deny that there is a universal human nature, emphasizing the conflict between "industrial" or instrumental and "pecuniary" or ceremonial values, which became known as the Ceremonial/Instrumental Dichotomy.[54]
In 1944 Hungarian-American mathematician
In 1956 American economist Robert Solow (1924–2023) and Australian economist Trevor Swan (1918–1989) proposed the Solow–Swan model, based on productivity, capital accumulation, population growth, and technological progress. In 1956 Swan also proposed the Swan diagram of the internal-external balance. In 1987 Solow was awarded the Nobel Economics Prize.[114]: 440–41
Post World War II and globalization (mid to late 20th century)
The globalization era began with the end of World War II and the rise of the U.S. as the world's leading economic power, along with the United Nations. To prevent another global depression, the victorious allies countries forgave Germany its war debts and used its surpluses to rebuild Europe and encourage reindustrialization of Germany and Japan. In the 1960s it changed its role to recycling global surpluses.[115]
After World War II, Canadian-born John Kenneth Galbraith (1908–2006) became one of the standard bearers for pro-active government and liberal-democrat politics. In The Affluent Society (1958), Galbraith argued that voters reaching a certain material wealth begin to vote against the common good. He also argued that the "conventional wisdom" of the conservative consensus was not enough to solve the problems of social inequality.[116] In an age of big business, he argued, it is unrealistic to think of markets of the classical kind. They set prices and use advertising to create artificial demand for their own products, distorting people's real preferences. Consumer preferences actually come to reflect those of corporations – a "dependence effect" – and the economy as a whole is geared to irrational goals.[117] In The New Industrial State Galbraith argued that economic decisions are planned by a private-bureaucracy, a technostructure of experts who manipulate marketing and public relations channels. This hierarchy is self-serving, profits are no longer the prime motivator, and even managers are not in control. Because they are the new planners, corporations detest risk, require steady economic and stable markets. They recruit governments to serve their interests with fiscal and monetary policy, for instance adhering to monetarist policies which enrich money-lenders in the City through increases in interest rates. While the goals of an affluent society and complicit government serve the irrational technostructure, public space is simultaneously impoverished. Galbraith paints the picture of stepping from penthouse villas onto unpaved streets, from landscaped gardens to unkempt public parks. In Economics and the Public Purpose (1973) Galbraith advocates a "new socialism" as the solution, nationalising military production and public services such as health care, introducing disciplined salary and price controls to reduce inequality.[118]
In contrast to Galbraith's linguistic style, the post-war economics profession began to synthesize much of Keynes' work with mathematical representations. Introductory university economics courses began to present economic theory as a unified whole in what is referred to as the neoclassical synthesis. "Positive economics" became the term created to describe certain trends and "laws" of economics that could be objectively observed and described in a value-free way, separate from "normative economic" evaluations and judgments.
The
American economist Kenneth Arrow's (1921–2017) published Social Choice and Individual Values in 1951. It consider connections between economics and political theory. It gave rise to social choice theory with the introduction of his "Possibility Theorem". This sparked widespread discussion over how to interpret the different conditions of the theorem and what implications it had for democracy and voting. Most controversial of his four (1963) or five (1950/1951) conditions is the independence of irrelevant alternatives.[119]
In the 1950s Kenneth Arrow and
In 1971 Arrow and Frank Hahn published General Competitive Analysis (1971), which reasserted a theory of general equilibrium of prices through the economy. In 1971, US President Richard Nixon's had declared that "We are all Keynesians now", announcing wage and price controls. He lifted this from a comment by Milton Friedman in 1965 which formed a Time.[120]
International economics
In 1951 English economist James Meade (1907–1995) published The Balance of Payments, volume 1 of "The Theory of International Economic Policy", which proposed the theory of domestic divergence (internal and external balance), and promoted policy tools for governments. In 1955 he published volume 2 Trade and Welfare, which proposed the theory of the "second-best", and promoted protectionism. He shared the 1977 Nobel Economic Prize with Bertil Ohlin.
In 1979 American economist
Development economics
In 1954 Saint Lucian economist
In 1955 Russian-born American economist Simon Kuznets (1901–1985), who introduced the concept of Gross domestic product (GDP) in 1934 published an article revealing an inverted U-shaped relation between income inequality and economic growth, meaning that economic growth increases income disparity between rich and poor in poor countries, but decreases it in wealthy countries. In 1971 he received the Nobel Economics Prize.
Indian economist Amartya Sen (1933–) expressed considerable skepticism about the validity of neoclassical assumptions, and was highly critical of rational expectations theory, devoting his work to Development Economics and human rights.
In 1981, Sen published Poverty and Famines: An Essay on Entitlement and Deprivation (1981), a book in which he argued that famine occurs not only from a lack of food, but from inequalities built into mechanisms for distributing food. Sen also argued that the Bengal famine was caused by an urban economic boom that raised food prices, thereby causing millions of rural workers to starve to death when their wages did not keep up.[121]
In addition to his important work on the causes of famines, Sen's work in the field of development economics has had considerable influence in the formulation of the "Human Development Report",[122] published by the United Nations Development Programme.[123] This annual publication that ranks countries on a variety of economic and social indicators owes much to the contributions by Sen among other social choice theorists in the area of economic measurement of poverty and inequality. Sen was awarded the Nobel Prize in Economics in 1998.
New Economic History (Cliometrics)
In 1958 American economists
Public choice theory and constitutional economics
In 1962 American economists
Impossible trinity
In 1962–1963 Scottish economist Marcus Fleming (1911–1976) and Canadian economist Robert Mundell (1932–) published the Mundell–Fleming Model of the Economy, an extension of the IS–LM Model to an open economy, proposing the Impossible Trinity of fixed exchange rate, free capital movement, and an independent monetary policy, only two of which can be maintained simultaneously. Mundell received the 1999 Nobel Economics Prize.
Market for corporate control
In 1965 American economist Henry G. Manne (1928–2015) published Mergers and the Market for Corporate Control in Journal of Political Economy, which claims that changes in the price of a share of stock in the stock market will occur more rapidly when insider trading is prohibited than when it is permitted, founding the theory of market for corporate control.
Information economics
In 1970 George Akerlof (1940–) published the paper The Market for Lemons, founding the theory of Information Economics, receiving the 2001 Nobel Economics Prize.
Joseph E. Stiglitz (1943–) also received the Nobel Economics Prize in 2001 for his work in Information Economics. He has served as chairman of President Clinton's Council of Economic Advisers, and as chief economist for the World Bank. Stiglitz has taught at many universities, including Columbia, Stanford, Oxford, Manchester, Yale, and MIT. In recent years he has become an outspoken critic of global economic institutions. In Making Globalization Work (2007) he offers an account of his perspectives on issues of international economics:
"The fundamental problem with the neoclassical model and the corresponding model under market socialism is that they fail to take into account a variety of problems that arise from the absence of perfect information and the costs of acquiring information, as well as the absence or imperfections in certain key risk and capital markets. The absence or imperfection can, in turn, to a large extent be explained by problems of information."[124]
Stiglitz talks about his book Making Globalization Work here.[125]
Market design theory
In 1973 Russian-American mathematician-economist Leonid Hurwicz (1917–2008) founded Market (Mechanism) Design Theory, a.k.a. Reverse Game Theory, which allows people to distinguish situations in which markets work well from those in which they do not, aiding the identification of efficient trading mechanisms, regulation schemes, and voting procedures; he developed the theory with Eric Maskin (1950–) and Roger Myerson (1951–), sharing the 2007 Nobel Economics Prize with them.
The Laffer curve and Reaganomics
In 1974 American economist Arthur Laffer formulated the Laffer curve, which postulates that no tax revenue will be raised at the extreme tax rates of 0% and 100%, and that there must be at least one rate where tax revenue would be a non-zero maximum. This concept was adopted by U.S. President Ronald Reagan in the early 1980s, becoming the cornerstone of Reaganomics, which was co-founded by American economist Paul Craig Roberts.
Market regulation
In 1986 French economist Jean Tirole (1953–) published "Dynamic Models of Oligopoly", followed by "The Theory of Industrial Organization" (1988), launching his quest to understand market power and regulation, resulting in the 2014 Nobel Economics Prize.
Post 2008 financial crisis (21st century)
 | This section needs to be updated. (September 2020) |
The 2007–2008 financial crisis led to a global recession. This prompted some Macro economists and Financial Economists to question the current orthodoxy.[126][127]
One response was the Keynesian resurgence. This emerged as a consensus among some policy makers and economists for Keynesian solutions.[further explanation needed] Figures in this school included Dominique Strauss-Kahn, Olivier Blanchard, Gordon Brown, Paul Krugman, and Martin Wolf.[128][129][130]
See also
- Corporate law
- Economic history
- Energy economics
- Index of international trade topics
- Labour law
- List of economics journals
- List of economists
- List of important publications in economics
- Outline of economics
- Perspectives on capitalism
- Timeline of international trade
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- The History of Economic Thought. By Gonçalo L. Fonseca.
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- "Family tree" of economics poster from the 16th century on.
- Pioneers of the social sciences London School of Economics and Political Science Archived 26 July 2016 at the Wayback Machine