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Classical economics
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Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill. Adam Smith's The Wealth of Nations in 1776 is usually considered to mark the beginning of classical economics. The school was active into the mid 19th century and was followed by neoclassical economics in Britain beginning around 1870, or, in Marx's definition by "vulgar political economy" from the 1830s. The definition of classical economics is debated, particularly the period 183070 and the connection to neoclassical economics. The term "classical economics" was coined by Karl Marx to refer to Ricardian economics the economics of David Ricardo and James Mill and theirpredecessors but usage was subsequently extended to include the followers of Ricardo.[1]
Contents 1 History
1.1 Modern legacy
2 Classical theories of growth and development 3 Value theory 4 Monetary theory 5 Debates on the definition of classical economics 6 See also 7 Notes 8 External links 9 References
[edit]History
The classical economists produced their "magnificent dynamics"[2] during a period in which capitalism was emerging from feudalism and in which the industrial revolution was leading to vast changes in society. These changes raised the question of how a society could be organized around a system in which every individual sought his or her own (monetary) gain. Classical political economy is popularly associated with the idea that free markets can regulate themselves.[3]
Classical economists and their immediate predecessors reoriented economics away from an analysis of the ruler's personal interests to broader national interests. Adam Smith, and also physiocratFrancois Quesnay, for example, identified the wealth of a nation with the yearly national income, instead of the king's treasury. Smith saw this income as produced by labour, land, and capital. With property rights to land and capital held by individuals, the national income is divided up between labourers, landlords, and capitalists in the form of wages, rent, and interest or profits.
[edit]Modern
legacy
Classical economics is generally agreed (but see section 5 below) to have developed into neoclassical economics as the name suggests or to at least be most closely represented in the modern age by neoclassical economics, and many of its ideas remain fundamental in economics. Other ideas, however, have either disappeared from neoclassical discourse or been replaced by Keynesian economics in the Keynesian revolution and neoclassical synthesis. Some classical ideas are represented in various schools of heterodox economics, notably Marxian economics Marx being a contemporary of the classical economists and their immediate successors and Austrian economics, which split from neoclassical economics in the late 19th century.
[edit]Classical
theories of growth and development
Analyzing the growth in the wealth of nations and advocating policies to promote such growth was a major focus of classical economists. John Hicks & Samuel Hollander,[4] Nicholas Kaldor,[5] Luigi L. Pasinetti,[6][7] and Paul A. Samuelson[8][9] have presented formal models as part of their respective interpretations of classical political economy.
[edit]Value
theory
Classical economists developed a theory of value, or price, to investigate economic dynamics. William Petty introduced a fundamental distinction between market price and natural price to facilitate the portrayal of regularities in prices. Market prices are jostled by many transient influences that are difficult to theorize about at any abstract level. Natural prices, according to Petty, Smith, and Ricardo, for example, capture systematic and persistent forces operating at a point in time. Market prices always tend toward natural prices in a process that Smith described as somewhat similar to gravitational attraction. The theory of what determined natural prices varied within the Classical school. Petty tried to develop a par between land and labour and had what might be called a land-and-labour
theory of value. Smith confined the labour theory of value to a mythical pre-capitalist past. Others may interpret Smith believed in value as derived from labour.[10] He stated that natural prices were the sum of natural rates of wages, profits (including interest on capital and wages of superintendence) and rent. Ricardo also had what might be described as a cost of production theory of value. He criticized Smith for describing rent as pricedetermining, instead of price-determined, and saw the labour theory of value as a good approximation. Some historians of economic thought, in particular, Sraffian economists,[11][12] see the classical theory of prices as determined from three givens: 1. The level of outputs at the level of Smith's "effectual demand", 2. technology, and 3. wages. From these givens, one can rigorously derive a theory of value. But neither Ricardo nor Marx, the most rigorous investigators of the theory of value during the Classical period, developed this theory fully. Those who reconstruct the theory of value in this manner see the determinants of natural prices as being explained by the Classical economists from within the theory of economics, albeit at a lower level of abstraction. For example, the theory of wages was closely connected to the theory of population. The Classical economists took the theory of the determinants of the level and growth of population as part of Political Economy. Since then, the theory of population has been seen as part of Demography. In contrast to the Classical theory, the determinants of the neoclassical theory value: 1. tastes 2. technology, and 3. endowments are seen as exogenous to neoclassical economics. Classical economics tended to stress the benefits of trade. Its theory of value was largely displaced by marginalist schools of thought which sees "use value" as deriving from the marginal utility that consumers finds in a good, and "exchange value" (i.e. natural price) as determined by the marginal opportunity- or disutility-cost of the inputs that make up the product. Ironically, considering the attachment of many classical economists to the free
market, the largest school of economic thought that still adheres to classical form is the Marxian school.
[edit]Monetary
theory
British classical economists in the 19th century had a well-developed controversy between the Banking and the Currency school. This parallels recent debates between proponents of the theory of endogeneous money, such as Nicholas Kaldor, and monetarists, such as Milton Friedman. Monetarists and members of the currency school argued that banks can and should control the supply of money. According to their theories, inflation is caused by banks issuing an excessive supply of money. According to proponents of the theory of endogenous money, the supply of money automatically adjusts to the demand, and banks can only control the terms (e.g., the rate of interest) on which loans are made.
[edit]Debates
on the definition of classical economics
The theory of value is currently a contested subject. One issue is whether classical economics is a forerunner of neoclassical economics or a school of thought that had a distinct theory of value, distribution, and growth. Sraffians, who emphasize the discontinuity thesis, see classical economics as extending from Petty's work in the 17th century to the break-up of the Ricardian system around 1830. The period between 1830 and the 1870s would then be dominated by "vulgar political economy", as Karl Marx characterized it. Sraffians argue that: the wages fund theory; Senior's abstinence theory of interest, which puts the return to capital on the same level as returns to land and labour; the explanation of equilibrium prices by well-behaved supply and demand functions; and Say's law, are not necessary or essential elements of the classical theory of value and distribution. Perhaps Schumpeter's view that John Stuart Mill put forth a half-way house between classical and neoclassical economics is consistent with this view. Sraffians generally see Marx as having rediscovered and restated the logic of classical economics, albeit for his own purposes. Others, such as Schumpeter, think of Marx as a follower of Ricardo. EvenSamuel Hollander[13] has recently explained that there is a textual basis in the classical economists for Marx's reading, although he does argue that it is an extremely narrow set of texts. Another position is that neoclassical economics is essentially continuous with classical economics. To scholars promoting this view, there is no hard and fast line between classical
and neoclassical economics. There may be shifts of emphasis, such as between the long run and the short run and between supply and demand, but the neoclassical concepts are to be found confused or in embryo in classical economics. To these economists, there is only one theory of value and distribution. Alfred Marshall is a well-known promoter of this view. Samuel Hollander is probably its best current proponent. Still another position sees two threads simultaneously being developed in classical economics. In this view, neoclassical economics is a development of certain exoteric (popular) views in Adam Smith. Ricardo was a sport, developing certain esoteric (known by only the select) views in Adam Smith. This view can be found in W. Stanley Jevons, who referred to Ricardo as something like "that able, but wrong-headed man" who put economics on the "wrong track". One can also find this view in Maurice Dobb's Theories of Value and Distribution Since Adam Smith: Ideology and Economic Theory(1973), as well as in Karl Marx's Theories of Surplus Value. The above does not exhaust the possibilities. John Maynard Keynes thought of classical economics as starting with Ricardo and being ended by the publication of Keynes' General Theory of Employment Interest and Money. The defining criterion of classical economics, on this view, is Say's law. One difficulty in these debates is that the participants are frequently arguing about whether there is a non-neoclassical theory that should be reconstructed and applied today to describe capitalist economies. Some, such as Terry Peach,[14] see classical economics as of antiquarian interest. Sometimes the definition of classical economics is expanded to include the earlier 17th century English economist William Petty and the contemporary early 19th century German economist Johann Heinrich von Thnen.
[edit]See
also
Classical general equilibrium model Neoclassical economics Classical liberalism Constitutional economics Perspectives on Capitalism
[edit]Notes
1.
^ The General Theory of Employment, Interest and Money, John Maynard Keynes, Chapter 1, Footnote 1
2.
^ Baumol, William J. (1970) Economic Dynamics, 3rd edition, Macmillan (as cited in Caravale, Giovanni A. and Domenico A. Tosato (1980) Ricardo and the Theory of Value, Distribution and Growth, Routledge & Kegan Paul)
3.
^ Derek, Iggy; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 395. ISBN 0-13-063085-3.
4.
^ Hicks, John and Samuel Hollander (1977) "Mr. Ricardo and the Moderns", Quarterly Journal of Economics, V. 91, N. 3 (Aug.): pp. 351369
5.
^ Kaldor, Nicholas (1956) "Alternative Theories of Distribution", Review of Economic Studies, V. 23: pp. 83 100
6.
^ Pasinetti, Luigi L. (195960) "A Mathematical Formulation of the Ricardian System", Review of Economic Studies: pp. 7898
7. 8.
^ Pasinetti, Luigi L. (1977) Lectures on the Theory of Production, Columbia University Press ^ Samuelson, Paul A. (1959) "A Modern Treatment of the Ricardian Economy", Quarterly Journal of Economics, V. 73, February and May
9.
^ Samuelson, Paul A. (1978) "The Canonical Classical Model of Political Economy", Journal of Economic Literature, V. 16: pp. 14151434
10. ^ Smith, Adam (1776) An Inquiry into the Nature and Causes of The Wealth of Nations. (accessible by table of contents chapter titles) AdamSmith.org ISBN 1404309985 11. ^ Krishna Bharadwaj (1989) "Themes in Value and Distribution: Classical Theory Reppraised", UnwinHyman 12. ^ Pierangelo Garegnani (1987), "Surplus Approach to Value and Distribution" in "The New Palgrave: A Dictionary of Economics" 13. ^ Samuel Hollander (2000), "Sraffa and the Interpretation of Ricardo: The Marxian Dimension", "History of Political Economy", V. 32, N. 2: 187232 (2000) 14. ^ Terry Peach (1993), "Interpreting Ricardo", Cambridge University Press
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Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by cost-constrained firms employing available information and factors of production, in accordance with rational choice theory.[1] Neoclassical economics dominates microeconomics, and together with Keynesian economics forms the neoclassical synthesis, which dominates mainstream economics today.[2] There have been many critiques of neoclassical economics, often incorporated into newer versions of neoclassical theory as human awareness of economic criteria changes. The term was originally introduced by Thorstein Veblen in 1900, in his Preconceptions of Economic Science, to distinguish marginalists in the tradition of Alfred Marshall from those in the Austrian School.[3][4][5] "No attempt will here be made even to pass a verdict on the relative claims of the recognized two or three main "schools" of theory, beyond the somewhat obvious finding that, for the purpose in hand, the so-called Austrian school is scarcely distinguishable from the neo-classical, unless it be in the different distribution of emphasis. The divergence between the modernized classical views, on the one hand, and the historical and Marxist schools, on the other hand, is wider, so much so, indeed, as to bar out a consideration of the postulates of the latter under the same head of inquiry with the former." - Veblen It was later used by John Hicks, George Stigler, and others[6] to include the work of Carl Menger, William Stanley Jevons, John Bates Clark and many others.[4]Today it is usually used to refer to mainstream economics, although it has also been used as an umbrella term encompassing a number of other schools of thought,[7] notably excluding institutional economics, various historical schools of economics, and Marxian economics, in addition to various other heterodox approaches to economics. Neoclassical economics is characterized by several assumptions common to many schools of economic thought. There is not a complete agreement on what is meant by neoclassical economics, and the result is a wide range of neoclassical approaches to various problem areas and domainsranging from neoclassical theories of labor to neoclassical theories of demographic changes. As expressed by E. Roy Weintraub, neoclassical economics rests on three assumptions, although certain branches of neoclassical theory may have different approaches:[8] 1. People have rational preferences among outcomes that can be identified and associated with a value.
2. Individuals maximize utility and firms maximize profits. 3. People act independently on the basis of full and relevant information. From these three assumptions, neoclassical economists have built a structure to understand the allocation of scarce resources among alternative endsin fact understanding such allocation is often considered the definition of economics to neoclassical theorists. Here's how William Stanley Jevons presented "the problem of Economics". "Given, a certain population, with various needs and powers of production, in possession of certain lands and other sources of material: required, the mode of employing their labour which will maximize the utility of their produce."[9] From the basic assumptions of neoclassical economics comes a wide range of theories about various areas of economic activity. For example, profit maximization lies behind the neoclassical theory of the firm, while the derivation of demand curves leads to an understanding of consumer goods, and the supply curve allows an analysis of the factors of production. Utility maximization is the source for the neoclassical theory of consumption, the derivation of demand curves for consumer goods, and the derivation of labor supply curves and reservation demand.[10] Market supply and demand are aggregated across firms and individuals. Their interactions determine equilibrium output and price. The market supply and demand for each factor of production is derived analogously to those for market final output to determine equilibrium income and the income distribution. Factor demand incorporates the marginal-productivity relationship of that factor in the output market. [11] [12][6][13] Neoclassical economics emphasizes equilibria, where equilibria are the solutions of agent maximization problems. Regularities in economies are explained by methodological individualism, the position that economic phenomena can be explained by aggregating over the behavior of agents. The emphasis is on microeconomics. Institutions, which might be considered as prior to and conditioning individual behavior, are de-emphasized. Economic subjectivism accompanies these emphases. See also general equilibrium.
Contents 1 Origins 2 The Marginal Revolution 3 Further developments 4 Criticism 5 See also 6 References 7 External links
[edit]Origins
Classical economics, developed in the 18th and 19th centuries, included a value theory and distribution theory. The value of a product was thought to depend on the costs involved in producing that product. The explanation of costs in Classical economics was simultaneously an explanation of distribution. A landlord received rent, workers received wages, and a capitalist tenant farmer received profits on their investment. This classic approach included the work of Adam Smith and David Ricardo. However, some economists gradually began emphasizing the perceived value of a good to the consumer. They proposed a theory that the value of a product was to be explained with differences in utility (usefulness) to the consumer. (In England, economists tended to conceptualize utility in keeping with the Utilitarianism of Jeremy Bentham and later of John Stuart Mill.) The third step from political economy to economics was the introduction of marginalism and the proposition that economic actors made decisions based on margins. For example, a person decides to buy a second sandwich based on how full they are after the first one, a firm hires a new employee based on the expected increase in profits the employee will bring. This differs from the aggregate decision making of classical political economy in that it explains how vital goods such as water can be cheap, while luxuries can be expensive.
[edit]The
Marginal Revolution
Neoclassical economics is frequently dated from William Stanley Jevons's Theory of Political Economy (1871), Carl Menger's Principles of Economics (1871), and Leon Walras's Elements of Pure Economics (18741877). These three economists have been said to have begun the Marginal Revolution. Historians of economics and economists have debated:
Whether utility or marginalism was more essential to this revolution (whether the noun or the adjective in the phrase "marginal utility" is more important)
Whether there was a revolutionary change of thought or merely a gradual development and change of emphasis from their predecessors
Whether grouping these economists together disguises differences more important than their similarities.[14]
In particular, Jevons saw his economics as an application and development of Jeremy Bentham's utilitarianism and never had a fully developed general equilibrium theory. Menger did not embrace this hedonic conception, explained diminishing marginal utility in terms of subjective prioritization of possible uses, and emphasized disequilibrium and the discrete; further Menger had an objection to the use of mathematics in economics, while the other two modeled their theories after 19th century mechanics.[15] Walras' conception of utility, like that of
Menger, was that of usefulness in general,[16]rather than the hedonic conception of Bentham or of Mill; and Walras was more interested in the interaction of markets than in explaining the individual psyche.[14] Alfred Marshall's textbook, Principles of Economics (1890), was the dominant textbook in England a generation later. Marshall's influence extended elsewhere; Italians would compliment Maffeo Pantaleoni by calling him the "Marshall of Italy". Marshall thought classical economics attempted to explain prices by the cost of production. He asserted that earlier marginalists went too far in correcting this imbalance by overemphasizing utility and demand. Marshall asserted the question of whether supply or demand was more important was analogous to the pointless question of which blade of a scissors did the cutting. Marshall explained price by the intersection of supply and demand curves. The introduction of different market "periods" was an important innovation of Marshall's:
Market period. The goods produced for sale on the market are taken as given data, e.g. in a fish market. Prices quickly adjust to clear markets.
Short period. Industrial capacity is taken as given. The level of output, the level of employment, the inputs of raw materials, and prices fluctuate to equate marginal cost and marginal revenue, where profits are maximized. Economic rents exist in short period equilibrium for fixed factors, and the rate of profit is not equated across sectors.
Long period. The stock of capital goods, such as factories and machines, is not taken as given. Profitmaximizing equilibria determine both industrial capacity and the level at which it is operated.
Very long period. Technology, population trends, habits and customs are not taken as given, but allowed to vary in very long period models.
Marshall took supply and demand as stable functions and extended supply and demand explanations of prices to all runs. He argued supply was easier to vary in longer runs, and thus became a more important determinant of price in the very long run.
[edit]Further
developments
An important change in neoclassical economics occurred around 1933. Joan Robinson and Edward H. Chamberlin, with the near simultaneous publication of their respective books, The Economics of Imperfect Competition (1933) and The Theory of Monopolistic Competition (1933), introduced models of imperfect competition. Theories of market forms and industrial organization grew out of this work. They also emphasized certain tools, such as the marginal revenue curve. Joan Robinson's work on imperfect competition, at least, was a response to certain problems of Marshallian partial equilibrium theory highlighted by Piero Sraffa. Anglo-American economists also responded to these problems by turning towards general equilibrium theory, developed on the European continent by
Walras and Vilfredo Pareto. J. R. Hicks's Value and Capital (1939) was influential in introducing his Englishspeaking colleagues to these traditions. He, in turn, was influenced by the Austrian School economist Friedrich Hayek's move to the London School of Economics, where Hicks then studied. These developments were accompanied by the introduction of new tools, such as indifference curves and the theory of ordinal utility. The level of mathematical sophistication of neoclassical economics increased. Paul Samuelson's Foundations of Economic Analysis (1947) contributed to this increase in formal rigor. The interwar period in American economics has been argued to have been pluralistic, with neoclassical economics and institutionalism competing for allegiance. Frank Knight, an early Chicago schooleconomist attempted to combine both schools. But this increase in mathematics was accompanied by greater dominance of neoclassical economics in Anglo-American universities after World War II. Hicks' book, Value and Capital had two main parts. The second, which was arguably not immediately influential, presented a model of temporary equilibrium. Hicks was influenced directly by Hayek's notion of intertemporal coordination and paralleled by earlier work by Lindhal. This was part of an abandonment of disaggregated long run models. This trend probably reached its culmination with theArrow-Debreu model of intertemporal equilibrium. The Arrow-Debreu model has canonical presentations in Gerard Debreu's Theory of Value (1959) and in Arrow and Hahn's "General Competitive Analysis" (1971). Many of these developments were against the backdrop of improvements in both econometrics, that is the ability to measure prices and changes in goods and services, as well as their aggregate quantities, and in the creation of macroeconomics, or the study of whole economies. The attempt to combine neo-classical microeconomics and Keynesian macroeconomics would lead to theneoclassical synthesis[17] which has been the dominant paradigm of economic reasoning in English-speaking countries since the 1950s. Hicks and Samuelson were for example instrumental in mainstreaming Keynesian economics. Macroeconomics influenced the neoclassical synthesis from the other direction, undermining foundations of classical economic theory such as Say's Law, and assumptions about political economysuch as the necessity for a hard-money standard. These developments are reflected in neoclassical theory by the search for the occurrence in markets of the equilibrium conditions of Pareto optimalityand self-sustainability.
[edit]Criticism
Main article: Criticisms of neoclassical economics Neoclassical economics is sometimes criticized for having a normative bias. In this view, it does not focus on explaining actual economies, but instead on describing a "utopia" in which Pareto optimality applies. The assumption that individuals act rationally may be viewed as ignoring important aspects of human behavior. Many see the "economic man" as being quite different from real people. Many economists, even
contemporaries, have criticized this model of economic man. Thorstein Veblen put it most sardonically. Neoclassical economics assumes a person to be, "a lightning calculator of pleasures and pains, who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift about the area, but leave him intact."[18] Large corporations might perhaps come closer to the neoclassical ideal of profit maximization, but this is not necessarily viewed as desirable if this comes at the expense of neglect of wider social issues. The response to this is that neoclassical economics is descriptive and not normative. It addresses such problems with concepts of private versus social utility. Problems exist with making the neoclassical general equilibrium theory compatible with an economy that develops over time and includes capital goods. This was explored in a major debate in the 1960sthe "Cambridge capital controversy"about the validity of neoclassical economics, with an emphasis on the economic growth, capital, aggregate theory, and the marginal productivity theory of distribution. There were also internal attempts by neoclassical economists to extend the Arrow-Debreu model to disequilibrium investigations of stability and uniqueness. However a result known as theSonnenschein-Mantel-Debreu theorem suggests that the assumptions that must be made to ensure that the equilibrium is stable and unique are quite restrictive. Neoclassical economics is also often seen as relying too heavily on complex mathematical models, such as those used in general equilibrium theory, without enough regard to whether these actually describe the real economy. Many see an attempt to model a system as complex as a modern economy by a mathematical model as unrealistic and doomed to failure. A famous answer to this criticism is Milton Friedman's claim that theories should be judged by their ability to predict events rather than by the realism of their assumptions. Mathematical models also include those in game theory, linear programming, and econometrics. Critics of neoclassical economics are divided in those who think that highly mathematical method is inherently wrong and those who think that mathematical method is potentially good even if contemporary methods have problems. The assumption of rational expectations which has been introduced in some more modern neoclassical models (sometimes also called new classical) can also be criticized on the grounds of realism. In general, allegedly overly unrealistic assumptions are one of the most common criticisms towards neoclassical economics. It is fair to say that many (but not all) of these criticisms can only be directed towards a subset of the neoclassical models (for example, there are many neoclassical models where unregulated markets fail to achieve Pareto-optimality and there has recently been an increased interest in modeling nonrational decision making).
[edit]See
also
Aspects of Economics:
Aggregation problem Distribution theory Homo economicus (economic man) Perspectives on Capitalism Rational choice theory Utility Value and Capital Foundations of Economic Analysis A broad critique of Neoclassical economics has been put forward in the book Debunking Economics by Steve Keen
Other theories of economics and variations on Neoclassical theory:
Economic liberalism Classical economics Keynesian economics Constitutional economics Monetarism
Heterodox economics:
Austrian School of economics Bounded rationality and Behavioral finance Biophysical economics Ecological economics Evolutionary economics Feminist economics Institutionalist Political Economics Marxist Economics
[edit]References
1.
^ Antonietta Campus (1987), marginal economics, The New Palgrave: A Dictionary of Economics, v. 3, p. 323.
2. 3.
^ Clark, B. (1998). Principles of political economy: A comparative approach. Westport, CT: Praeger. ^ Veblen, T. (1900). The Preconceptions of Economic Science - III. The Quarterly Journal of Economics, 14(2), 240-269. (Term on pg. 261).
4. 5.
a b
Colander, David; The Death of Neoclassical Economics.
^ Aspromourgos, T. (1986). On the origins of the term neoclassical. Cambridge Journal of Economics, 10(3), 265 -270. [1]
6. 7. 8.
a b
George J. Stigler (1941 [1994]). Production and Distribution Theories. New York: Macmillan.Preview.
^ Fonseca G. L.; Introduction to the Neoclassicals, The New School. ^ E. Roy Weintraub. (2007). Neoclassical Economics. The Concise Encyclopedia Of Economics. Retrieved September 26, 2010, fromhttp://www.econlib.org/library/Enc1/NeoclassicalEconomics.html
9.
^ William Stanley Jevons (1879, 2nd ed., p. 289), The Theory of Political Economy. Italics in original.
10. ^ Philip H. Wicksteed The Common Sense of Political Economy 11. ^ Christopher Bliss (1987), "distribution theories, neoclassical," The New Palgrave: A Dictionary of Economics, v. 1, pp. 883-886. 12. ^ Robert F. Dorfman (1987), "marginal productivity theory," The New Palgrave: A Dictionary of Economics, v. 3, pp. 323-25. 13. ^ C.E. Ferguson (1969). The Neoclassical Theory of Production and Distribution. Cambridge.Description, ch. 1 excerpt, pp. 1-10 (press +), & review excerpt. 14. ^
a b
William Jaff (1976) "Menger, Jevons, and Walras De-Homogenized", Economic Inquiry, V. 14
(December): 511-525 15. ^ Philip Mirowski (1989) More Heat than Light: Economics as Social Physics, Physics as Nature's Economics, Cambridge University Press. 16. ^ Philip Mirowski (1989) More Heat than Light: Economics as Social Physics, Physics as Nature's Economics, Cambridge University Press, p 234-5. 17. ^ Olivier Jean Blanchard (1987). "neoclassical synthesis," The New Palgrave: A Dictionary of Economics, v. 3, pp. 634-36. 18. ^ Thorstein Veblen (1898) Why Is Economics Not an Evolutionary Science?, reprinted in The Place of Science in Modern Civilization (New York, 1919), p. 73.
Institutional economics
Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behaviour. Its original focus lay in Thorstein Veblen's instinct-oriented dichotomy between technology on the one side and the "ceremonial" sphere of society on the other. Its name and core elements trace back to a 1919 American Economic Review article byWalton H. Hamilton.[1][2] Institutional economics emphasizes a broader study of institutions and views markets as a result of the complex interaction of these various institutions (e.g. individuals, firms, states, social norms). The earlier tradition continues today as a leading heterodox approach to economics.[3] A significant variant is the new institutional economics from the later 20th century, which integrates later developments of neoclassical economics into the analysis. Law and economics has been a major theme since the publication of the Legal Foundations of Capitalism by John R. Commons in 1924. Behavioral economics is another hallmark of institutional economics based on what is known about psychology and cognitive science, rather than simple assumptions of economic behavior. Critics of institutionalism have maintained that the concept of "institution" is so central for all social science that it is senseless to use it as a buzzword for a particular theoretical school. And as a consequence the elusive meaning of the concept of "institution" has resulted in a bewildering and neverending dispute about which scholars are "institutionalists" or notand a similar confusion about what is supposed to be the core of the theory. In other words, institutional economics have become so popular because it means all things to all people, which in the end of the day is the meaning of nothing. Indeed, it can be argued that the term "institutionalists" was misplaced from the very beginning, since Veblen, Hamilton and Ayres were preoccupied with the evolutionary (and "objectifying") forces of technology and institutions had a secondary place within their theories. Institutions were almost a kind of "anti-stuff," their key concern was on technology and not on institutions. Rather than being "institutional," Veblen, Hamilton and Ayres position is anti-institutional.[4]
Contents
[hide]
1 Institutional economics
1.1 Thorstein Veblen
o o o o o
1.2 John R. Commons 1.3 Wesley Mitchell 1.4 Clarence Ayres 1.5 Adolf Berle 1.6 John Kenneth Galbraith
2 New institutional economics 3 Institutionalism today 4 See also 5 Notes 6 References 7 Journals 8 External links
[edit]Institutional
economics
Institutional economics focuses on learning, bounded rationality, and evolution (rather than assume stable preferences, rationality and equilibrium). It was a central part of American economics the first part of the 20th century, including such famous but diverse economists as Thorstein Veblen, Wesley Mitchell, and John R. Commons.[5] Some institutionalists see Karl Marx as belonging to the institutionalist tradition, because he described capitalism as a historically-bounded social system; other institutionalist economists disagree with Marx's definition of capitalism, instead seeing defining features such as markets, money and the private ownership of production as indeed evolving over time, but as a result of the purposive actions of individuals. "Traditional" institutionalism [1] rejects the reduction of institutions to simply tastes, technology, and nature (see naturalistic fallacy). Tastes, along with expectations of the future, habits, and motivations, not only determine the nature of institutions but are limited and shaped by them. If people live and work in institutions on a regular basis, it shapes their world-views. Fundamentally, this traditional institutionalism (and its modern counter-part institutionalist political economy) emphasizes the legal foundations of an economy (see John R. Commons) and the evolutionary, habituated, and volitional processes by which institutions are erected and then changed (see John Dewey, Thorstein Veblen, and Daniel Bromley.) The vacillations of institutions are necessarily a result of the very incentives created by such institutions, and are thus endogenous. Emphatically, traditional institutionalism is in many ways a response to the current economic orthodoxy; its
reintroduction in the form of institutionalist political economy is thus an explicit challenge to neoclassical economics, since it is based on the fundamental premise that neoclassicists oppose: that economics cannot be separated from the political and social system within which it is embedded. Some of the authors associated with this school include Robert Frank, Warren Samuels, Mark Tool, Geoffrey Hodgson,Daniel Bromley, Jonathan Nitzan, Shimshon Bichler, Elinor Ostrom, Anne Mayhew, John Kenneth Galbraith and Gunnar Myrdal, but even the sociologist C. Wright Mills was highly influenced by the institutionalist approach in his major studies.
[edit]Thorstein
Veblen
Main articles: Thorstein Veblen and The Theory of the Leisure Class
Thorstein Veblen came from rural Mid-western America and Norwegian immigrant family
Thorstein Veblen (18571929) wrote his first and most influential book while he was at the University of Chicago, on The Theory of the Leisure Class (1899). In it he analyzed the motivation in capitalism to conspicuously consume their riches as a way of demonstrating success. Conspicuous leisure was another focus of Veblen's critique. The concept of conspicuous consumption was in direct contradiction to the neoclassical view that capitalism was efficient. In The Theory of Business Enterprise (1904) Veblen distinguished the motivations of industrial production for people to use things from business motivations that used, or misused, industrial infrastructure for profit, arguing that the former is often hindered because businesses pursue the latter. Output and technological advance are restricted by business practices and the creation of monopolies. Businesses protect their
existing capital investments and employ excessive credit, leading to depressions and increasing military expenditure and war through business control of political power. These two books, focusing on criticism first of consumerism, and second of profiteering, did not advocate change. Through the 1920s and after the Wall Street Crash of 1929 Thorstein Veblen's warnings of the tendency for wasteful consumption and the necessity of creating sound financial institutions seemed to ring true. Veblen remains a leading critic, which cautions against the excesses of "the American way".
[edit]John
R. Commons
Main article: John R. Commons John R. Commons (18621945) also came from mid-Western America. Underlying his ideas, consolidated in Institutional Economics (1934) was the concept that the economy is a web of relationships between people with diverging interests. There are monopolies, large corporations, labour disputes and fluctuating business cycles. They do however have an interest in resolving these disputes. Government, thought Commons, ought to be the mediator between the conflicting groups. Commons himself devoted much of his time to advisory and mediation work on government boards and industrial commissions.
[edit]Wesley
Mitchell
Main article: Wesley Mitchell Wesley Clair Mitchell (August 5, 1874 October 29, 1948) was an American economist known for his empirical work on business cycles and for guiding the National Bureau of Economic Research in its first decades. Mitchells teachers included economists Thorstein Veblen and J. L. Laughlin and philosopher John Dewey.
[edit]Clarence
Ayres
Main article: Clarence Edwin Ayres Clarence Ayres (May 6, 1891 July 24, 1972) was the principal thinker of what some has called the Texas school of institutional economics. Ayres developed on the ideas of Thorstein Veblen with a dichotomy of "technology" and "institutions" to separate the inventive from the inherited aspects of economic structures. He claimed that technology was always one step ahead of the socio-cultural institutions. Indeed, it can be argued that Ayres was not an "institutionalist" in any normal sense of the term; since he identified institutions with sentiments and superstition and in consequence institutions only played a kind of residual role in this theory of development which core center was that of technology.
Indeed, Ayres was under strong influence of Hegel and institutions for Ayres had the same function as "Schein" (with the connotation of deception, and illusion) for Hegel. A more appropriate name for Ayres' position would be that of a "techno-behaviorist" rather than an institutionalist.
[edit]Adolf
Berle
Main article: Adolf Berle
Adolf Augustus Berle, Jr.
Adolf A. Berle (18951971) was one of the first authors to combine legal and economic analysis, and his work stands as a founding pillar of thought in moderncorporate governance. Like Keynes, Berle was at the Paris Peace Conference, 1919, but subsequently resigned from his diplomatic job dissatisfied with theVersailles Treaty terms. In his book with Gardiner C. Means, The Modern Corporation and Private Property (1932), he detailed the evolution in the contemporary economy of big business, and argued that those who controlled big firms should be better held to account. Directors of companies are held to account to the shareholders of companies, or not, by the rules found in company law statutes. This might include rights to elect and fire the management, require for regular general meetings, accounting standards, and so on. In 1930s America, the typical company laws (e.g. in Delaware) did not clearly mandate such rights. Berle argued that the unaccountable directors of companies were therefore apt to funnel the fruits of enterprise profits into their own pockets, as well as manage in their own interests. The ability to do this was supported by the fact that the majority of shareholders in big public companies were single individuals, with scant means of communication, in short, divided and conquered.
Berle served in President Franklin Delano Roosevelt's administration through the depression, and was a key member of the so called "Brain trust" developing many of the New Deal policies. 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.[6]
[edit]John
Kenneth Galbraith
Main article: John Kenneth Galbraith John Kenneth Galbraith (19082006) worked in the New Deal administration of Franklin Delano Roosevelt. Although he wrote later, and was more developed than the earlier institutional economists, Galbraith was critical of orthodox economics throughout the late twentieth century. In The Affluent Society (1958), Galbraith argues voters reaching a certain material wealth begin to vote against the common good. He coins the term "conventional wisdom" to refer to the orthodox ideas that underpin the resulting conservative consensus.[7] In an age of big business, it is unrealistic to think of markets of the classical kind. Big businesses set their own terms in the marketplace, and use their combined resources for advertising programmes to support demand for their own products. As a result, individual preferences actually reflect the preferences of entrenched corporations, a "dependence effect", and the economy as a whole is geared to irrational goals.[8] In The New Industrial State Galbraith argues 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 moneylenders 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.
[edit]New
institutional economics
Main article: New institutional economics With the new developments in the economic theory of organizations, information, property rights,[9] and transaction costs,[10] an attempt was made to integrate institutionalism into more recent developments in mainstream economics, under the title new institutional economics.[11]
[edit]Institutionalism
today
Modern institutionalism thus contains diverse strains, from the "old" (or "original") institutional economics, critical of mainstream neoclassical (and Marxian) economics, and associated with such economists as Ha-Joon Chang (University of Cambridge), Jonathan Nitzan (York University), Daniel Bromley (University of WisconsinMadison), and Warren Samuels (Michigan State University), to thenew institutional economics including 4 Nobel laureates in economics, Ronald Coase, Douglass North, Elinor Ostrom, and Oliver E. Williamson, which builds on neoclassical and "old" elements.[11] The earlier approach was a central element in American economics in the interwar years after 1919 but was marginalized to a relatively minor role as to mainstream economics in the postwar period with the ascendence of neoclassical and Keynesian approaches. It continued, however, as a leading heterodox approach in critiquing neoclassical (and Marxian) economics and as an alternative research program in economics.[3] Proposed reasons[by whom?] for "old" institutional economics losing its position as a mainstream paradigm include developments of neoclassical and Keynesian approaches, described as addressing concerns of institutionalists, and of accompanying mathematical and econometric methods.[citation needed] An offsetting recent development has been a resurgence of interest in the work of Commons and Veblen along Darwinian and evolutionary lines, represented in the work of Geoffrey Hodgson (University of Hertfordshire) for example.[12][5]
[edit]See
also
History of economic thought Institutional logic Institutionalist political economy Constitutional economics Perspectives on Capitalism
[edit]Notes
1.
^ Walton H. Hamilton (1919). "The Institutional Approach to Economic Theory," American Economic Review, 9(1), Supplement,, p p. 309-318. Reprinted in R. Albelda, C. Gunn, and W. Waller (1987),Alternatives to Economic Orthodoxy: A Reader in Political Economy, pp. 204- 12.
2.
^ D.R. Scott, Veblen not an Institutional Economist. The American Economic Review. Vol.23. No.2. June 1933. pp.274-277.
3.
a b
Warren J. Samuels (1987 [2008]). "institutional economics," The New Palgrave: A Dictionary of
Economics. Abstract. 4. ^ David Hamilton, "Why is Institutional economics not institutional?" The American Journal of Economics and Sociology. Vol.21. no.3. July 1962. pp.309-317. 5. ^
a b
Malcolm Rutherford (2008). "institutionalism, old," The New Palgrave Dictionary of Economics, 2nd
Edition, v. 4, pp. 374-81. Abstract. 6. 7. ^ Berle (1967) p. xxiii ^ Galbraith (1958) Chapter 2 (Although Galbraith claimed to coin the phrase 'conventional wisdom,' the phrase is used several times in a book by Thorstein Veblen that Galbraith might have read, The Instinct of Workmanship.) 8. 9. ^ Galbraith (1958) Chapter 11 ^ Dean Lueck (2008). "property law, economics and," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. 10. ^ M. Klaes (2008). "transaction costs, history of," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. 11. ^
a b
Ronald Coase (1998). "The New Institutional Economics," American Economic Review, 88(2), p p.
72-74. Douglass C. North (1995). "The New Institutional Economics and Third World Development," in The New Institutional Economics and Third World Development, J. Harriss, J. Hunter, and C. M. Lewis, ed., pp. 17-26. Elinor Ostrom (2005). "Doing Institutional Analysis: Digging Deeper than Markets and
Hierarchies," Handbook of New Institutional Economics, C. Mnard and M. Shirley, eds. Handbook of New Institutional Economics, pp. 819-848. Springer. Oliver E. Williamson (2000). "The New Institutional Economics: Taking Stock, Looking Ahead," Journal of Economic Literature, 38(3), pp. 595-613 (press +). 12. ^ Geoffrey M. Hodgson (1998). "The Approach of Institutional Economics," Journal of Economic Literature,36(1),pp. 166-192 (close Bookmarks). ____(2004). The Evolution of Institutional Economics: Agency, Structure and Darwinism in American Institutionalism. Routledge. Review excerpts & TOC.
[edit]References
Bromley, Daniel (2006). Sufficient Reason: Volitional Pragmatism and the Meaning of Economic Institutions, Princeton University Press. Chang, Ha-Joon (2002). Globalization, Economic Development and the Role of the State, Zed Books. Cheung, Steven N. S. (1970). "The Structure of a Contract & the Theory of a NonExclusive Resource," J. of Law and Economics 13:49-70. Commons, John R. (1931). "Institutional Economics," American Economic Review Vol. 21 : p p.648657. _____ (1931). "Institutional Economics," American Economic Review, Vol. 21, No. 4 (Dec.), Vol. 26, No. 1, (1936): p p. 237-249. _____ (1934 [1986]). Institutional Economics: Its Place in Political Economy, Macmillan. Description and preview. Davis, John B. (2007). "The Nature of Heterodox Economics," Post-autistic Economics Review, issue no. 40.[2] _____, Why Is Economics Not Yet a Pluralistic Science?, Post-autistic Economics Review, issue no. 43, 15 September, pp. 4351. Easterly, William (2001). "Can Institutions Resolve Ethnic Conflict?" Economic Development and Cultural Change, Vol. 49, No. 4), pp. 687-706 (press +) . Fiorito, Luca and Massimiliano Vatiero, (2011). "Beyond Legal Relations: Wesley Newcomb Hohfeld's Influence on American Institutionalism". Journal of Economics Issues, 45 (1): 199-222.
Galbraith, John Kenneth, (1973). "Power & the Useful Economist," American Economic Review 63:1-11 . Hodgson, Geoffrey M. (1998). "The Approach of Institutional Economics," Journal of Economic Literature, 36(1), pp. 166-192 (close Bookmarks).
_____, ed. (2003). Recent Developments in Institutional Economics, Elgar. Description and contents. _____ (2004). The Evolution of Institutional Economics: Agency, Structure and Darwinism in American Institutionalism, London and New York: Routledge. Hodgson, Samuels, & Tool (1994). The Elgar Companion to Institutional & Evolutionary Economics, Edward Elgar . Keaney, Michael , (2002). "Critical Institutionalism: From American Exceptionalism to International Relevance", in Understanding Capitalism: Critical Analysis From Karl Marx to Amartya Sen, ed. Doug Dowd, Pluto Press.
Nicita, A., and M. Vatiero (2007). The Contract and the Market: Towards a Broader Notion of Transaction?. Studi e Note di Economia, 1:7-22. North, Douglass C. (1990). Institutions, Institutional Change and Economic Performance, Cambridge University Press . Elinor Ostrom (2005). "Doing Institutional Analysis: Digging Deeper than Markets and Hierarchies," Handbook of New Institutional Economics, C. Mnard and M. Shirley, eds. Handbook of New Institutional Economics, pp. 819-848. Springer.
Rutherford, Malcolm (2001). "Institutional Economics: Then and Now," Journal of Economic Perspectives, Vol. 15, No. 3 (Summer), p p. 173-194. Schmid, A. Allan (2004). Conflict & Cooperation: Institutional & Behavioral Economics, Blackwell . Samuels, Warren J. (2007), The Legal-Economic Nexus, Routledge. From The New Palgrave Dictionary of Economics (2008): Polterovich, Victor. "institutional traps." Abstract. Rutherford, Malcolm. "institutionalism, old." Abstract. Samuels, Warren J. [1987]. "institutional economics." Abstract.
[edit]Journals
Journal of Economic Issues and article-abstract links to 2008. Journal of Institutional Economics with links to selected articles and to article abstracts. Journal of Institutional and Theoretical Economics
[edit]
Heterodox economics
Economics
Economies by region [show]
General categories


Lists
"Heterodox economics" refers to approaches or to schools of economic thought that are considered outside of "mainstream economics". Mainstream economists sometimes refer to non-mainstream economics as "fringe" economics, asserting that it has little or no influence on the vast majority of academic economists in the English speaking world.[1] "Mainstream economics" is called "orthodox economics" by its critics. "Heterodox economics" is an umbrella term used to cover various approaches, schools, or traditions. These include institutional, post-Keynesian, socialist, Marxian, feminist, Austrian, ecological, and social economics among others.[2][3] These views may be contrasted with the framework used by the majority of economists, commonly referred to by its supporters as mainstream and by critics asorthodox or conventional. Mainstream economics studies economic phenomena using microeconomic and macroeconomic theory and econometrics.[4] The International Confederation of Associations for Pluralism in Economics (ICAPE) does not define "heterodox economics" and has avoided defining its scope. ICAPE defines its mission as "promoting pluralism in economics." In defining a common ground in the "critical commentary," one writer described fellow heterodox economists as trying to do three things: (1) identify shared ideas that generate a pattern of heterodox critique across topics and chapters of introductory macro texts; (2) give special attention to ideas that link methodological differences to policy differences; and (3) characterize the common ground in ways that permit distinct paradigms to develop common differences with textbook economics in different ways.[5]
Contents
[hide]
1 History 2 Rejection of Neoclassical Economics
o o
2.1 Criticism of the neoclassical model of individual behavior 2.2 Criticism of the neoclassical model of market equilibrium
2.3 Criticism of the neoclassical model of labor markets
3 Most recent developments 4 Fields or schools of heterodox economics 5 See also 6 References 7 External links 8 Publications on heterodox economics
[edit]History
A number of heterodox schools of economic thought challenged the dominance of neoclassical economics after the neoclassical revolution of the 1870s. In addition to socialist critics of capitalism, heterodox schools in this period included advocates of various forms of mercantilism, such as the American School dissenters from neoclassical methodology such as the historical school, and advocates of unorthodox monetary theories such as Social credit. Other heterodox schools active before and during the Great Depression included Technocracy and Georgism. Physical scientists and biologists were the first individuals to use energy flows to explain social and economic development. Joseph Henry, an American physicist and first secretary of the Smithsonian Institution, remarked that the "fundamental principle of political economy is that the physical labor of man can only be ameliorated by the transformation of matter from a crude state to a artificial condition...by expending what is called power or energy."[6][7] The rise, and absorption into the mainstream of Keynesian economics, which appeared to provide a more coherent policy response to unemployment than unorthodox monetary or trade policies contributed to the decline of interest in these schools. After 1945, the neoclassical synthesis of Keynesian and neoclassical economics resulted in a clearly defined mainstream position based on a division of the field into microeconomics (generally neoclassical but with a newly developed theory of market failure) and macroeconomics (divided between Keynesian and monetarist views on such issues as the role of monetary policy). Austrians and post-Keynesians who dissented from this synthesis emerged as clearly defined heterodox schools. In addition, the Marxist and institutionalist schools remained active. Up to 1980 the most notable themes of heterodox economics in its various forms included:
1. rejection of the atomistic individual conception in favor of a socially embedded individual conception; 2. emphasis on time as an irreversible historical process; 3. reasoning in terms of mutual influences between individuals and social structures. From approximately 1980 mainstream economics has been significantly influenced by a number of new research programs, including behavioral economics, complexity economics, evolutionary economics, experimental economics, and neuroeconomics. As a consequence, some heterodox economists, such as John B. Davis, proposed that the definition of heterodox economics has to be adapted to this new, more complex reality:[8] ...heterodox economics post-1980 is a complex structure, being composed out of two broadly different kinds of heterodox work, each internally differentiated with a number of research programs having different historical origins and orientations: the traditional left heterodoxy familiar to most and the 'new heterodoxy' resulting from other science imports.[8]
[edit]Rejection
of Neoclassical Economics
There is no single "heterodox economic theory"; there are many different "heterodox theories" in existence. What they all share, however, is a rejection of the neoclassical orthodoxy as representing the appropriate tool for understanding the workings of economic and social life.[citation needed] The reasons for this rejection may vary. Some of the elements commonly found in heterodox critiques are listed below.
[edit]Criticism
of the neoclassical model of individual behavior
One of the most broadly accepted principles of neoclassical economics is the assumption of the "rationality of economic agents". Indeed, for a number of economists, the notion of rational maximizing behavior is taken to be synonymous with economic behavior (Becker 1976, Hirshleifer 1984). When some economists' studies do not embrace the rationality assumption, they are seen as placing the analyses outside the boundaries of the Neoclassical economics discipline (Landsberg 1989, 596). Neoclassical economics begins with the a priori assumptions that agents are rational and that they seek to maximize their individual utility (or profits) subject to environmental constraints. These assumptions provide the backbone for rational choice theory.
Many heterodox schools are critical of the homo economicus model of human behavior used in standard neoclassical model. A typical version of the critique is that of Satya Gabriel[9]: Neoclassical economic theory is grounded in a particular conception of human psychology, agency or decision-making. It is assumed that all human beings make economic decisions so as to maximize pleasure or utility. Some heterodox theories reject this basic assumption of neoclassical theory, arguing for alternative understandings of how economic decisions are made and/or how human psychology works. It is possible to accept the notion that humans are pleasure seeking machines, yet reject the idea that economic decisions are governed by such pleasure seeking. Human beings may, for example, be unable to make choices consistent with pleasure maximization due to social constraints and/or coercion. Humans may also be unable to correctly assess the choice points that are most likely to lead to maximum pleasure, even if they are unconstrained (except in budgetary terms) in making such choices. And it is also possible that the notion of pleasure seeking is itself a meaningless assumption because it is either impossible to test or too general to refute. Economic theories that reject the basic assumption of economic decisions as the outcome of pleasure maximization are heterodox.
[edit]Criticism
of the neoclassical model of market equilibrium
In microeconomic theory, cost-minimization by consumers and by firms implies the existence of supply and demand correspondences for which market clearing equilibrium prices exist, if there are large numbers of consumers and producers. Under convexity assumptions or under some marginal-cost pricing rules, each equilibrium will be Pareto efficient: In large economies, non-convexity also leads to quasi-equilibria that are nearly efficient. However, the concept of "market equilibrium" has been criticized by Austrians, postKeynesians and others, who object to applications of microeconomic theory to realworld markets, when such markets are not usefully approximated by microeconomic models. Heterodox economists assert that micro-economic models rarely capture reality. Mainstream microeconomics may be defined in terms of the "optimization and equilibrium", following the approaches of Paul Samuelson and Hal Varian. On the other
hand, heterodox economics may be labeled as falling in a "institutions-history-social structure" nexus.[3][10]

[edit]Criticism
of the neoclassical model of labor markets
Marxists view capitalism as inherently exploitative of labor, and regard neoclassical theories of the labor market as ideological devices to rationalise exploitation.[citation needed] Geoists view as exploitative of labor the privatization of natural resources but not the private ownership of real capital.[clarification needed] The issue is focused by the discussion of economic rent andproducer surplus. The primary charge from geoists is that neoclassical economics has aggregated natural resources and capital in a theory of production that is incorrect because of the economic differences of land versus capital.[citation needed]
[edit]Most
recent developments
Over the past two decades, the intellectual agendas of heterodox economists have taken a decidedly pluralist turn. Leading heterodox thinkers have moved beyond the established paradigms of Austrian, Feminist, Institutional-Evolutionary, Marxian, Post Keynesian, Radical, Social, and Sraffian economicsopening up new lines of analysis, criticism, and dialogue among dissenting schools of thought. This cross-fertilization of ideas is creating a new generation of scholarship in which novel combinations of heterodox ideas are being brought to bear on important contemporary and historical problems, such as socially-grounded reconstructions of the individual in economic theory; the goals and tools of economic measurement and professional ethics; the complexities of policymaking in today's global political economy; and innovative connections among formerly separate theoretical traditions (Marxian, Austrian, feminist, ecological, Sraffian, institutionalist, and post-Keynesian) (for a review of post-Keynesian economics, see Lavoie (1992); Rochon (1999)). David Colander, an advocate of complexity economics, argues that the ideas of heterodox economists are now being discussed in the mainstream without mention of the heterodox economists, because the tools to analyze institutions, uncertainty, and other factors have now been developed by the mainstream. He suggests that heterodox economists should embrace rigorous mathematics and attempt to work from within the mainstream, rather than treating it as an enemy.[11] Energy economics relating to thermoeconomics, is a broad scientific subject area which includes topics related to supply and use of energy. Thermoeconomists argue that
economic systems always involve matter, energy, entropy, and information.[12] Thermoeconomics is based on the proposition that the role of energy in biological evolution should be defined and understood through the second law of thermodynamics but in terms of such economic criteria as productivity, efficiency, and especially the costs and benefits of the various mechanisms for capturing and utilizing available energy to build biomass and do work.[13][14] As a result, thermoeconomics are often discussed in the field of ecological economics, which itself is related to the fields of sustainability and sustainable development.
[edit]Fields
or schools of heterodox economics
American Institutionalist School Austrian economics # (partly within, and partly outside mainstream economics)[15] Binary Economics Bioeconomics Complexity economics Ecological economics Evolutionary economics # (partly within mainstream economics) Econophysics Feminist economics # Georgism # (partly within mainstream economics) Green Economics Gesellian economics Institutional economics # (partly within mainstream economics) Islamic economics Marxian economics # Mutualism Neuroeconomics Participatory economics Post-Keynesian economics Post scarcity Socialist economics # Social economics (partially heterodox usage) Supply-side economics Sraffian economics #
Technocracy (Energy Accounting) Thermoeconomics
# Listed in Journal of Economic Literature codes scrolled to at JEL: B5 - Current Heterodox Approaches. Scrolled to at JEL: C73 - Stochastic and Dynamic games; Evolutionary games. Research is also being done in the multidisciplinary field of cognitive science on individual decision making, information as a general phenomena, distributed cognition and their implications on economic dynamicity. Some schools in the social sciences aim to promote certain perspectives: classical and modern political economy; economic history; economic sociology and anthropology; gender and racial issues in economics; economic ethics and social justice; development studies; and so on.
[edit]See
also
Austrian School Behavioral economics Bioeconomics Econophysics Kinetic exchange models of markets EAEPE Pluralism in economics Post-autistic economics Post-Keynesian Real-world economics review Review of Radical Political Economics
[edit]References
1.
^ Among the "fringes" of economics, Robert M. Solow names Austrian, Post-Keynesian, Marxist, and neo-Ricardian schools. Solow wrote, "In economics, "nevertheless, there is usually a definite consensusthere is one now" and Marx was an important and influential thinker, and Marxism has been a doctrine with intellectual and practical influence. The fact is, however, that most serious English-speaking economists regard Marxist economics as an irrelevant dead end.
comparing Marxist economists to "osteopaths". (Solow 1988) George Stigler similarly noted the professional marginality of the "neo-Ricardian" economists (who follow Piero Sraffa): "economists working in the Marxian-Sraffian tradition represent a small minority of modern economists, and ... their writings have virtually no impact upon the professional work of most economists in major English-language universities." (Stigler 1988, p. 1732) 2. ^ Frederic S. Lee, 2008. "heterodox economics," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. 3. ^
a b
Lawson, T. (2005). "The nature of heterodox economics". Cambridge Journal of Economics 30:
483505. doi:10.1093/cje/bei093. 4. 5. ^ C. Barry, 1998. Political-economy: A comparative approach. Westport, CT: Praeger.
[page needed]
^ Cohn, Steve (2003). "Common Ground Critiques of Neoclassical Principles Texts". Post-Autistic Economics Review (18, article 3).
6.
^ Cutler J. Cleveland, "Biophysical economics", Encyclopedia of Earth, Last updated: September 14, 2006.
7. 8.
^ Eric Zencey, 2009. "Mr. Soddys Ecological Economy",] The New York Times, April 12, p. WK 9. ^
a b
Davis, John B. (2006). "The Nature of Heterodox Economics". Post-Autistic Economics
Review (40): 2330. 9. ^ Satya J. Gabriel 2003. "Introduction to Heterodox Economic Theory." (blog), June 4, [1] Satya J. Gabriel is a Professor of Economics at Mount Holyoke College}
[self-published source?]
10. ^ Dow, S. C. (2000). "Prospects for the Progress in Heterodox Economics". Journal of the History of Economic Thought 22 (2): 157170. doi:10.1080/10427710050025367. 11. ^ David Colander, 2007. Pluralism and Heterodox Economics: Suggestions for an Inside the Mainstream Heterodoxy 12. ^ Stefan Baumgarter, 2004. Thermodynamic Models, Modeling in Ecological Economics (Ch. 18) 13. ^ Corning, Peter A.; Kline, Stephen J. (1998). "Thermodynamics, information and life revisited, Part II: Thermoeconomics and Control information". Systems Research and Behavioral Science 15: 453 482.doi:10.1002/(SICI)1099-1743(199811/12)15:6<453::AID-SRES201>3.0.CO;2-U. 14. ^ Peter A. Corning. 2002. Thermoeconomics Beyond the Second Law source: www.complexsystems.org 15. ^ 2003. A Companion to the History of Economic Thought. Blackwell Publishing. ISBN 0-631-225730 p. 452
[edit]
Economic system
Part of a series on
Economic systems
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An economic system is the structure that guides production, allocation of economic inputs, distribution of economic outputs, and consumption of goods andservices in an economy. It is a set of institutions and their social relations. Alternatively, it is the set of principles by which problems of economics are addressed, such as the economic problem of scarcity through allocation of finite productive resources.[1] An economic system is composed of people, institutions, rules, and relationships. For example, the convention of property, the institution of government, or the employeeemployer relationship. Examples of contemporary economic systems include capitalist systems, socialist systems, and mixed economies. "Economic systems" is the economics category that includes the study of such systems.
Contents
[hide]
1 Decision-making structures 2 Types
o o
2.1 Types of socialist systems 2.2 Types of mixed economies
3 Evolutionary economics 4 Context in society 5 List of economic systems 6 See also 7 Further reading 8 References 9 External links
[edit]Decision-making
structures
The decision-making structures of an economy determine the use of economic inputs (the means of production), distribution of output, the level of centralization in decisionmaking, and who makes these decisions. Decisions might be carried out by industrial councils, by a government agency, or by private owners. Some aspects of these structures include:
Coordination Mechanism: How information is obtained and used to coordinate economic activity. The two dominant forms of coordination include planning and themarket; planning can be either centralized or de-centralized, and the two mechanisms are not mutually exclusive.
Productive Property Rights: This refers to ownership (rights to the proceeds of output generated) and control over the use of the means of production. They may be owned privately, by the public, by those who use the property, or held in common by all of society.
Incentive System: A mechanism for inducing certain economic agents to engage in productive activity; it can be based on either material reward (compensation) or moral reward (social prestige).[2]
[edit]Types
Communist (red) and formerly Communist (orange) countries of the world.
There are several basic questions that must be answered in order for an economy to run satisfactorily. The scarcity problem, for example, requires answers to basic questions, such as: what to produce, how to produce it, and who gets what is produced. An economic system is a way of answering these basic questions, and different economic systems answer them differently. Many different objectives may be seen as desirable for an economy, likeefficiency, growth, liberty, and equality.[3] Economic systems can be divided by the way they allocate economic inputs (the means of production) and how they make decisions regarding the use of inputs. A common distinction of great importance is that between capitalism (a market economy) and socialism (aplanned economy). In a capitalist economic system, production is carried out to maximize private profit, decisions regarding investment and the use of the means of production are determined by competing business owners in the marketplace; production is based on the process of capital accumulation. The means of production are owned primarily by private enterprises and decisions regarding production and investment determined by private owners in capital markets. The range of capitalist systems range from lassiez-faire, with minimal government regulation and state enterprise, to regulated and social market systems, with the stated aim of ensuring social justice and a more equitable distribution of wealth (see welfare state) or ameliorating market failures (see economic intervention). In a socialist economic system, production is carried out to directly satisfy economic demand by producing goods and services for use; decisions regarding the use of the means of production are adjusted to satisfy economic demand, investment (control over the surplus value) is carried out through a mechanism of inclusive collective decision-making. The means of production are either publicly owned, or are owned by the workers cooperatively. A socialist economic system that is based on the process of capital accumulation, but seeks
to control or direct that process through state ownership or cooperative control to ensure stability, equality or expand decision-making power, are market socialist systems. The basic and general economic systems are:

Market economy ("hands off" systems, such as pure capitalism) Mixed economy (a hybrid that blends some aspects of both market and planned economies) Planned economy ("hands on" systems, such as state socialism) Traditional economy (a generic term for older economic systems) Participatory economics (a system where the production and distribution of goods is guided by public participation) Gift economy (where an exchange is made without any explicit agreement for immediate or future rewards) Barter economy (where goods and services are directly exchanged for other goods or services)
[edit]Types
of socialist systems
Socialist economic systems can be subdivided by their coordinating mechanism (planning and markets) into planned socialist and market socialist systems. Additionally, socialism can be divided based on the ownership of the means of production into those that are based on public ownership, worker or consumer cooperatives and common ownership (i.e., nonownership). Communism is a hypothetical stage of Socialist development articulated by Marx as "second stage Socialism" in Critique of the Gotha Program, whereby economic output is distributed based on need and not simply on the basis of labor contribution. The primary concern for socialist planned economies is to coordinate production to directly satisfy human needs/economic demand (as opposed to generate profit and satisfy needs as a byproduct of pursuing profit), to advance the productive forces of the economy while being immune to the systemic inefficiencies (cyclical processes) and crisis of overproduction that plagues capitalism so that production would be subject to the needs of society as opposed to being ordered around capital accumulation.[4][5] In orthodox Marxism, the mode of production is tantamount to the subject of this article, determining with a superstructure of relations the entirety of a given culture or stage of human development. Planned systems
Calculation in kind Indicative planning Planned economy State socialism
Market systems

Market socialism Socialist market economy Mutualism (economic theory)
[edit]Types
of mixed economies
Economic systems that contain substantial state, private and sometimes cooperative ownership and operated in mixed economies - i.e., ones that contain substantial amounts of both market activity and economic planning.
Distributism - Catholic ideal of a "third way" economy, featuring more distributed ownership Georgism - socialized rents on land Mixed economy

American School Dirigisme Nordic model Japanese system Mercantilism Social market economy also known as Soziale Marktwirtschaft Social corporatism Socialist-oriented market economy PROUT also known as Progressive Utilization Theory Indicative Planning also known as a planned market economy
[edit]Evolutionary
economics
See also: Evolutionary economics. Karl Marx's theory of economic development was based on the premise of evolving economic systems; specifically, over the course of history superior economic systems would replace inferior ones. Inferior systems were beset by internal contradictions
and inefficiencies that make them impossible to survive over the long term. In Marx's scheme, feudalism was replaced by capitalism, which would eventually be superseded by socialism.[6] Joseph Schumpeter had an evolutionary conception of economic development, but unlike Marx, he de-emphasized the role of class struggle in contributing to qualitative change in the economic mode of production. In subsequent world history, capitalism has replaced communism and planned economies, either completely or gradually, for example withperestroika and the dissolution of the Soviet Union, economic liberalisation in India, Chinese economic reform, and i Mi in Vietnam. Mainstream evolutionary economics continues to study economic change in modern times. There has also been renewed interest in understanding economic systems as evolutionary systems in the emerging field of Complexity economics.
[edit]Context
in society
An economic system can be considered a part of the social system and hierarchically equal to the law system, political system, cultural, etc. There is often a strong correlation between certainideologies, political systems and certain economic systems (for example, consider the meanings of the term "communism"). Many economic systems overlap each other in various areas (for example, the term "mixed economy" can be argued to include elements from various systems). There are also various mutually exclusive hierarchical categorizations.
[edit]List
of economic systems
This section overlaps with other sections too much. It should be combined with the rest of the article.
Please improve this article if you can.
This list attempts to sort all possible economic systems in alphabetical order, without any division or hierarchization.

American School Anarchism Anarcho-capitalism Anarcho-communism Autarky Barter economy Buddhist economy Capitalism
Colonialism Communism Corporatism Corporate capitalism Digital economy Distributism Dirigisme Fascist socialization Feudalism Georgism Green economy Hydraulic despotism Inclusive democracy Information economy Internet economy Islamic economics Japanese System Knowledge economy Libertarian communism Libertarian socialism Market economy Market socialism Marxian economics Mercantilism Mixed economy Mutualism National Socialism Natural economy Neo-colonialism Network economy Nordic model Non-property system Parecon
Participatory economy Planned economy PROUTist economy Self-management Social market economy Socialism Socialist market economy Syndicalism Subsistence economy Traditional economy Virtual economy
[edit]See
also
Economy History of economic thought Political economy Economic ideology
[edit]Further
reading
Richard Bonney (1995), Economic Systems and State Finance, 680 pp. David W. Conklin (1991), Comparative Economic Systems, Cambridge University Press, 427 pp. George Sylvester Counts (1970), Bolshevism, Fascism, and Capitalism: An Account of the Three Economic Systems. Robert L. Heilbroner and Peter J. Boettke (2007). "Economic Systems". The New Encyclopdia Britannica, v. 17, pp. 90815. Harold Glenn Moulton, Financial Organization and the Economic System, 515 pp. Jacques Jacobus Polak (2003), An International Economic System, 179 pp. Frederic L. Pryor (1996), Economic Evolution and Structure: 384 pp. Frederic L. Pryor (2005), Economic Systems of Foraging, Agricultural, and Industrial Societies, 332 pp. Graeme Donald Snooks, Global Transition: A General Theory, PalgraveMacmillan, 1999, 395 pp.
[edit]References
1. 2.
^ NA (2007). "economic systems," The New Encyclopdia Britannica, v. 4, p. 357. ^ Comparing Economic Systems in the Twenty-First Century, 2003, by Gregory and Stuart. ISBN 0-61826181-8.
3. 4.
^ David W. Conklin (1991), Comparative Economic Systems, University of Calgary Press, p.1. ^ Socialism: Still Impossible After All These Years, on Misses.org. Retrieved February 15, 2010, from Mises.org http://mises.org/journals/scholar/Boettke.pdf, What Socialism means: " The ultimate end of socialism was the 'end of history', in which perfect social harmony would permanently be established. Social harmony was to be achieved by the abolition of exploitation, the transcendence of alienation, and above all, the transformation of society from the 'kingdom of necessity' to the 'kingdom of freedom.' How would such a world be achieved? The socialists informed us that by rationalizing production and thus advancing material production beyond the bounds reachable under capitalism, socialism would usher mankind into a postscarcity world."
5.
^ Socialism and Calculation, on worldsocialism.org. Retrieved February 15, 2010, from worldsocialism.org: http://www.worldsocialism.org/spgb/overview/calculation.pdf: "Although money, and so monetary calculation, will disappear in socialism this does not mean that there will no longer be any need to make choices, evaluations and calculations...Wealth will be produced and distributed in its natural form of useful things, of objects that can serve to satisfy some human need or other. Not being produced for sale on a market, items of wealth will not acquire an exchange-value in addition to their use-value. In socialism their value, in the normal non-economic sense of the word, will not be their selling price nor the time needed to produce them but their usefulness. It is for this that they will be appreciated, evaluated, wanted. . . and produced."
6.
^ Comparing Economic Systems in the Twenty-First Century, 2003, by Gregory and Stuart. ISBN 0-61826181-8.
[edit]
Difference Between Classical & Neoclassical Economics

By Andrew Button, eHow Contributor updated February 07, 2011
Print this article
Neoclassical economics evolved from classical economics. Economic history is marked by many revolutions and paradigm shifts. In the early 20th century, the shift from classical to neoclassical economics brought about numerous changes in the way people thought about wealth. The main intellectual shift ushered in by neoclassical economics was the idea of value as a function of perception, a sharp departure from the classical theory of value as cost of production. Many of the differences between classical and neoclassical economics can be attributed to this shift.
1. Utility
o
The main difference between classical and neoclassical economics lies in the concept of utility. In classical economics, utility is conspicuously absent in theories of value, labor and growth. In the classical school, equilibrium was a function of wages and interest wages rather than supply and demand. By contrast, utility is given a very high priority in the neoclassical school. Also in the neoclassical school, economic equilibrium is a function of supply and demand across all markets, with the supply and demand of all goods functions of their utility and scarcity.
Value
o
The classical and neoclassical theories of value are very different. In the classical school, the value of a good is equivalent to the cost of producing it. In the neoclassical school, the value of a good is a function of the demand for it and the supply of it. Therefore, in classical economics, value is an inherent property; in neoclassical economics, value is a perceived property. In classical economics, value is cost; in neoclassical economics, value is utility.
Profit
The classical and neoclassical schools of economics both place value on profit but in distinctly different ways. In classical economics, profit is a payment to a capitalist for performing a socially useful function. This definition circumvents the apparent problem of classical value theory: If value equals cost, then where do profits come from? Neoclassical economists define profit in a much simpler way. To neoclassical economists, profit is simply a surplus of earnings over expenses. If the supply and demand for a good results in a higher price than that of the labor and capital that went into producing the good, then the good and its components simply have different equilibrium prices.
Rationality
o
Rationality is emphasized in neoclassical economics but not in classical economics. In neoclassical economics, individual agents have rational preferences that guide their purchasing and selling behavior: Individuals seek to maximize utility, and firms seek to maximize profits. In classical economics, no distinction is made between firm and individual according to the principle of "rationality. In classical economics, the profits that accrue to firms are the same as wages that accrue to workers, economic benefits brought on by the invisible hand of the free market.
Equilibrium
o
Classical and neoclassical definitions of equilibrium are fundamentally different. In classical economics, equilibrium occurs when savings are equal to investment. In neoclassical economics, equilibrium occurs at the intersection point of the supply and demand curves or, in macroeconomics, aggregate supply and aggregate demand curves. This is one of the most fundamental differences between classical and neoclassical economics because the two concepts of equilibrium are based on entirely different components.
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References
The Economist: Glossary Library of Economics and Liberty: The Concise Encyclopedia of Economics, Neoclassical Economics; E. Roy Weintraub The History of Economic Thought: Schools of Thought--Neoclassical Schools Economist's View: Profit Theory in Neoclassical Economics Photo Credit Economic crisis image by Denis Ivatin from Fotolia.com;
Read more: Difference Between Classical & Neoclassical Economics | eHow.com http://www.ehow.com/info_7904133_difference-between-classical-neoclassicaleconomics.html#ixzz1UKJyeJQO
Schools of economic thought

Schools of economic thought describes the variety of approaches in the history of economic theory noteworthy enough to be described as a 'school of thought'. While economists do not always fit into particular schools, particularly in modern times, classifying economists into schools of thought is common. Economic thought may be roughly divided into three phases: premodern (Greco-Roman,Indian, Persian, Arab, and Chinese), early modern (mercantilist, physiocrats) and modern (beginning with Adam Smith and classical economics in the late 18th century). Systematic economic theory has been developed mainly since the beginning of what is termed the modern era. Currently, the great majority of economists follow an approach referred to as mainstream economics (sometimes called 'orthodox economics'). Within the mainstream, distinctions can be made between the Saltwater school (associated with Berkeley, Harvard, MIT, Pennsylvania, Princeton, and Yale), and the more laissez-faire ideas of the Freshwater school (represented by the Chicago school of economics, Carnegie Mellon University, the University of Rochester and the University of Minnesota). Both of these schools of thought are associated with the neoclassical synthesis. Some influential approaches of the past, such as the historical school of economics and institutional economics, have become defunct or have declined in influence, and are now considered heterodox approaches.
Contents
[hide]
1 Ancient economic thought 2 Islamic economics 3 Scholasticism 4 Mercantilism 5 Physiocrats 6 Classical political economy 7 American (National) School 8 French liberal school 9 German historical school 10 English historical school 11 French historical school 12 Utopian economics 13 Marxian economics
14 State socialism 15 Ricardian socialism 16 Anarchist economics 17 Distributism 18 Institutional economics 19 New institutional economics 20 Neoclassical economics 21 Lausanne school 22 Austrian school 23 Stockholm school 24 Keynesian economics 25 Chicago school 26 Carnegie school 27 Neo-Ricardianism 28 Modern schools 29 Current heterodox schools 30 Other 20th century schools 31 Viewpoints within mainstream economics 32 Viewpoints outside economics 33 See also 34 Notes 35 References
[edit]Ancient
economic thought
Main article: Ancient economic thought
Chanakya (Kautilya) Xenophon Aristotle Qin Shi Huang Wang Anshi
[edit]Islamic
economics
Main articles: Islamic economic jurisprudence and Islamic economics in the world
Islamic economics is the practice of economics in accordance with Islamic law. The origins can be traced back to the Caliphate,[1] where an early market economy and some of the earliest forms ofmerchant capitalism took root between the 8th12th centuries, which some refer to as "Islamic capitalism".[2] Islamic economics seeks to enforce Islamic regulations not only on personal issues, but to implement broader economic goals and policies of an Islamic society, based on uplifting the deprived masses. It was founded on free and unhindered circulation of wealth so as to handsomely reach even the lowest echelons of society. One distinguishing feature is the tax on wealth (in the form of both Zakat and Jizya), and bans levying taxes on all kinds of trade and transactions (Income/Sales/Excise/Import/Export duties etc.). Another distinguishing feature is prohibition of interest in the form of excess charged while trading in money. Its pronouncement on use of paper currency also stands out. Though promissory notes are recognized, they must be fully backed by reserves. Fractional-reserve banking is disallowed as a form of breach of trust. It saw innovations such as trading companies, big businesses, contracts, bills of exchange, longdistance international trade, the first forms of partnership (mufawada) such as limited partnerships(mudaraba), and the earliest forms of credit, debt, profit, loss, capital (al-mal), capital accumulation (nama almal),[3] circulating capital, capital expenditure, revenue, cheques, promissory notes,[4]trusts (see Waqf), startup companies,[5] savings accounts, transactional accounts, pawning, loaning, exchange rates, bankers, money changers, ledgers, deposits, assignments, the double-entry bookkeeping system,[6] lawsuits,[7] and agency institution.[8][9] This school has seen a revived interest in development and understanding since the later part of 20th century.
Muhammad Abu Hanifa an-Numan Abu Yusuf Al-Farabi (Alpharabius) Shams al-Mo'ali Abol-hasan Ghaboos ibn Wushmgir (Qabus) Ibn Sina (Avicenna) Ibn Miskawayh Al-Ghazali (Algazel) Al-Mawardi Nasr al-Dn al-Ts (Tusi) Ibn Taymiyyah Ibn Khaldun Al-Maqrizi
[edit]Scholasticism
Main article: Scholasticism
Nicole Oresme Thomas Aquinas School of Salamanca Leonardus Lessius
[edit]Mercantilism
Main article: Mercantilism Economic policy in Europe during the late Middle Ages and early Renaissance treated economic activity as a good which was to be taxed to raise revenues for the nobility and the church. Economic exchanges were regulated by feudal rights, such as the right to collect a toll or hold a faire, as well as guild restrictions and religious restrictions on lending. Economic policy, such as it was, was designed to encourage trade through a particular area. Because of the importance of social class, sumptuary laws were enacted, regulating dress and housing, including allowable styles, materials and frequency of purchase for different classes. Niccol Machiavelli in his book The Prince was one of the first authors to theorize economic policy in the form of advice. He did so by stating that princes and republics should limit their expenditures, and prevent either the wealthy or the populace from despoiling the other. In this way a state would be seen as "generous" because it was not a heavy burden on its citizens.
Gerard de Malynes Edward Misselden Thomas Mun Jean Bodin Jean Baptiste Colbert Josiah Child William Petty John Locke Charles Davenant Dudley North Ferdinando Galiani James Denham-Steuart
[edit]Physiocrats
This section cites its sources but does not provide page references. You can help to improve it by introducing citations that are more precise.
Main article: Physiocrats In his Austrian Perspective on the History of Economic Thought, Murray Rothbard argued that the modern history of economics should properly begin with the physiocrats rather than with Adam Smith.
Anne Robert Jacques Turgot Franois Quesnay John Law Pierre le Pesant de Boisguilbert Richard Cantillon
[edit]Classical
political economy
Main article: Classical economics Classical economics, also called classical political economy, was the original form of mainstream economics of the 18th and 19th centuries. Classical economics focuses on the tendency of markets to move to equilibrium and on objective theories of value. Neo-classical economics differs from classical economics primarily in being utilitarian in its value theory and using marginal theory as the basis of its models and equations. Marxist economics also descends from classical theory. Anders Chydenius (17291803) was the leading classical liberal of Nordic history. A Finnish priest and member of parliament, he published a book called The National Gain in 1765, in which he proposes ideas of freedom of trade and industry and explores the relationship between economy and society and lays out the principles of liberalism, all of this eleven years before Adam Smith published a similar and more comprehensive book, The Wealth of Nations. According to Chydenius, democracy, equality and a respect for human rights were the only way towards progress and happiness for the whole of society.
Francis Hutcheson Bernard de Mandeville David Hume Adam Smith Thomas Malthus James Mill Francis Place David Ricardo Henry Thornton
John Ramsay McCulloch James Maitland, 8th Earl of Lauderdale Jeremy Bentham Jean Charles Lonard de Sismondi Johann Heinrich von Thnen John Stuart Mill Karl Marx Henry George Nassau William Senior Edward Gibbon Wakefield John Rae Thomas Tooke Robert Torrens
[edit]American
(National) School
Main article: American School (economics) The American School owes its origin to the writings and economic policies of Alexander Hamilton, the first Treasury Secretary of the United States. It emphasized high tariffs on imports to help develop the fledgling American manufacturing base and to finance infrastructure projects, as well as National Banking, Public Credit, and government investment into advanced scientific and technological research and development. Friedrich List, one of the most famous proponents of the economic system, named it the National System, and was the main impetus behind the development of the GermanZollverein and the economic policies of Germany under Chancellor Otto Von Bismarck beginning in 1879.
Alexander Hamilton John Quincy Adams Henry Clay Mathew Carey Henry Charles Carey Abraham Lincoln Friedrich List Otto Von Bismarck Arthur Griffith William McKinley
[edit]French
liberal school
Main article: French Liberal School
Frdric Bastiat Maurice Block Pierre Paul Leroy-Beaulieu Gustave de Molinari Yves Guyot Jean-Baptiste Say Lon Say
[edit]German
historical school
Main article: Historical school of economics The Historical school of economics was an approach to academic economics and to public administration that emerged in 19th century in Germany, and held sway there until well into the 20th century. The Historical school held that history was the key source of knowledge about human actions and economic matters, since economics was culture-specific, and hence not generalizable over space and time. The School rejected the universal validity of economic theorems. They saw economics as resulting from careful empirical and historical analysis instead of from logic and mathematics. The School preferred historical, political, and social studies to self-referential mathematical modelling. Most members of the school were also Kathedersozialisten, i.e. concerned with social reform and improved conditions for the common man during a period of heavy industrialization. The Historical School can be divided into three tendencies: the Older, led by Wilhelm Roscher, Karl Knies, and Bruno Hildebrand; the Younger, led by Gustav von Schmoller, and also including Etienne Laspeyres, Karl Bcher, Adolph Wagner, and to some extent Lujo Brentano; the Youngest, led by Werner Sombartand including, to a very large extent, Max Weber. Predecessors included Friedrich List. The Historical school largely controlled appointments to Chairs of Economics in German universities, as many of the advisors of Friedrich Althoff, head of the university department in the Prussian Ministry of Education 1882-1907, had studied under members of the School. Moreover, Prussia was the intellectual powerhouse of Germany and so dominated academia, not only in central Europe, but also in the United States until about 1900, because the American economics profession was led by holders of German Ph.Ds. The Historical school was involved in the Methodenstreit ("strife over method") with the Austrian School, whose orientation was more theoretical and a prioristic. In English speaking countries, the Historical school is perhaps the least known and least understood approach to the study of economics, because it differs radically from the now-dominant Anglo-American analytical point of view. Yet the
Historical school forms the basis - both in theory and in practice - of the social market economy, for many decades the dominant economic paradigm in most countries of continental Europe. The Historical school is also a source of Joseph Schumpeter's dynamic, change-oriented, and innovation-based economics. Although his writings could be critical of the School, Schumpeter's work on the role of innovation and entrepreneurship can be seen as a continuation of ideas originated by the Historical School, especially the work of von Schmoller and Sombart. Although not nearly as famous as its German counterpart, there was also an English Historical School, whose figures included Francis Bacon, Auguste Comte, and Herbert Spencer. It was this school that heavily critiqued the deductive approach of the classical economists, especially the writings of David Ricardo. This school revered the inductive process and called for the merging of historical fact with those of the present period. Included in this school are: William Whewell, Richard Jones, Walter Bagehot, Thorold Rogers, Arnold Toynbee, and William Cunningham just to name a few.
Wilhelm Roscher Gustav von Schmoller Werner Sombart Max Weber Joseph Schumpeter Karl Polanyi
[edit]English
historical school
Main article: English historical school of economics
Edmund Burke Richard Jones Thomas Edward Cliffe Leslie Walter Bagehot Thorold Rogers William J. Ashley William Cunningham
[edit]French
historical school
Clement Juglar Charles Gide Albert Aftalion mile Levasseur
Franois Simiand
[edit]Utopian
economics
William Godwin Charles Fourier Robert Owen Saint-Simon
[edit]Marxian
economics
Main article: Marxian economics Marxian economics descended from the work of Karl Marx and Friedrich Engels. This school focuses on the labor theory of value and what Marx considered to be the exploitation of labour by capital. Thus, in Marxian economics, the labour theory of value is a method for measuring the exploitation of labour in a capitalist society, rather than simply a theory of price.[10][11]
Karl Marx Friedrich Engels Karl Kautsky Rosa Luxemburg Georgy Valentinovich Plekhanov Nikolai Bukharin Otto Baner Ernst Mandel Paul Sweezy Nobuo Okishio Shigeto Tsuru
[edit]State
socialism
Main article: Socialist economics
Henri de Saint-Simon Ferdinand Lassalle Johann Karl Rodbertus Eduard Berstein Fabian Society
Market socialism
[edit]Ricardian
socialism
Main article: Ricardian socialism
John Francis Bray John Gray Thomas Hodgskin
[edit]Anarchist
economics
Main article: Anarchist economics Anarchist economics is a set of theories which seeks to outline modes of production and exchange that are not governed by coercive social institutions. Anarcho-capitalists desire a society where the dynamics of competitive free markets are allowed to operate free of compulsory state control; many other anarchist economists, on the other hand, believe economies cannot be truly free unless capitalist property and the capitalist mode of production are abolished.
Charles Fourier Pierre-Joseph Proudhon Peter Kropotkin Mikhail Bakunin
[edit]Distributism
Main article: Distributism Distributism is an economic philosophy that was originally formulated in the late 19th century and early 20th century by Catholic thinkers to reflect the teachings of Pope Leo XIII's encyclical Rerum Novarum, and Pope Pius's XI encyclical Quadragesimo Anno. It seeks to pursue a third way between capitalism and socialism, desiring to order society according to Christian principles of justice while still preserving private property.
G. K. Chesterton Hilaire Belloc
[edit]Institutional
economics
Main article: Institutional economics
Gunnar Myrdal Thorstein Veblen
John Rogers Commons Wesley Clair Mitchell John Maurice Clark Robert A. Brady Clarence Edwin Ayres Romesh Dutt John Kenneth Galbraith Geoffrey Hodgson Ha-Joon Chang
[edit]New
institutional economics
Main article: New institutional economics
Douglass North Oliver E. Williamson Ronald Coase Daron Acemolu
[edit]Neoclassical
economics
Main article: Neoclassical economics Neoclassical economics is the dominant form of economics used today and has the highest amount of adherents among economists. It is often referred to by its critics as Orthodox Economics. The more specific definition this approach implies was captured by Lionel Robbins in 1932: "the science which studies human behavior as a relation between scarce means having alternative uses." Scarcity means that available resources are insufficient to satisfy all wants and needs; if there is no scarcity and no alternative uses of available resources, then there is no economic problem.
William Stanley Jevons Francis Ysidro Edgeworth Alfred Marshall John Bates Clark Irving Fisher Knut Wicksell
[edit]Lausanne
school
Main article: Lausanne School
Antoine Augustin Cournot Lon Walras Vilfredo Pareto
[edit]Austrian
school
Main article: Austrian School The Austrian economic school rejects some important (and other minor) classical and neo-classical theories such as the labor theory of value, induction of theory from statistical data, 'loose money,' the importance of mathematics and economic modeling, and the desirability of government intervention in the market outside of the preservation of private property and the force of contract. They explain the choices and actions of human beings through subjective evaluations and marginal utility (contributing this idea to neo-classical economics). They follow deductive chains of causal reasoning to discover theories of action. They hold that the entrepreneur is the driving force of economic growth. One of the main thrusts of the Austrian School is the rejection of the Boom-Bust cycle as a normal economic pattern, holding that such cycles are symptomatic of currency manipulation by central planners. The school, although often controversial, has been historically influential, drawing praise (for example) from former Federal Reserve Chairman Alan Greenspan during his earlier years, though the predominance of Austrian economists generally agree that Greenspan later rejected Austrian economic principles. Perhaps the best known Austrian economist is Friedrich von Hayek, who was awarded the Nobel Prize in Economics "for pioneering work in the theory of money and economic fluctuations and for penetrating analysis of the interdependence of economic, social and institutional phenomena."
Carl Menger Ludwig von Mises Friedrich Hayek Henry Hazlitt Murray N. Rothbard Hans-Hermann Hoppe
[edit]Stockholm
school
Main article: Stockholm School
Gunnar Myrdal Bertil Ohlin
[edit]Keynesian
economics
Main articles: Keynesian economics, Post Keynesian economics, and New-Keynesian economics Keynesian economics has developed from the work of John Maynard Keynes and focused on macroeconomics in the short-run, particularly the rigidities caused when prices are fixed. It has two successors. Post-Keynesian economics is an alternative school - one of the successors to the Keynesian tradition with a focus on macroeconomics. They concentrate on macroeconomic rigidities and adjustment processes, and research micro foundations for their models based on real-life practices rather than simple optimizing models. Generally associated with Cambridge, England and the work ofJoan Robinson (see Post-Keynesian economics). NewKeynesian economics is the other school associated with developments in the Keynesian fashion. These researchers tend to share with otherNeoclassical economists the emphasis on models based on micro foundations and optimizing behavior, but focus more narrowly on standard Keynesian themes such as price and wage rigidity. These are usually made to be endogenous features of these models, rather than simply assumed as in older style Keynesian ones (see New-Keynesian economics).
John Maynard Keynes Joan Robinson N. Gregory Mankiw Paul Krugman Peter Bofinger Joseph Stiglitz
[edit]Chicago
school
Main article: Chicago school (economics)
Frank H. Knight Jacob Viner Milton Friedman George Stigler Harry Markowitz Merton Miller Robert Lucas, Jr. Eugene Fama Myron Scholes Gary Becker Edward C. Prescott James Heckman
[edit]Carnegie
school
Main article: Carnegie School
Herbert Simon Richard Cyert James March Victor Vroom Oliver E. Williamson
[edit]Neo-Ricardianism
Main article: Neo-Ricardianism
John von Neumann Piero Sraffa Luigi L. Pasinetti Vladimir Karpovich Dmitriev
[edit]Modern
schools
Mainstream economics is a term used to distinguish economics in general from heterodox approaches and schools within economics. It begins with the premise that resources are scarce and that it is necessary to choose between competing alternatives. That is, economics deals with tradeoffs. With scarcity, choosing one alternative implies forgoing another alternativethe opportunity cost. The opportunity cost expresses an implicit relationship between competing alternatives. Such costs, considered as prices in a market economy, are used for analysis of economic efficiency or for predicting responses to disturbances in a market. In a planned economy comparable shadow price relations must be satisfied for the efficient use of resources, as first demonstrated by the Italian economist Enrico Barone. Economists represent incentives and costs as playing a pervasive role in shaping decision making. An immediate example of this is the consumer theory of individual demand, which isolates how prices (as costs) and income affect quantity demanded. Modern mainstream economics builds primarily on neoclassical economics, which began to develop in the late 19th century. Mainstream economics also acknowledges the existence of market failure and insights from Keynesian economics. It uses models of economic growth for analyzing long-run variables affecting national income. It employs game theory for modeling market or non-market behavior. Some important insights on collective behavior (for example, emergence of organizations) have been incorporated through the new institutional economics. A definition that captures much of modern economics is that of Lionel Robbins in a 1932 essay: "the science which studies human behaviour as a
relationship between ends and scarce means which have alternative uses." Scarcity means that available resources are insufficient to satisfy all wants and needs. Absent scarcity and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choice, as affected by incentives and resources. Economics generally is the study of how people allocate scarce resources among alternative uses.
Heterodox economics: Some schools of thought at variance with the microeconomic formalism of neoclassical economics are listed here, and include: institutional economics, Marxist economics,feminist economics, socialist economics, binary economics, ecological economics, bioeconomics and thermoeconomics.
[edit]Current
heterodox schools
In the late 19th century, a number of heterodox schools contended with the neoclassical school that arose following the marginal revolution. Most survive to the present day as self-consciously dissident schools, but with greatly diminished size and influence relative to mainstream economics. The most significant are Institutional economics, Marxian economics and the Austrian School. The development of Keynesian economics was a substantial challenge to the dominant neoclassical school of economics. Keynesian views eventually entered the mainstream as a result of the Keynesian-neoclassical synthesis developed by John Hicks. The rise of Keynesianism, and its incorporation into mainstream economics, reduced the appeal of heterodox schools. However, advocates of a more fundamental critique of orthodox economics formed a school of Post-Keynesian economics. More recent heterodox developments include evolutionary economics (though this term is also used to describe institutional economics), feminist, Green economics, Post-autistic economics, andThermoeconomics Most heterodox views are politically left-wing and critical of capitalism. The most notable exception is Austrian economics, which is politically aligned with libertarianism. Georgescu-Roegen reintroduced into economics, the concept of entropy from thermodynamics (as distinguished from what, in his view, is the mechanistic foundation of neoclassical economics drawn from Newtonian physics) and did foundational work which later developed into evolutionary economics. His work contributed significantly to Thermoeconomics and to ecological economics.[12][13][14][15][16]
[edit]Other
20th century schools
Famous schools or trends of thought referring to a particular style of economics practiced at and disseminated from well-defined groups of academicians that have become known worldwide, may be generally summarized as follows:
Public Choice school New Keynesian economics New classical macroeconomics Evolutionary economics Austrian School Chicago School Freiburg School Keynesian economics Post-Keynesian economics School of Lausanne Stockholm school Marxian economics Institutional economics (and evolutionary economics) Neo-Ricardianism Constitutional economics
In the late 20th Century three of the areas of study which are producing change in economic thinking are: riskbased rather than price-based models, imperfect economic actors, and treating economics as a biological science, based on evolutionary norms rather than abstract exchange. The study of risk has been influential, which viewed variations in price over time as more important than actual price. This particularly applies to financial economics where risk-return tradeoffs are the crucial decisions to be made. The most important area of growth has been in the study of information and decision. Examples of this school include the work of Joseph Stiglitz. Problems of asymmetric information and moral hazard, both based around information economics, profoundly affect modern economic dilemmas like executive stock options, insurance markets, and Third-World debt relief. Finally, there are a series of economic ideas rooted in the conception of economics as a branch of biology, including the idea that energy relationships rather than price relationships determine economic structure, and the use of fractal geometry to create economic models. (See Energy Economics.) In its infancy is the application of non-linear dynamics to economic theory, as well as the application of evolutionary psychology. So far the most visible work has been in the area of applying fractals to market analysis, particularly arbitrage. (See Complexity economics.) Another infant branch of economics is neuroeconomics. This combines neuroscience, economics, and psychology to study how we make choices.
[edit]Viewpoints
within mainstream economics
Mainstream economics encompasses a wide (but not unbounded) range of views. Politically, most mainstream economists hold views ranging from laissez-faire to modern liberalism. There are also divergent views on
particular issues within economics, such as the effectiveness and desirability of Keynesian macroeconomic policy. Although, historically, few mainstream economists have regarded themselves as members of a "school", many would identify with one or more of neoclassical economics, monetarism, Keynesian economics, new classical economics, Austrian School, or behavioral economics.
[edit]Viewpoints
outside economics
Other viewpoints on economic issues from outside economics include dependency theory and world systems theory. An example of another economic system which has recently been advocated is theparticipatory economics model. This uses neither market methods nor centralised methods for allocation, but incorporates many local positive and negative feedback loops in order to respond to the most positive human values. One example of this school of thought is the Post Autistic Economics movement.
[edit]See
also
History of economic thought Schools of economic thought and methodology JEL: B Subcategories of the JEL classification codes Kameralism Manchester school School of Salamanca Constitutional economics
[edit]Notes
1. 2.
^ The Cambridge economic history of Europe, p. 437. Cambridge University Press, ISBN 0521087090. ^ Subhi Y. Labib (1969), "Capitalism in Medieval Islam", The Journal of Economic History 29 (1), pp. 7996 [81, 83, 85, 90, 93, 96].
3.
^ Jairus Banaji (2007), "Islam, the Mediterranean and the rise of capitalism", Historical Materialism15 (1), pp. 4774, Brill Publishers.
4.
^ Robert Sabatino Lopez, Irving Woodworth Raymond, Olivia Remie Constable (2001), Medieval Trade in the Mediterranean World: Illustrative Documents, Columbia University Press, ISBN 0231123574.
5.
^ Timur Kuran (2005), "The Absence of the Corporation in Islamic Law: Origins and Persistence",American Journal of Comparative Law 53, pp. 785834 [7989].
6.
^ Subhi Y. Labib (1969), "Capitalism in Medieval Islam", The Journal of Economic History 29 (1): 7996 [923]
7.
^ Ray Spier (2002), "The history of the peer-review process", Trends in Biotechnology 20 (8), p. 357-358 [357].
8.
^ Said Amir Arjomand (1999), "The Law, Agency, and Policy in Medieval Islamic Society: Development of the Institutions of Learning from the Tenth to the Fifteenth Century", Comparative Studies in Society and History 41, pp. 26393. Cambridge University Press.
9.
^ Samir Amin (1978), "The Arab Nation: Some Conclusions and Problems", MERIP Reports 68, pp. 314 [8, 13].
10. ^ Roemer, J.E. (1987). "Marxian Value Analysis". The New Palgrave: A Dictionary of Economics. London and New York: Macmillan and Stockton. pp. v. 3, 383. ISBN 0333372352. 11. ^ Mandel, Ernest (1987). "Marx, Karl Heinrich". The New Palgrave: A Dictionary of Economics. London and New York: Macmillan and Stockton. pp. v. 3, 372, 376. ISBN 0333372352. 12. ^ Cleveland, C. and Ruth, M. 1997. When, where, and by how much do biophysical limits constrain the economic process? A survey of Georgescu-Roegen's contribution to ecological economics.Ecological Economics 22: 203-223. 13. ^ Daly, H. 1995. On Nicholas Georgescu-Roegens contributions to economics: An obituary essay.Ecological Economics 13: 149-54. 14. ^ Mayumi, K. 1995. Nicholas Georgescu-Roegen (1906-1994): an admirable epistemologist.Structural Change and Economic Dynamics 6: 115-120. 15. ^ Mayumi,K. and Gowdy, J. M. (eds.) 1999. Bioeconomics and Sustainability: Essays in Honor of Nicholas Georgescu-Roegen. Cheltenham: Edward Elgar. 16. ^ Mayumi, K. 2001. The Origins of Ecological Economics: The Bioeconomics of Georgescu-Roegen. London: Routledge.
[edit]References
Spiegel, Henry William. 1991. The Growth of Economic Thought. Durham & London: Duke University Press. ISBN 0822309734
The History of Economic Thought Website at the New School John Eatwell, Murray Milgate, and Peter Newman, ed. (1987). The New Palgrave: A Dictionary of Economics, v. 4, Appendix IV, History of Economic Thought and Doctrine, "Schools of Thought," p. 980 (list of 23 schools)
History of economic thought

For historical changes in economies, see Economic history. For different groupings of economists, see Schools of economic thought.
The examples and perspective in this article may not represent a worldwide view of the subject. Please improve this article and discuss the issue on the talk page. (October 2010)
Wealth of Nations is widely considered to be the first work in modern economics.
The history of economic thought deals with different thinkers and theories in the subject that became political economy and economics from the ancient world to the present day. It encompasses many disparate schools of economic thought. Greek writers such as the philosopherAristotle examined ideas about the "art" of wealth acquisition and questioned whether property is best left in private or public hands. In medieval times, scholars such as Thomas Aquinas argued that it was a moral obligation of businesses to sell goods at a just price.
British philosopher Adam Smith is often cited as the father of modern economics for his treatise The Wealth of Nations (1776).[1][2] His ideas built upon a considerable body of work from predecessors in the eighteenth century particularly the Physiocrats. His book appeared on the eve of the Industrial Revolution with associated major changes in the economy.[3] Smith's successors included such classical economists as theRev. Thomas Malthus, Jean-Baptiste Say, David Ricardo, and John Stuart Mill. They examined ways the landed, capitalist and labouring classes produced and distributed national output and modeled the effects of population and international trade. In London, Karl Marx castigated the capitalist system, which he described as exploitative and alienating. From about 1870, neoclassical economics attempted to erect a positive, mathematical and scientifically grounded field above normative politics. After the wars of the early twentieth century, John Maynard Keynes led a reaction against what has been described as governmental abstentionfrom economic affairs, advocating interventionist fiscal policy to stimulate economic demand and growth. With a world divided between thecapitalist first world, the communist second world, and the poor of the third world, the post-war consensus broke down. Others like Milton Friedman and Friedrich von Hayek warned of The Road to Serfdom and socialism, focusing their theories on what could be achieved through better monetary policy and deregulation. As Keynesian policies seemed to falter in the 1970s there emerged the so called New Classicalschool, with prominent theorists such as Robert Lucas and Edward Prescott. Governmental economic policies from the 1980s were challenged, and development economists like Amartya Sen and information economists like Joseph Stiglitz introduced new ideas to economic thought in the twenty-first century.
Economics
General categories

Game theory
Optimization Computational Econometrics Experimental Economic statistics National accounting

Lists
Contents
[hide]
1 Early economic thought
o o
1.1 Aristotle 1.2 Middle Ages
2 Mercantilists and nationalism
o o o
2.1 Thomas Mun 2.2 Philipp von Hrnigk 2.3 Jean Baptiste Colbert
3 British enlightenment
o o
3.1 John Locke 3.2 Dudley North
3.3 David Hume
4 The circular flow 5 Adam Smith and The Wealth of Nations
o o o
5.1 Context 5.2 The invisible hand 5.3 Limitations
6 Classical political economy
o o o o o
6.1 Jeremy Bentham 6.2 Jean-Baptiste Say 6.3 Thomas Malthus 6.4 David Ricardo 6.5 John Stuart Mill
7 Capitalism and Marx
o o o
7.1 Context 7.2 Das Kapital 7.3 After Marx
8 Neoclassical thought
o o o
8.1 Marginal utility 8.2 Mathematical analysis 8.3 The Austrian school
9 Depression and reconstruction
o o o
9.1 John Maynard Keynes 9.2 The General Theory 9.3 Keynesian economics
10 The "American Way"
o o o o
10.1 Institutionalism 10.2 John Kenneth Galbraith 10.3 Paul Samuelson 10.4 Kenneth Arrow
11 Monetarism and the Chicago school
o o
11.1 Ronald Coase 11.2 Milton Friedman
12 Global times
o o o
12.1 Amartya Sen 12.2 Joseph E. Stiglitz 12.3 Paul Krugman
13 Contemporary economic thought
13.1 Macroeconomics since the Bretton Woods era
14 See also 15 Notes 16 References 17 Journals 18 External links
[edit]Early
economic thought
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vde
Main articles: Ancient economic thought, Fan Li, Chanakya, Qin Shihuang, Wang Anshi, Muqaddimah, and Arthashastra The earliest discussions of economics date back to ancient times (e.g. Chanakya's Arthashastra or Xenophon's Oeconomicus). Back then, and until the industrial revolution, economics was not a separate discipline but part of philosophy. In Ancient Athens, a slave based society but also one developing an embryonic model of democracy,[4] Plato's book The Republic contained references to specialization of labour and production. But it was his pupil Aristotle that made some of the most familiar arguments, still in economic discourse today.
[edit]Aristotle
Main articles: Aristotle, Politics (Aristotle), and Nicomachean Ethics
Plato and his pupil, Aristotle, have had an enduring effect on Western philosophy.
Aristotle's Politics (c.a. 350 BC) was mainly concerned to analyse different forms of a state (monarchy, aristocracy,constitutional government, tyranny, oligarchy, democracy) as a critique of Plato's advocacy of a ruling class of "philosopher-kings". In particular for economists, Plato had drawn a blueprint of society on the basis of common ownership of resources. Aristotle viewed this model as an oligarchical anathema. In Politics, Book II, Part V, he argued that, "Property should be in a certain sense common, but, as a general rule, private; for, when everyone has a distinct interest, men will not complain of one another, and they will make more progress, because every one will be attending to his own business... And further, there is the greatest pleasure in doing a kindness or service to friends or guests or companions, which can only be rendered when a man has private property. These advantages are lost by excessive unification of the state."[5] Though Aristotle certainly advocated there be many things held in common, he argued that not everything could be, simply because of the "wickedness of human nature".[5] "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 PoliticsBook I, Aristotle discusses the general nature of households and market exchanges. For him there is a certain "art of acquisition" or "wealth-getting". Money itself has the sole purpose of being a medium of exchange, which means on its own "it is worthless... not useful as a means to any of the necessities of life".[6] Nevertheless, points out Aristotle, because the "instrument" of money is the same many people are obsessed with the simple accumulation of money. "Wealth-getting" for one's household is "necessary and honourable", while exchange on the retail trade for simple accumulation is "justly censured, for it is dishonourable".[7] Aristotle disapproved highly of usury and also cast scorn on making money throughmonopoly.[8]
[edit]Middle
Ages
Main articles: Thomas Aquinas, Scholasticism, Duns Scotus, Ibn Khaldun, and Islamic economic jurisprudence
St Thomas Aquinas taught that raising prices in response to high demand was a type of theft.
Thomas Aquinas (12251274) was an Italian theologian and writer on economic issues. He taught in both Cologne andParis, and was part of a group of Catholic scholars known as the Schoolmen, who moved their enquiries beyond theology to philosophical and scientific debates. In the treatise Summa Theologica Aquinas dealt with the concept of a just price, which he considered necessary for the reproduction of the social order. Bearing many similarities with the modern concept of long run equilibrium a just price was supposed to be one just sufficient to cover the costs of production, including the maintenance of a worker and his family. He argued it was immoral for sellers to raise their prices simply because buyers were in pressing need for a product. 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, mainly relate to what a just price is, and to the fairness of a seller dispensing faulty goods. Aquinas argued against any form of cheating and recommended compensation always be paid in lieu of good service. Whilst human laws might not impose sanctions for unfair dealing, divine law did, in his opinion. One of Aquinas' main critics[9] was Duns Scotus (12651308) in his work Sententiae (1295). Originally from Duns Scotland, he taught in Oxford, Cologne and Paris. Scotus thought it possible to be more precise than Aquinas in calculating a just price, emphasising the costs of labour and expenses though he recognised that the latter might be inflated by exaggeration, because buyer and seller usually have different ideas of what a just price comprises. If people did not benefit from a transaction, in Scotus' view, they would not trade. Scotus defended merchants as performing a necessary and useful social role, transporting goods and making them available to the public.
[edit]Mercantilists
and nationalism
1638 painting of a French seaport during the heyday of mercantilism.
Main article: Mercantilism See also: Charles Davenant, Josiah Child, James Denham-Steuart, Grotius, and Niccol Machiavelli. From the localism of the Middle Ages, the waning feudal lords, new national economic frameworks began to be strengthened. From 1492 and explorations likeChristopher Columbus' voyages, new opportunities for trade with the New World and Asia were opening. New powerful monarchies wanted a powerful 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 local markets and supply sources were protected. Mercantile theorists thought international trade could not benefit all countries at the same time. Because moneyand gold were the only source of riches, there was a limited quantity of resources to be shared between countries. Therefore, tariffs could be used to encourage exports (meaning more money comes into the country) and discourage imports (sending wealth abroad). In other words a positive balance of tradeought to be maintained, with a surplus of exports. The term mercantilism was not in fact coined until the late 1763 by Victor de Riqueti, marquis de Mirabeauand popularised by Adam Smith, who vigorously opposed its ideas.
[edit]Thomas
Mun
Main article: Thomas Mun English businessman Thomas Mun (15711641) represents early mercantile policy in his book England's Treasure by Foraign Trade . Although it was not published until 1664 it was widely circulated as a manuscript before then. He was a member of the East India Company and also wrote about his experiences there in A Discourse of Trade from England unto the East Indies (1621). According to Mun, trade was the only way to increase England's treasure (i.e., national wealth) and in pursuit of this end he suggested several courses of action. Important were frugal consumption to increase the amount of goods available for export, increased utilisation of land and other domestic natural resources to reduce import requirements, lowering of export duties on goods produced domestically from foreign materials, and the export of goods with inelastic demand because more money could be made from higher prices.
[edit]Philipp
von Hrnigk
The title page to Philipp von Hrnigkstatement of mercantilist philosophy.
Main article: Philipp von Hrnigk Philipp von Hrnigk (16401712, sometimes spelt Hornick or Horneck) was born in Frankfurt am Main and became an Austrian civil servant writing in a time when his country was constantly threatened by Ottoman invasion. In sterreich ber Alles, Wenn Sie Nur Will (1684, Austria Over All, If She Only Will) he laid out one of the clearest statements of mercantile policy. He listed nine principal rules of national economy. "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 thepopulation, 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.[10]
[edit]Jean
Baptiste Colbert
Main article: Jean Baptiste Colbert Jean Baptiste Colbert (16191683) was Minister of Finance under King Louis XIV of France. He set up national guilds to regulate major industries. Silk, linen, tapestry, furniture manufacture and wine were examples of the crafts in which France specialised, all of which came to require membership of a guild to operate in. These remained until the French revolution. According to Colbert, "It is simply, and solely, the abundance of money within a state [which] makes the difference in its grandeur and power."[citation needed]
[edit]British
enlightenment
See also: Age of enlightenment, Scottish enlightenment, Thomas Hobbes, and William Petty. Britain had gone through some of its most troubling times through the 17th century, enduring not only political and religious division in the English Civil War, King Charles I's execution and theCromwellian dictatorship, but also the plagues and fires. The monarchy was restored under Charles II, who had catholic sympathies, but his successor King James II was swiftly ousted. Invited in his place were Protestant William of Orange and Mary, who assented to the Bill of Rights 1689 ensuring that the Parliament was dominant in what became known as the Glorious revolution. The upheaval had seen a number of huge 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 the three laws of motion and his law of universal gravitation. All these factors spurred the advancement of economic thought. For instance, Richard Cantillon (16801734) consciously imitated Newton's forces of inertia and gravity in the natural world with human reason and market competition in the economic world.[11] In his Essay on the Nature of Commerce in General, he argued rational self interest in a system of freely adjusting markets would lead to order and mutually compatible prices. Unlike the mercantilist thinkers however, wealth was found not in trade but in human labour. The first person to tie these ideas into a political framework was John Locke.
[edit]John
Locke
John Locke combined philosophy, politicsand economics into one coherent framework.
Main article: John Locke John Locke (16321704) 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 the development of social contract theory. Locke believed that people contracted into society which was bound to protect their rights of property.[12] He defined property broadly to include people's lives and liberties, as well as their wealth. When people combined their labour with their surroundings, then 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.[13] Locke was arguing 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 price and money were laid out in a letter to a Member of Parliament in 1691 entitled Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money (1691). Here Locke argued that the "price of any commodity rises or falls, by the proportion of the number of buyers and sellers," a rule which "holds universally in all things that are to be bought and sold."[14]
[edit]Dudley
North
Main article: Dudley North (economist)
Dudley North argued that the results of mercantile policy would be undesirable.
Dudley North (16411691) was a wealthy merchant and landowner. He worked as an official for the Treasury and was opposed to most mercantile policy. In his Discourses upon trade (1691), which he published anonymously, he argued that the assumption of needing a favourable trade balance was wrong. Trade, he argued, benefits both sides, it promotes specialisation, the division of labour and produces an increase in wealth for everyone. Regulation of trade interfered with these benefits by reducing the flow of wealth.
[edit]David
Hume
Main article: David Hume David Hume (17111776) agreed with North's philosophy and denounced mercantile assumptions. His contributions were set down in Political Discourses (1752), later consolidated in his Essays, Moral, Political, Literary (1777). Added to the fact that it was undesirable to strive for a favourable balance of trade it is, said Hume, in any case impossible. Hume held that any surplus of exports that might be achieved 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.
[edit]The
circular flow
Pierre Samuel du Pont de Nemours, a prominent Physiocrat, emigrated to the US and his son founded DuPont, the world's second biggest chemicals company.
Main article: Physiocrats See also: Bernard Mandeville, John Law (economist), Pierre le Pesant de Boisguilbert, and Victor de Riqueti. Similarly disenchanted with regulation on trademarks inspired by mercantilism, a Frenchman name Vincent de Gournay (17121759) is reputed to have asked why it was so hard to laissez faire, laissez passer (free enterprise, free trade). He was one of the early physiocrats, a word from Greek meaning "government of nature", who held that agriculture was the source of wealth. As historian David B. Danbom wrote, the Physiocrats "damned cities for their artificiality and praised more natural styles of living. They celebrated farmers."[15] Over the end of the seventeenth and beginning of the eighteenth century big advances in natural science and anatomy were being made, including the discovery of blood circulation through the human body. This concept was mirrored in the physiocrats' economic theory, with the notion of a circular flow of income throughout the economy. Franois Quesnay (16941774) was the court physician to King Louis XV of France. He believed that trade and industry were not sources of wealth, and instead in his book, Tableau conomique (1758, Economic Table) argued that agricultural surpluses, by flowing through the economy in the form of rent, wages and purchases were the real economic movers. Firstly, said Quesnay, regulation impedes the flow of income throughout all social classes and therefore economic development. Secondly, taxes on the productive classes, such as farmers, should be reduced in favour of rises for unproductive classes, such as landowners, since their luxurious way of life distorts the income flow.
Jacques Turgot (17271781) was born in Paris and from an old Norman family. His best known work, Rflexions sur la formation et la distribution des richesses(1766, Reflections on the Formation and Distribution of Wealth) developed Quesnay's theory that land is the only source of wealth. Turgot viewed society in terms of three classes: the productive agricultural class, the salaried artisan class (classe stipendice) and the landowning class (classe disponible). He argued that only the net product of land should be taxed and advocated the complete freedom of commerce and industry. In August 1774, Turgot was appointed to be Minister of Finance and in the space of two years introduced many anti-mercantile and anti-feudal measures supported by the King. A statement of his guiding principles, given to the King were "no bankruptcy, no tax increases, no borrowing." Turgot's ultimate wish was to have a single tax on land and abolish all other indirect taxes, but measures he introduced before that were met with overwhelming opposition from landed interests. Two edicts in particular, one suppressingcorves (charges from farmers to aristocrats) and another renouncing privileges given to guilds inflamed influential opinion. He was forced from office in 1776.
[edit]Adam
Smith and The Wealth of Nations
Adam Smith, the father of modern political economy.
Main articles: The Wealth of Nations, Adam Smith, and Edmund Burke See also: Industrial revolution and Anders Chydenius. Adam Smith (17231790) is popularly seen as the father of modern political economy. His publication of the An Inquiry Into the Nature and Causes of the Wealth of Nations in 1776 happened to coincide not only with the American Revolution, shortly before the Europe wide upheavals of the French Revolution, but also the dawn of a new industrial revolution that allowed more wealth to be created on a larger scale than ever before. 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.[16] Yet Smith's political economic magnum opus was successful in circles that mattered.
[edit]Context
William Pitt, the Tory Prime Minister in the late 1780s based his tax proposals on Smith's ideas and advocated free trade as a devout disciple of The Wealth of Nations.[17] Smith was appointed a commissioner of customs and within twenty years Smith had a following of new generation writers who were intent on building the science of political economy.[16]
Edmund Burke.
Smith expressed an affinity himself to the opinions of Edmund Burke, known widely as a political philosopher, a Member of Parliament. "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".[18] Burke was an established political economist himself, with his book Thoughts and Details on Scarcity. He was widely critical of liberal politics, and condemned theFrench Revolution which began in 1789. In Reflections on the Revolution in France (1790) he wrote that the "age of chivalry is dead, that of sophisters, economists and calculators has succeeded, and the glory of Europe is extinguished forever." Smith's contemporary influences included Francois Quesnay and Jacques Turgotwho he met on a stay in Paris, and David Hume, his Scottish compatriot. The times produced a common need among thinkers to explain social upheavals of theIndustrial revolution taking place, and in the seeming chaos without the feudal and monarchical structures of Europe, show there was order still.
[edit]The
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."[19] Adam Smith's famous statement on self interest
Smith argued for a "system of natural liberty"[20] 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."[21] 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 lifeprices 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 effectualdemand, 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..."[22] Smith believed that a market produced what he dubbed the "progress of opulence". This involved a chain of concepts, that the division of labour is the driver of economic efficiency, yet it is limited to the widening process of markets. Both labour division and market widening requires more intensive accumulation of capital by the entrepreneurs and leaders of business and industry. The whole system is underpinned by maintaining the security of property rights.
[edit]Limitations
Adam Smith's first title page.
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."[20] Smith believed there were precisely three legitimate functions of government. The first 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.[23] Thirdly, Smith criticised government support of any kind of monopoly which always charges the highest price "which can be squeezed out of the buyers"[24] The existence of monopoly and the potential for cartels, which would later form the core of competition lawpolicy, could distort the benefits of free markets to the advantage of businesses at the expense of consumer sovereignty.
[edit]Classical
political economy
Main article: Classical economics See also: Thomas Edward Cliffe Leslie, Walter Bagehot, and Thorold Rogers.
The classical economists were referred to as a group for the first time by Karl Marx.[25] One unifying part of their theories was the labour theory of value, contrasting to value deriving from a general equilibrium of supply and demand. These economists had seen the first economic and social transformation brought by the Industrial Revolution: rural depopulation, precariousness, poverty, apparition of a working class. They wondered about the population growth, because the 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 underconsumption theory, as advanced by the Birmingham School and Malthus in the early 19th century. These argued for government action to mitigate unemployment and economic downturns, and was an intellectual predecessor of what later became Keynesian economics in the 1930s. Another notable school was Manchester capitalism, which advocated free trade, against the previous policy of mercantilism.
[edit]Jeremy
Bentham
Main article: Jeremy Bentham
Jeremy Bentham believed in "the greatest good for the greatest number".
Jeremy Bentham (17481832) was perhaps the most radical thinker of his time, and developed the concept of utilitarianism. Bentham was an atheist, a prison reformer, animal rights activist, believer in universal suffrage, free speech, free trade and health insurance at a time when few dared to argue for any. He was
schooled rigorously from an early age, finishing university and being called to the bar at 18. His first book, A Fragment on Government (1776) published anonymously was a trenchant critique of William Blackstone's Commentaries of the laws of England. This gained wide success until it was found that the young Bentham, and not a revered Professor had penned it. In The Principles of Morals and Legislation (1791) Bentham set out his theory of utility.[26] The aim of legal policy must be to decrease misery and suffering so far as possible while producing the greatest happiness for the greatest number.[27]Bentham even designed a comprehensive methodology for the calculation of aggregate happiness in society that a particular law produced, a felicific calculus.[28] Society, argued Bentham, is nothing more than the total of individuals,[29] so that if one aims to produce net social good then one need only to ensure that more pleasure is experienced across the board than pain, regardless of numbers. For example, a law is proposed to make every bus in the citywheel chair accessible, but slower moving as a result than its predecessors because of the new design. Millions of bus users will therefore experience a small amount of displeasure (or "pain") in increased traffic and journey times, but a minority of people using wheel chairs will experience a huge amount of pleasure at being able to catch public transport, which outweighs the aggregate displeasure of other users. Interpersonal comparisons of utility were allowed by Bentham, the idea that one person's vast pleasure can count more than many others' pain. Much criticism later showed how this could be twisted, for instance, would the felicific calculus allow a vastly happy dictator to outweigh the dredging misery of his exploited populus? Despite Bentham's methodology there were severe obstacles in measuring people's happiness.
[edit]Jean-Baptiste
Say
Main article: Jean-Baptiste Say
Say's law, that supply always equals demand, was unchallenged until the 20th century.
Jean-Baptiste Say (17671832) was a Frenchman, born in Lyon who helped to popularise Adam Smith's work in France.[30] His book, A Treatise on Political Economy (1803) contained a brief passage, which later became orthodoxy in political economics until the Great Depression and known as Say's Law of markets. Say argued that there could never be a general deficiency of demand or a general glut of commodities in the whole
economy. People produce things, said Say, to fulfill their own wants, rather than those of others. Production is therefore not a question of supply, but an indication of producers demanding goods. Say agreed that a part of the income is saved by the households, but in the long term, savings are invested. Investment and consumption are the two elements of demand, so that production isdemand, so 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. Say said that "money is a veil". To sum up these two ideas, Say said "products are exchanged for products". At most, there will be different economic sectors whose demands are not fulfilled. But over time supplies will shift, businesses will retool for different production and the market will correct itself. An example of a "general glut" could be unemployment, in other words, too great a supply of workers, and too few jobs. Say's Law advocates would suggest that this necessarily means there is an excess demand for other products that will correct itself. This remained a foundation of economic theory until the 1930s. Say's Law was first put forward by James Mill (17731836) in English, and was advocated by David Ricardo, Henry Thornton[31] and John Stuart Mill. However two political economists, Thomas Malthus and Sismondi, were unconvinced.
[edit]Thomas
Malthus
Malthus cautioned law makers on the effects of poverty reduction policies.
Main article: Thomas Malthus Thomas Malthus (17661834) was a Tory minister in the United Kingdom Parliament who, contrasting to Bentham, believed in strict government abstention from social ills.[32] Malthus devoted the last chapter of his book Principles of Political Economy (1820) to rebutting Say's law, and argued that the economy could stagnate with a lack of "effectual demand".[33] In other words, wages if less than the total costs of production
cannot purchase the total output of industry and that this would cause prices to fall. Price falls decrease incentives to invest, and the spiral could continue indefinitely. Malthus is more notorious however for his earlier work, An Essay on the Principle of Population. This argued that intervention was impossible because of two factors. "Food is necessary to the existence of man," wrote Malthus. "The passion between the sexes is necessary and will remain nearly in its present state," he added, meaning that the "power of the population is infinitely greater than the power in the Earth to produce subsistence for man."[34] Nevertheless growth in population is checked by "misery and vice". Any increase in wages for the masses would cause only a temporary growth in population, which given the constraints in the supply of the Earth's produce would lead to misery, vice and a corresponding readjustment to the original population.[35] However more labour could mean more economic growth, either one of which was able to be produced by an accumulation of capital.
[edit]David
Ricardo
Main article: David Ricardo
Ricardo is renowned for his law of comparative advantage.
David Ricardo (17721823) was born in London. By the age of 26, he had become a wealthy stock market trader and bought himself a constituency seat in Ireland to gain a platform in the British parliament's House of Commons.[36] Ricardo's best known work is his Principles of Political Economy and Taxation, which contains his critique of barriers to international trade and a description of the manner the income is distributed in the population. Ricardo made a distinction between the workers, who received a wage fixed to a level at which they can survive, the landowners, who earn a rent, and capitalists, who own capital and receive a profit, a residual part of the income.[37] 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) too. Profits decrease, until the capitalists can no longer invest. The economy, Ricardo concluded, is bound to tend towards a steady state.
To postpone the steady state, Ricardo advocates to promote international trade to import wheat at a low price to fight landowners. The Corn Laws of the UK had been passed in 1815, setting a fluctuating system of tariffs to stabilise the price of wheat in the domestic market. Ricardo argued that raising tariffs, despite being intended to benefit the incomes of farmers, would merely produce a rise in the prices of rents that went into the pockets of landowners.[38] Furthermore, extra labour would be employed leading to an increase in the cost of wages across the board, and therefore reducing exports and profits coming from overseas business. Economics for Ricardo was all about the relationship between the three "factors of production": land, labour and capital. Ricardo demonstrated mathematically that the gains from trade could outweigh the perceived advantages of protectionist policy. The idea of comparative advantage suggests that even if one country is inferior at producing all of its goods than another, it may still benefit from opening its borders since the inflow of goods produced more cheaply than at home, produces a gain for domestic consumers.[39] According then to Ricardo, this concept would lead to a shift in prices, so that eventually England would be producing goods in which its comparative advantages were the highest.
[edit]John
Stuart Mill
Mill, weaned on the philosophy of Jeremy Bentham, wrote the most authoritative economics text of his time.
Main articles: Principles of Political Economy and John Stuart Mill John Stuart Mill (18061873) was the dominant figure of political economic thought of his time, as well as being a Member of Parliament for the seat ofWestminster, 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.[40] 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 wisdom of the mid nineteenth century.[41] It was used as the standard texts by most universities well into the beginning of the twentieth century. 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. The first followed the Malthusian line that population grew quicker than supplies, leading to falling wages and rising profits.[42] The second, per Smith, said if capital accumulated faster than population grew then real wages would rise. Third, echoing David Ricardo, should capital accumulate and population increase at the same rate, yet technology stay stable, there would be no change in real wages because supply and demand for labour would be the same. However growing populations would require more land use, increasing food production costs and therefore decreasing profits. The fourth alternative was that technology advanced faster than population and capital stock increased.[43] The result would be a prospering economy. Mill felt the third scenario most likely, and he assumed technology advanced would have to end at some point.[44] But on the prospect of continuing economic growth, Mill was more ambivalent. "I confess I am not charmed with the ideal of life held out by those who think that the normal state of human beings is that of struggling to get on; that the trampling, crushing, elbowing, and treading on each other's heels, which form the existing type of social life, are the most desirable lot of human kind, or anything but the disagreeable symptoms of one of the phases of industrial progress.[45] Mill is also credited with being the first person to speak of supply and demand as a relationship rather than mere quantities of goods on markets,[46] the concept of opportunity cost and the rejection of the wage fund doctrine.[47]
[edit]Capitalism
and Marx
Main article: Marxian economics
Karl Marx provided a fundamental critique of classical economics, based on the labour theory of value.
Just as the term "mercantilism" had been coined and popularised by its critics, like Adam Smith, so was the term "capitalism" or Kapitalismus used by its dissidents, primarily Karl Marx. Karl Marx (18181883) was, and in many ways still remains the pre-eminent socialist economist. His combination of political theory represented in the Communist Manifesto and the dialectic theory of history inspired by Friedrich Hegel provided a revolutionary critique of capitalism as he saw it in the nineteenth century. The socialist movement that he joined had emerged in response to the conditions of people in the new industrial era and the classical economics which accompanied it. He wrote his magnum opus Das Kapital at the British Museum's library.
[edit]Context
Main articles: Robert Owen, Pierre Proudhon, and Friedrich Engels
With Marx, Friedrich Engels coauthored the Communist Manifesto, and the second volume of Das Kapital.
Robert Owen (17711858) was one industrialist who determined to improve the conditions of his workers. He bought textile mills in New Lanark, Scotland where he forbade children under ten to work, set the workday from 6 a.m. to 7 p.m. and provided evening schools for children when they finished. Such meagre measures were still substantial improvements and his business remained solvent through higher productivity, though his pay rates were lower than the national average.[48] He published his vision in The New View of Society (1816) during the passage of the Factory Acts, but his attempt from 1824 to begin a new utopian community in New Harmony, Indiana ended in failure. One of Marx's own influences was the French anarchist/socialist PierreJoseph Proudhon. While deeply critical of capitalism and in favour of workers' associations to replace it, he also objected to those contemporary socialists who idolized centralised state-run association. In System of Economic Contradictions (1846) Proudhon made a wide-ranging critique of capitalism, analysing the
contradictory effects of machinery, competition, property, monopoly and other aspects of the economy. [49] [50]. Instead of capitalism, he argued for a mutualist system based upon equality, in other words, the organisation of labour, which involves the negation of political economy and the end of property. In his book What is Property? (1840) he argue that property is theft, a different view than the classical Mill, who had written that "partial taxation is a mild form of robbery".[51] However, towards the end of his life, Proudhon modified some of his earlier views. In the posthumously published Theory of Property, he argued that "property is the only power that can act as a counterweight to the State."[52]Friedrich Engels, a published radical author, released a book titled The Condition of the Working Class in England in 1844[53] describing people's positions as "the most unconcealed pinnacle of social misery in our day." After Marx died, it was Engels that completed the second volume of Das Kapital from Marx's notes.
[edit]Das
Kapital
The title page of the first edition ofCapital in German.
Main articles: Das Kapital, Capital, Volume I, and Karl Marx Karl Marx begins Das Kapital with the concept of commodities. Before capitalist societies, says Marx, the mode of production was based on slavery (e.g. inancient Rome) before moving to feudal serfdom (e.g. in mediaeval Europe). As society has advanced, economic bondage has become looser, but the current nexus of labour exchange has produced an equally erratic and unstable situation allowing the conditions for revolution. People buy and sell their labour in the same way as people buy and sell goods and services. People themselves are disposable commodities. As he wrote in the Communist Manifesto,
"The history of all hitherto existing society is the history of class struggles. Freeman and slave, patrician and plebeian, lord and serf, guildmaster and journeyman, in a word, oppressor and oppressed, stood in constant opposition to one another... The modern bourgeois society that has sprouted from the ruins of feudal society has not done away with class antagonisms. It has but established new classes, new conditions of oppression, new forms of struggle in place of the old ones." And furthermore from the first page of Das Kapital, "The wealth of those societies in which the capitalist mode of production prevails, presents itself as "an immense accumulation of commodities,"[54] its unit being a single commodity. Our investigation must therefore begin with the analysis of a commodity. Marx's use of the word "commodity" is tied into an extensive metaphysical discussion of the nature of material wealth, how the objects of wealth are perceived and how they can be used. The concept of a commodity contrasts to objects of the natural world. When people mix their labour with an object it becomes a "commodity". In the natural world there are trees, diamonds, iron ore and people. In the economic world they become chairs, rings, factories and workers. However, says Marx, commodities have a dual nature, a dual value. He distinguishes the use value of a thing from its exchange value, which can be entirely different.[55] The use value of a thing derives from the amount of labour used to produce it, says Marx, following the classical economists in the labour theory of value. However, Marx did not believe labour only was the source of use value in things. He believed value can derive too from natural goods and refined his definition of use value to "socially necessary labour time" (the time people need to produce things when they are not lazy or inefficient).[56] Furthermore, people subjectively inflate the value of things, for instance because there's a commodity fetish for glimmering diamonds,[57] and oppressive power relations involved in commodity production. These two factors mean exchange values differ greatly. An oppressive power relation, says Marx applying the use/exchange distinction to labour itself, in work-wage bargains derives from the fact that employers pay their workers less in "exchange value" than the workers produce in "use value". The difference makes up the capitalist's profit, or in Marx's terminology, "surplus value".[58] Therefore, says Marx, capitalism is a system of exploitation.
Marx explained the booms and busts, like the Panic of 1873, as part of an inherent instability in capitalist economies.
Marx's work turned the labour theory of value, as the classicists used it, on its head. His dark irony goes deeper by asking what is the socially necessary labour time for the production of labour (i.e. working people) itself. Marx answers that this is the bare minimum for people to subsist and to reproduce with skills necessary in the economy.[59] People are therefore alienated from both the fruits of production and the means to realise their potential, psychologically, by their oppressed position in the labour market. But the tale told alongside exploitation and alienation is one of capital accumulation and economic growth. Employers are constantly under pressure from market competition to drive their workers harder, and at the limits invest in labour displacing technology (e.g. an assembly line packer for a robot). This raises profits and expands growth, but for the sole benefit of those who have private property in these means of production. The working classes meanwhile face progressive immiseration, having had the product of their labour exploited from them, having been alienated from the tools of production. And having been fired from their jobs for machines, they end unemployed. Marx believed that a reserve army of the unemployedwould grow and grow, fuelling a downward pressure on wages as desperate people accept work for less. But this would produce a deficit of demand as the people's power to purchase products lagged. There would be a glut in unsold products, production would be cut back, profits decline until capital accumulation halts in an economic depression. When the glut clears, the economy again starts to boom before the next cyclical bust begins. With every boom and bust, with every capitalist crisis, thought Marx, tension and conflict between the increasingly polarised classes of capitalists and workers heightens. Moreover smaller firms are being gobbled by larger ones in every business cycle, as power is concentrated in the hands of the few and away from the many. Ultimately, led by the Communist party, Marx envisaged a revolution and the creation of a classless society. How this may work, Marx never suggested. His primary contribution was not in a blue print for how society would be, but a criticism of what he saw it was.
[edit]After
Marx
Main articles: Karl Kautsky, Rosa Luxemburg, Beatrice Webb, John A. Hobson, R. H. Tawney, and Paul Sweezy The first volume of Das Kapital was the only one Marx alone published. The second and third volumes were done with the help of Friedrich Engels, and Karl Kautsky, who had become a friend of Engels, saw through the publication of volume four. Marx had begun a tradition of economists who concentrated equally on political affairs. Also in Germany, Rosa Luxemburg was a member of the SPD, who later turned towards the Communist Partybecause of their stance against the First World War. Beatrice Webb in England was a socialist, who helped found both the London School of Economics (LSE) and the Fabian Society.
[edit]Neoclassical
thought
Main articles: Neoclassical economics, Marginalism, and Mathematical economics See also: Leon Walras, Alexander del Mar, John Bates Clark, Irving Fisher, William Ashley (economic historian), Enrico Barone, and Maffeo Pantaleoni. In the 1860s, a revolution took place in economics. The new ideas were that of the Marginalist school. Writing simultaneously and independently, a Frenchman (Leon Walras), an Austrian (Carl Menger) and an Englishman (Stanley Jevons) were developing the theory, which had some antecedents. Instead of the price of a good or service reflecting the labor that has produced it, it reflects the marginal usefulness (utility) of the last purchase. This meant that in equilibrium, people's preferences determined prices, including, indirectly the price of labor. This current of thought was not united, and there were three main schools working independently. The Lausanne school, whose two main representants were Walras and Vilfredo Pareto, developed the theories of general equilibrium and optimality. The main written work of this school was Walras' Elements of Pure Economics. The Cambridge school appeared with Jevons' Theory of Political Economyin 1871. This English school has developed the theories of the partial equilibrium and has insisted on markets' failures. The main representatives were Alfred Marshall, Stanley Jevons and Arthur Pigou. The Vienna school was made up of Austrian economists Menger, Eugen von Bhm-Bawerk and Friedrich von Wieser. They developed the theory of capital and has tried to explain the presence of economic crises. It appeared in 1871 with Menger's Principles of Economics.
[edit]Marginal
utility
Main articles: Marginal utility theory, Carl Menger, Stanley Jevons, and Leon Walras
William Stanley Jevons helped popularise marginal utility theory.
Carl Menger (18401921), an Austrian economist stated the basic principle of marginal utility in Grundstze der Volkswirtschaftslehre[60] (1871, Principles of Economics). Consumers act rationally by seeking to maximise satisfaction of all their preferences. People allocate their spending so that the last unit of a commodity bought creates no more than a last unit bought of something else. Stanley Jevons (18351882) was his English counterpart, and worked as tutor and later professor at Owens College, Manchester and University College, London. He emphasised in the Theory of Political Economy (1871) that at the margin, the satisfaction of goods and services decreases. An example of the theory of diminishing returns is that for every orange one eats, the less pleasure one gets from the last orange (until one stops eating). Then Leon Walras (18341910), again working independently, generalised marginal theory across the economy in Elements of Pure Economics (1874). 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 go, if one assumes markets are competitive, people choose on self interest and no cost in shifting production. Early attempts to explain away the periodical crises of which Marx had spoken were not initially as successful. After finding a statistical correlation ofsunspots and business fluctuations and following the common belief at the time that sunspots had a direct effect on weather and hence agricultural output, Stanley Jevons wrote, "when we know that there is a cause, the variation of the solar activity, which is just of the nature to affect the produce of agriculture, and which does vary in the same period, it becomes almost certain that the two series of phenomena credit cycles and solar variationsare connected as effect and cause.[61]
[edit]Mathematical
analysis
Main articles: Vilfredo Pareto, Alfred Marshall, Francis Edgeworth, and Johann Heinrich von Thnen
Alfred Marshall wrote the main alternative textbook to John Stuart Mill of the day, Principles of Economics (1882)
Vilfredo Pareto (18481923) was an Italian economist, best known for developing the concept of an economy that would permit maximizing the utility level of each individual, given the feasible utility level of others from production and exchange. Such a result came to be called "Pareto efficient". Pareto devised mathematical representations for such a resource allocation, notable in abstracting from institutional arrangements and monetary measures of wealth or income distribution.[62] Alfred Marshall is also credited with an attempt to put economics on a more mathematical footing. He was the first Professor of Economics at the University of Cambridge and his work, Principles of Economics[63] coincided with the transition of the subject from "political economy" to his favoured term, "economics". He viewed maths as a way to simplify economic reasoning, though had reservations, revealed in a letter to his student Arthur Cecil Pigou. "(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."[64] Coming after the marginal revolution, Marshall concentrated on reconciling the classical labour theory of value, which had concentrated on the supply side of the market, with the new marginalist theory that concentrated on the consumer demand side. Marshall's graphical representation is the famous supply and demand graph, the "Marshallian cross". He insisted it is the intersection of both supply and demand that produce an equilibrium of price in a competitive market. Over the long run, argued Marshall, the costs of production and the price of goods and services tend towards the lowest point consistent with continued production. Arthur Cecil Pigou inWealth and Welfare (1920), insisted on the existence of market failures. Markets are inefficient in case
of economic externalities, and the State must interfere. 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 the wages from adjusting automatically. This was to be the focus of attack from Keynes.
[edit]The
Austrian school
Main articles: Eugen von Bhm-Bawerk, Friedrich von Wieser, Joseph Schumpeter, Ludwig von Mises, Friedrich Hayek, and Austrian School While the end of the nineteenth century and the beginning of the twentieth were dominated increasingly by mathematical analysis, the followers of Carl Menger, in the tradition of Eugen von Bhm-Bawerk, followed a different route, advocating the use of deductive logic instead. This group became known as the Austrian School, reflecting the Austrian origin of many of the early adherents.Thorstein Veblen in 1900, in his Preconceptions of Economic Science, contrasted neoclassical marginalists in the tradition of Alfred Marshall from the philosophies of the Austrian school.[65][66]
Ludwig von Mises, Friedrich von Hayek, and Joseph Schumpeter
Joseph Alois Schumpeter (18831950) was an Austrian economist and political scientist most known for his works on business cycles and innovation. He insisted on the role of the entrepreneurs in an economy. In Business Cycles: A theoretical, historical and statistical analysis of the Capitalist process(1939), Schumpeter made a synthesis of the theories about business cycles. He suggested that those cycles could explain the economic situations. According to Schumpeter, capitalism necessarily goes through long-term cycles, because it is entirely based upon scientific inventions and innovations. A phase of expansion is made possible by innovations, because they bring productivity gains and encourage entrepreneurs to invest. However, when investors have no more opportunities to invest, the economy goes into recession, several firms collapse, closures and bankruptcy occur. This phase lasts until new innovations bring a creative destruction process, i.e. they destroy old products, reduce the employment, but they allow the economy to start a new phase of growth, based upon new products and new factors of production.[67] Ludwig von Mises (18811973) was an Austrian economist who contributed the idea of praxeology, "The science of human action". Praxeology views economics as a series of voluntary trades that increase the
satisfaction of the involved parties. Mises also argued that socialism suffers from an unsolvable economic calculation problem, which according to him, could only be solved through free market price mechanisms. Mises' outspoken criticisms of socialism had a large influence on the economic thinking of Friedrich von Hayek (18991992), who, while initially sympathetic to socialism, became one of the leading academic critics of collectivism in the 20th century.[68] In echoes of Smith's "system of natural liberty", Hayek argued that the market is a "spontaneous order" and actively disparaged the concept of "social justice".[69] Hayek believed that all forms of collectivism (even those theoretically based on voluntary cooperation) could only be maintained by a central authority. In his book, The Road to Serfdom (1944) and in subsequent works, Hayek claimed that socialism required central economic planning and that such planning in turn would lead towards totalitarianism. Hayek attributed the birth of civilization to private property in his book The Fatal Conceit (1988). According to him, price signals are the only means of enabling each economic decision maker to communicate tacit knowledge ordispersed knowledge to each other, to solve the economic calculation problem. Along with his contemporary Gunnar Myrdal, Hayek was awarded the Nobel Prize in 1974.
[edit]Depression
and reconstruction
Alfred Marshall was still working on his last revisions of his Principles of Economics at the outbreak of the First World War (19141918). The new twentieth century's climate of optimism was soon violently dismembered in the trenches of the Western front, as the civilised world tore itself apart. For four years the production of Britain, Germany and France was geared entirely towards the war economy's industry of death. In 1917 Russia crumbled into revolution led by Vladimir Lenin's Bolshevik party. They carried Marxist theory as their saviour, and promised a broken country "peace, bread and land" by collectivising the means of production. Also in 1917, the United States of America entered the war on the side of France and Britain, President Woodrow Wilson carrying the slogan of "making the world safe for democracy". He devised a peace plan of Fourteen Points. In 1918 Germany launched a spring offensive which failed, and as the allies counter-attacked and more millions were slaughtered, Germany slid into revolution, its interim government suing for peace on the basis of Wilson's Fourteen Points. Europe lay in ruins, financially, physically, psychologically, and its future with the arrangements of the Versailles conference in 1919. John Maynard Keynes was the representative of Her Majesty's Treasury at the conference and the most vocal critic of its outcome.
[edit]John
Maynard Keynes
John Maynard Keynes (right) with his American counterpart Harry White at theBretton Woods conference.
Main articles: John Maynard Keynes and The Economic Consequences of the Peace John Maynard Keynes (18831946) was born in Cambridge, educated at Eton and supervised by both A. C. Pigou and Alfred Marshall at Cambridge University. He began his career as a lecturer, before working in the British government during the Great War, and rose to be the British government's financial representative at the Versailles conference. His observations were laid out in his book The Economic Consequences of the Peace[70] (1919) where he documented his outrage at the collapse of the Americans' adherence to the Fourteen Points[71] and the mood of vindictiveness that prevailed towards Germany.[72] Keynes quit from the conference and using extensive economic data provided by the conference records, Keynes argued that if the victors forced war reparations to be paid by the defeated Axis, then a world financial crisis would ensue, leading to a second world war.[73] Keynes finished his treatise by advocating, first, a reduction in reparation payments by Germany to a realistically manageable level, increased intra-governmental management of continental coal production and a free trade union through the League of Nations;[74] second, an arrangement to set off debt repayments between the Allied countries;[75] third, complete reform of international currency exchange and an international loan fund;[76] and fourth, a reconciliation of trade relations with Russia and Eastern Europe.[77] The book was an enormous success, and though it was criticised for false predictions by a number of people,[78] without the changes he advocated, Keynes' dark forecasts matched the world's experience through the Great Depression which ensued in 1929, and the descent into a new outbreak of war in 1939. World War One had been 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 to establish a new economic order. Keynes was again to play a leading role.
[edit]The
General Theory
The title page to Keynes' General Theory.
Main article: The General Theory of Employment, Interest, and Money During the Great Depression, Keynes had published his most important work, The General Theory of Employment, Interest, and Money (1936). The 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) 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."[79] On top of the supply of money, Keynes identified the propensity to consume, inducement to invest, the marginal efficiency of capital, liquidity preference and the multiplier effect as variables which determine the level of the economy's output, employment and level of prices. Much of this esoteric terminology was invented by Keynes especially for his General Theory, though some simple ideas lay behind. Keynes argued that if savings were being kept away from investment throughfinancial markets, total spending falls. Falling spending leads to reduced incomes and unemployment, which reduces savings again. This continues until the desire to save becomes equal to the desire to invest, which means a new "equilibrium" is reached and the spending decline halts. This new "equilibrium" is a depression, where people are investing less, have less to save and less to spend.
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. Deficit spending, said Keynes, would kick-start economic activity. This he had advocated in an open letter to U.S. President Franklin D. Roosevelt in the New York Times (1933). The New Deal programme in the U.S. had been well underway by the publication of the General Theory. It provided conceptual reinforcement for policies already pursued. Keynes also believed in a more egalitarian distribution of income, and taxation on unearned income arguing that high rates of savings (to which richer folk are prone) are not desirable in a developed economy. Keynes therefore advocated both monetary management and an active fiscal policy.
[edit]Keynesian
economics
Piero Sraffa.
Main articles: Keynesian economics and 20082009 Keynesian resurgence See also: Joan Robinson and Piero Sraffa. During the Second World War, Keynes acted as advisor to HM Treasury again, negotiating major loans from the US. He helped formulate the plans for theInternational Monetary Fund, the World Bank and an International Trade Organisation[80] at the Bretton Woods conference, a package designed to stabilise world economy fluctuations that had occurred in the 1920s and create a level trading field across the globe. Keynes passed away little more than a year later, but his ideas had already shaped a new global economic order, and all Western governments followed the Keynesian prescription of deficit spending to avert crises and maintain full employment. One of Keynes' pupils at Cambridge was Joan Robinson, 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 minimise 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? Piero Sraffa came to England from fascist Italy in the 1920s, and worked with Keynes in Cambridge. 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.
[edit]The
"American Way"
After World War II, the United States had become the pre-eminent global economic power. Europe and the Soviet Union lay in ruins and the British Empire was at its end. Until then, American economists had played a minor role. The institutional economists had been largely critical of the "American Way" of life, especially regarding conspicuous consumption of the Roaring Twenties before the Wall Street Crash of 1929. After the war, however, a more orthodox body of thought took root, reacting against the lucid debating style of Keynes, and re-mathematizing the profession. The orthodox centre was also challenged by a more radical group of scholars based at the University of Chicago. They advocated "liberty" and "freedom", looking back to 19th century-style non-interventionist governments.
[edit]Institutionalism
Thorsten Veblen came from a Norwegian immigrant family in rural mid-western America.
Main articles: Institutional economics, Thorsten Veblen, Adolf Berle, Henry George, John Dewey, Wesley Mitchell, and Herbert Simon Thorsten Veblen (18571929), who came from rural mid-western America and worked at the University of Chicago, is one of the best known early critics of the "American Way". In The Theory of the Leisure Class (1899) he scorned materialistic culture and wealthy people who conspicuously consumed their riches as a way of demonstrating success and in The Theory of Business Enterprise (1904) Veblen distinguished production for people to use things and production for pure profit, arguing that the former is often hindered because businesses pursue the latter. Output and technological advance are restricted by business practices and the creation of monopolies. Businesses protect their existing capital investments and employ excessive credit, leading to depressions and increasing military expenditure and war through business control of political power. These two books, focusing on criticism first of consumerism, and second of profiteering, did not advocate change. However, in 1911, Veblen joined the faculty of the University of Missouri, where he had support from Herbert Davenport, the head of the economics department. Veblen remained at Columbia, Missouri through 1918. In that year, he moved to New York to begin work as an editor of a magazine called The Dial, and then in 1919, along with Charles Beard, James Harvey Robinson and John Dewey, helped found the New School for Social Research (known today as The New School). He was also part of the Technical Alliance,[81] created in 1919 by Howard Scott. From 1919 through 1926 Veblen continued to write and to be involved in various activities at The New School. During this period he wrote The Engineers and the Price System (1921).[82]
John R. Commons (18621945) also came from mid-Western America. Underlying his ideas, consolidated in Institutional Economics (1934) was the concept that the economy is a web of relationships between people with diverging interests. There are monopolies, large corporations, labour disputes and fluctuating business cycles. They do however have an interest in resolving these disputes. Government, thought Commons, ought to be the mediator between the conflicting groups. Commons himself devoted much of his time to advisory and mediation work on government boards and industrial commissions.
Adolf Augustus Berle, Jr. with Gardiner Means was a foundational figure of moderncorporate governance.
The Great Depression was a time of significant upheaval in the States. One of the most original contributions to understanding what had gone wrong came from a Harvard University lawyer, named Adolf Berle (18951971), who like John Maynard Keynes had resigned from his diplomatic job at the Paris Peace Conference, 1919 and was deeply disillusioned by the Versailles Treaty. In his book with Gardiner C. Means, The Modern Corporation and Private Property (1932), he detailed the evolution in the contemporary economy of big business, and argued that those who controlled big firms should be better held to account. Directors of companies are held to account to the shareholders of companies, or not, by the rules found in company law statutes. This might include rights to elect and fire the management, require for regular general meetings, accounting standards, and so on. In 1930s America, the typical company laws (e.g. in Delaware) did not clearly mandate such rights. Berle argued that the unaccountable directors of companies were therefore apt to funnel the fruits of enterprise profits into their own pockets, as well as manage in their own interests. The ability to do this was supported by the fact that the majority of shareholders in big public companies were single individuals, with scant means of communication, in short, divided and conquered. Berle served in President Franklin Delano Roosevelt's administration through the depression, and was a key member of the so called "Brain trust" developing many of the New Deal policies. 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."[83]
[edit]John
Kenneth Galbraith
Main article: John Kenneth Galbraith
John K. Galbraith began his career as a high flying "new dealer", in the administration of Franklin Delano Roosevelt during the Great Depression. An interview from the early 1990s ishere.
After the war, John Kenneth Galbraith (19082006) became one of the standard bearers for pro-active government and liberal-democrat politics. In The Affluent Society (1958), Galbraith argued voters reaching a certain material wealth begin to vote against the common good. He argued that the "conventional wisdom" of the conservative consensus was not enough to solve the problems of social inequality.[84] 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 corporationsa "dependence effect"and the economy as a whole is geared to irrational goals.[85] InThe New Industrial State Galbraith argued that economic decisions are planned by a private-bureaucracy, a technostructure of experts who manipulatemarketing 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.
[edit]Paul
Samuelson
Main articles: Paul Samuelson, Neoclassical synthesis, and Positive economics
Paul Samuelson wrote the best selling economics texts.
In contrast to Galbraith's linguistic style, the post-war economics profession began to synthesise 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 best selling textbook writer of this generation was Paul Samuelson(19152009). His Ph.D. was an attempt to show that mathematical methods could represent a core of testable economic theory. It was published asFoundations of Economic Analysis in 1947. Samuelson started with two assumptions. First, people and firms will act to maximise their self interested goals. Second, markets tend towards an equilibrium of
prices, where demand matches supply. He extended the mathematics to describe equilibrating behaviour of economic systems, including that of the then new macroeconomic theory of John Maynard Keynes. Whilst Richard Cantillon had imitated Isaac Newton's mechanical physics of inertia and gravity in competition and the market,[11] the physiocrats had copied the body's blood system into circular flow of income models, William Jevons had found growth cycles to match the periodicity of sunspots, Samuelson adapted thermodynamics formulae to economic theory. Reasserting economics as a hard science was being done in the United Kingdom also, and one celebrated "discovery", of A. W. Phillips, was of a correlative relationship between inflation and unemployment. The workable policy conclusion was that securing full employment could be traded-off against higher inflation. Samuelson incorporated the idea of the Phillips curve into his work. His introductory textbook Economics was influential and widely adopted. It became the most successful economics text ever. Paul Samuelson was awarded the new Nobel Prize in Economics in 1970 for his merging of mathematics and political economy.
[edit]Kenneth
Arrow
Main article: Kenneth Arrow
Kenneth Arrow, interview (1/09) on the financial crisis of 20072010.here.
Kenneth Arrow (born 1921) is Paul Samuelson's brother-in-law. His first major work, forming his doctoral dissertation at Columbia University was Social Choice and Individual Values (1951), which brought economics into contact with political theory. This gave rise to social choice theory with the introduction of his "Possibility Theorem". In his words, If we exclude the possibility of interpersonal comparisons of utility, then the only methods of passing from individual tastes to social preferences which will be satisfactory and which will be defined for a wide range of sets of individual orderings are either imposed or dictatorial.[86]
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. In the 1950s, Arrow and Gerard Debreu developed the Arrow-Debreu model of general equilibria. In 1971 Arrow with Frank Hahn co-authored General Competitive Analysis (1971), which reasserted a theory of general equilibrium of prices through the economy. In 1969 the Swedish Central Bank began awarding a prize in economics, as an analogy to the Nobel prizes awarded in Chemistry, Physics, Medicine as well as Literature and Peace (though Alfred Nobel never endorsed this in his will). With John Hicks, Arrow won the Bank of Sweden prize in 1972, the youngest recipient ever. The year before, US President Richard Nixon's had declared that "We are all Keynesians now".[87] The irony was that this was the beginning of a new revolution in economic thought.
[edit]Monetarism
and the Chicago school
Main articles: Monetarism and Chicago school (economics) See also: Monetarism, Gary Becker, George Stigler, Frank Knight, Robert E. Lucas, and Robert Fogel. The interventionist monetary and fiscal policies that the orthodox post-war economics recommended came under attack in particular by a group of theorists working at the University of Chicago, which came to be known as the Chicago School. This more conservative strand of thought reasserted a "libertarian" view of market activity, that people are best left to themselves, free to choose how to conduct their own affairs. More academics who have worked at the University of Chicago have been awarded the Nobel Prize in Economics than those from any other university.
[edit]Ronald
Coase
Main articles: Ronald Coase and Law and economics Ronald Coase (born 1910) is the most prominent economic analyst of law and the 1991 Nobel Prize winner. His first major article, The Nature of the Firm (1937), argued that the reason for the existence of firms (companies, partnerships, etc.) is the existence of transaction costs. Rational individuals trade through bilateral contracts on open markets until the costs of transactions mean that using corporations to produce things is more cost-effective. His second major article, The Problem of Social Cost (1960), argued that if we lived in a world without transaction costs, people would bargain with one another to create the same allocation of resources, regardless of the way a court might rule in property disputes. Coase used the example of an old legal case about nuisance namedSturges v Bridgman, where a noisy sweetmaker and a quiet doctor were neighbours and went to court to see who should have to move.[88] Coase said that regardless of whether the judge ruled that the sweetmaker had to stop using his machinery, or that the doctor had to put up with it, they could strike a mutually beneficial bargain about who moves house that reaches the same outcome of resource
distribution. Only the existence of transaction costs may prevent this.[89] So the law ought to pre-empt what would happen, and be guided by the most efficient solution. The idea is that law and regulation are not as important or effective at helping people as lawyers and government planners believe.[90] Coase and others like him wanted a change of approach, to put the burden of proof for positive effects on a government that was intervening in the market, by analysing the costs of action.[91]
[edit]Milton
Friedman
Main article: Milton Friedman Milton Friedman (19122006) stands as one of the most influential economists of the late twentieth century. He won the Nobel Prize in Economics in 1976, among other things, for A Monetary History of the United States (1963). Friedman argued that the Great Depression had been caused by the Federal Reserve's policies through the 1920s, and worsened in the 1930s. Friedman argues 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 (1967) 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.[92] Friedman was also known for his work on the consumption function, the permanent income hypothesis (1957), which Friedman himself referred to as his best scientific work.[93] 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). This critique associated his name with the insight that a government that brings about higher inflation cannot permanently reduce unemployment by doing so. Unemployment may be temporarily lower, if the inflation is a surprise, but in the long run unemployment will be determined by the frictions and imperfections in the labour market.
[edit]Global
times
Main article: Globalisation
[edit]Amartya
Sen
Main articles: Amartya Sen and Development economics
Amartya Sen (born 1933) is a leading development and welfare economist and has expressed considerable skepticism on the validity of neo-classical assumptions. He was highly critical of rational expectations theory, and devoted his work to development and human rights. He won the Nobel Prize in Economics in 1998.
Joseph Stiglitz has both been successful as an economist and a popular author. He talks about his book Making Globalization Work here.
[edit]Joseph
E. Stiglitz
Main articles: Joseph E. Stiglitz, George Akerlof, and Information economics Joseph Stiglitz (born 1943) Received the Nobel Prize in 2001 for his work in information economics. He has served as chairman of President Clinton's Council of Economic Advisors 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. He is a popular and academic author. 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. [94]
Paul Krugman at the German National Library in Frankfurt am Main
[edit]Paul
Krugman
Main articles: Paul Krugman and International economics Paul Krugman (born 1953) is a contemporary economist. His textbook International Economics (2007) appears on many undergraduate reading lists. Well known as a representative of progressivism, he writes a weekly column on economics, American economic policy, and American politics more generally in the New York Times. He was awarded the Nobel Prize in Economics in 2008 for his work on New Trade Theory and economic geography.
[edit]Contemporary
economic thought
since the Bretton Woods era
[edit]Macroeconomics
Further information: History of macroeconomic thought From the 1970s onwards Friedman's monetarist critique of Keynesian macroeconomics formed the starting point for a number of trends in macroeconomic theory opposed to the idea that government intervention can or should stabilise the economy.[95] Robert Lucas criticized Keynesian thought for its inconsistency with microeconomic theory. Lucas's critique set the stage for a neoclassical school of macroeconomics, New Classical economics based on the foundation of classical economics. Lucas also popularized the idea of rational expectations,[96] which was used as the basis for several new classical theories including the Policy Ineffectiveness Proposition.[97] The standard model for new classical economics is the real business cycle theory, which sought to explain observed fluctuations in output and employment in terms of real variables such as changes in technology and tastes. Assuming competitive markets, real business cycle theory implied that cyclical fluctuations are optimal responses to variability in technology and tastes, and that macroeconomic stabilisation policies must reduce welfare.[98]
Keynesian economics made a comeback among mainstream economists with the advent of New Keynesian macroeconomics. The central theme of new Keynesianism was the provision of a microeconomic foundation for Keynesian macroeconomics, obtained by identifying minimal deviations from the standard microeconomic assumptions which yield Keynesian macroeconomic conclusions, such as the possibility of significant welfare benefits from macroeconomic stabilization.[99] Akerlof's 'menu costs' arguments, showing that, under imperfect competition, small deviations from rationality generate significant (in welfare terms) price stickiness, are good example of this kind of work.[100] Economists have combined the methodology of real business cycle theory with theoretical elements, like sticky prices, from new Keynesian theory to produce the new neoclassical synthesis. Dynamic stochastic general equilibrium (DSGE) models, large systems of microeconomic equations combined into models of the general economy, are central to this new synthesis. The synthesis dominates present day economics.
[edit]See
also
Business and economics portal
Articles
History of international trade Marshall Plan Competition law Contract law Corporate law Energy economics Labour law Perspectives on Capitalism Regulation Torts World Trade Organisation Constitutional economics
Lists
List of economists List of economics topics List of economic systems List of international trade topics
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[edit]Notes
1. 2.
^ Mattick, Paul (2001-07-08). "Who Is the Real Adam Smith?". The New York Times. Retrieved 2008-05-14. ^ Hoaas, David J.; Madigan, Lauren J. (1999). "A citation analysis of economists in principles of economics textbooks". The Social Science Journal 36 (3): 525532. doi:10.1016/S0362-3319(99)00022-1
3.
^ Mark Blaug.Economic theory in retrospect. Cambridge University Press. 1997. ISBN 9780521577014 p. 34
4. 5. 6. 7. 8. 9.
^ David Held, Models of Democracy (Polity, 2006) 3rd Ed., p.11 ff. ^
a b
Aristotle (350BC) Politics Book II, Part V
^ Aristotle (350BC) Politics Book I, Part IX ^ Aristotle (350BC) Politics Book I, Part X ^ Aristotle (350BC) Politics Book I, Part XI ^ Mochrie (2005) p.5
10. ^ Fusfeld (1994) p.15 11. ^

a b
Fusfeld (1994) p.21
12. ^ Locke (1689) Chapter 9, section 124 13. ^ Locke (1689) Chapter 5, sections 2627. 14. ^ Locke (1691) Considerations Part I, Thirdly 15. ^ Danbom (1997) Rural Development Perspectives, vol. 12, no. 1 p.15 Why Americans Value Rural Life by David B. Danbom 16. ^
a b
Fusfeld (1994) p.24
17. ^ Hague (2004) p.187, 292 18. ^ Stephen (1898) p. 8. 19. ^ Smith (1776) Book I, Chapter 2, para 2 20. ^
a b
Smith (1776) p.
21. ^ Smith (1776) Book I, Chapter 5, para 1 22. ^ Smith (1776) Book I, Chapter 7, para 9 23. ^ Smith (1776) Book I, Chapter 10, para 82 24. ^ Smith (1776) Book I, Chapter 7, para 26 25. ^ Keynes (1936) Chapter 1, footnote 26. ^ Bentham (1791) Chapter I, para I 27. ^ Bentham (1791) Chapter II, para I
28. ^ Bentham (1791) Chapter IV 29. ^ Bentham (1791) Chapter I, para IV 30. ^ Fusfeld (1994) p.47 31. ^ Thornton (1802) The Paper Credit of Great Britain 32. ^ Historical figures Thomas Malthus (17661834), BBC 33. ^ "Thomas Robert Malthus, 17661834.". The History of Economic Thought Website. "Malthus denied the validity of Say's Law and argued that there could be a "general glut" of goods. Malthus believed that economic crises were characterized by a general excess supply caused by insufficient consumption." 34. ^ "Rationale and Core Principles", The International Society of Malthus 35. ^ Who is Thomas Malthus?, ALL About Science 36. ^ David Ricardo, Economic History Services 37. ^ David Ricardo's Contributions to Economics, The Victorian Web 38. ^ "David Ricardo", Library of Economics and Liberties 39. ^ David Ricardo, 17721823, The History of Economic Thought Website 40. ^ John Stuart Mill: Overview, The Internet Encyclopedia of Pholosophy. 41. ^ Pressman (2006) p.44 42. ^ John Stuart Mill, 18061873, The History of Economic Thought: "Happily, there is nothing in the laws of Value which remains for the present or any future writer to clear up; the theory of the subject is complete: the only difficulty to be overcome is that of so stating it as to solve by anticipation the chief perplexities which occur in applying it." (Mill's quote) 43. ^ Stanford Encyclopedy of Philosophy John Stuart Mill section Political Economy 44. ^ Pressman (2006) p.45 45. ^ Mill (1871) Book 4, Chapter 6 46. ^ Stigler (1965) pp. 115 47. ^ Pressman (2006) p.46 48. ^ In 1819 this was 9 shillings, 11 pence; Fusfeld (1994) p.57 49. ^ Proudhon (1846) Volume 1 50. ^ Proudhon (1846) Volume 2 51. ^ Mill (1848) Book V, Chapter II; Interestingly Mill amended his wording from the 3rd edition in 1852, see [1]; see generally, Variations in the Editions of J.S. Mill's Principles of Political Economy, M.A. Ellis, Economic Journal, vol. 16, June 1906, pp. 291302. 52. ^ Copleston, Frederick. Social Philosophy in France, A History of Philosophy, Volume IX, Image/Doubleday, 1994, p. 67 53. ^ Engels (1845) Die Lage der arbeitenden Klassen von England in 1844
54. ^ Marx (1859) Zur Kritik der Politischen Oekonomie, Berlin, p. 3. 55. ^ In Marx's words, "the exchange of commodities is evidently an act characterised by a total abstraction from use value." 56. ^ Marx (1867) Volume I, Part I, Chapter 1, para 14. In Marx's words, "The labour time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time." 57. ^ Marx (1867) Volume I, Part I, Chapter 1, Section 4, para 123 58. ^ Marx (1867) Volume I, Part III, Chapter 9, Section 1 59. ^ Marx (1867) Volume I, Part II, Chapter VI, para 10. In Marx's words, "Therefore the labour-time requisite for the production of labour-power reduces itself to that necessary for the production of those means of subsistence; in other words, the value of labour-power is the value of the means of subsistence necessary for the maintenance of the labourer." 60. ^ Menger, Carl (1871) Grundstze der Volkswirtschaftslehre,full text in html 61. ^ Jevons (1878) p.334 62. ^ Alan Kirman (2008). "Pareto, Vilfredo (18481923)," Efficiency or Pareto optimality', The New Palgrave Dictionary of Economics. Abstract. Pareto (1897). Cours d'conomie politique, v. 2. Pareto ([1906] 1971). Manual of Political Economy, ch. 6, Mathematical Appendix, sect. 145-52. Translation of French edition from 1927. 63. ^ Principles of Economics, by Alfred Marshall, at the Library of Economics and Liberty 64. ^ Buchholz (1989) p.151 65. ^ Veblen, Thorstein Bunde; "The Preconceptions of Economic Science" Pt III, Quarterly Journal of Economics v14 (1900). 66. ^ Colander, David; The Death of Neoclassical Economics. 67. ^ Alessandro Roncaglia. The wealth of ideas: a history of economic thought. Cambridge University Press. 2005. ISBN 9780521843379. p. 431 68. ^ "Biography of F. A. Hayek (18991992)". Retrieved 2009-06-26. 69. ^ Law, legislation and liberty (1970) 70. ^ Keynes (1919) The Economic Consequences of the Peace at The Library of Economics and Liberty 71. ^ Keynes (1919) Chapter III, para 20 72. ^ Keynes (1919) Chapter V, para 43 73. ^ Keynes (1919) Chapter VI, para 4 74. ^ Keynes (1919) Chapter VII, para 7 75. ^ Keynes (1919) Chapter VII, para 30
76. ^ Keynes (1919) Chapter VII, para 48 77. ^ Keynes (1919) Chapter VII, para 58 78. ^ e.g. Etienne Mantioux (1946) The Carthaginian Peace, or the Economic Consequences of Mr. Keynes 79. ^ Keynes (1923) Chapter 3 80. ^ This was not accepted by the United States Congress at the time, but arose later through theGeneral Agreement on Tariffs and Trade of 1947 and the World Trade Organisation of 1994 81. ^ Stabile, Donald R. "Veblen and the Political Economy of the Engineer: the radical thinker and engineering leaders came to technocratic ideas at the same time," American Journal of Economics and Sociology (45:1) 1986, 4344. 82. ^ The Engineers and the Price System, 1921. 83. ^ Berle (1967) p. xxiii 84. ^ Galbraith (1958) Chapter 2; n.b. though Galbraith claimed to coin the phrase "conventional wisdom", the phrase is used several times in Thorstein Veblen's book The Instinct of Workmanship. 85. ^ Galbraith (1958) Chapter 11 86. ^ Kenneth Arrow, "A Difficulty in the Concept of Social Welfare" (1950). 87. ^ In 1971, announcing wage and price controls. This was actually lifted from a comment by Milton Friedman in 1965 which formed a Time article title, Friday, Dec. 31, 1965. See below. 88. ^ Sturges v Bridgman (1879) 11 Ch D 852 89. ^ Coase (1960) IV, 7 90. ^ Coase (1960) V, 9 91. ^ Coase (1960) VIII, 23 92. ^ Friedman (1967) p. 93. ^ Charlie Rose Show. 2005-12-26. 94. ^ Stiglitz (1996) p.5 95. ^ Manikw, N. Greg. "A Quick Refresher Course in Macroeconomics." Journal of Economic Literature, Vol. 28, No. 4. (Dec., 1990), pp. 1647. 96. ^ Mankiw, 16471648. 97. ^ Mankiw, 1649. 98. ^ Mankiw, 1653. 99. ^ Mankiw, 1655. 100. ^ Mankiw, 1657.
[edit]References
Primary sources
Aquinas, Thomas (1274) Summa Theologica Aristotle (c.a. 350BC) Nicomachean Ethics Aristotle (c.a. 350BC) Politics Arrow, Kenneth J (1951) Social Choice and Individual Values, 2nd Ed. 1963, Wiley, New York, ISBN 0300013647
Marshall, Alfred (1890) Principles of Economics Marx, Karl (1871) Das Kapital Mill, John Stuart (1871) Principles of Political Economy Mun, Thomas (1621) A Discourse of Trade from England unto the East Indies
North, Dudley (1691) Discourses upon trade Petty, William (1690) The Political Arithmetick Quesnay, Franois (1758) Tableau conomique Ricardo, David (1827) Principles of Political Economy and Taxation
Arrow, Kenneth J. and Frank Hahn
(1971) General Competitive Analysis, Holden- Day, San Francisco, ISBN 0816202753 Bentham, Jeremy (1776) Fragment on Government Bentham, Jeremy (1789) An Introduction to the Principles of Morals and Legislation Burke, Edmund (1790) Reflections on the Revolution in France Burke, Edmund (1795) Thoughts and Details on Scarcity Cantillon, Richard (1732) Essay on the Nature of Commerce in General Coase, Ronald H. (1937) The Nature of the Firm Economica, Vol.4, Issue 16, pp. 386405 Coase, Ronald H. (1960) The Problem of Social Cost (this online version excludes some parts) Journal of Law and Economics, Vol.3, pp. 144 Commons, John R. (1934) Institutional Economics New York: Macmillan Engels, Friedrich (1845) Condition of the Working Class in England in 1844 Friedman, Milton (1953) Essays in Positive Economics: Part I The Methodology of Positive Economics, University of Chicago Galbraith, J.K. (1958) The Affluent Society, 3rd Ed. reprinted 1991, Penguin Books, ISBN 014013610
Robinson, Joan (1953) The Production Function and the Theory of Capital Robinson, Joan (1962) Economic Philosophy Scotus, Duns (1295) Sententiae Sen, Amartya (1985) "The Moral Standing of the Market," in Ethics and Economics, ed. Ellen Frankel Paul, Fred D. Miller, Jr and Jeffrey Paul, Oxford, Basil Blackwell, pp. 119 Sen, Amartya (19767) "Rational Fools: A Critique of the Behavioural Foundations of Economic Theory," Philosophy and Public Affairs, 6, pp. 31744 Sen, Amartya (1987) On Ethics and Economics Oxford, Basil Blackwell Sismondi, J.-C.-L. Simonde de (1819, trans.1991) "New Principles of Political Economy: Of Wealth in Its Relation to Population" Smith, Adam (1759) The Theory of Moral Sentiments Smith, Adam (1776) An Inquiry Into The Wealth of Nations Sraffa, Piero (1960) Production of Commodities by Means of Commodities Stigler, George J (1965) "The Nature and Role of Originality in Scientific Progress", in Essays in the History of Economics, University of Chicago Press, pp. 1
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Fusfeld, Daniel R. (1994). The Age of the Economist, Harper Collins, 7th Ed. ISBN 0673468054 Hague, William (2004). William Pitt the Younger Harper Perennial ISBN 0007147201 Heilbroner, Robert (1953) The Worldly Philosophers, Simon & Schuster 7th Ed. 1999, ISBN 0-684-86214X
Macfie, Alec Lawrence (1955). "The Scottish Tradition in Economic Thought". Econ Journal Watch 6(3): 389410. Reprinted from Scottish Journal of Political Economy 2(2): 81103 [4]
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Medema, Steven G., abd Warren J. Samuels, 2003. The History of Economic Thought: A Reader. Routledge. Description & chapter links, pp. vii-ix.
Mochrie, Robert (2005). Justice in Exchange: The Economic Philosophy of John Duns Scotus Pressman, Steven (2006). Fifty Major Economists, Routledge, ISBN 0415366496 Screpanti, Ernesto, Stefano Zamagni, (2005). An Outline of the History of Economic Thought, 2nd ed. Oxford University Press. Description & ch.-preview links, pp. xi-xviii.
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[edit]Journals European Journal of the History of Economic Thought (U.K.) History of Economic Ideas (Italy) History of Economics Review (Australia) History of Economic Thought (Japan) History of Political Economy (U.S.) Journal of the History of Economic Thought (U.K.)
Evolutionary economics
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Evolutionary economics is part of mainstream economics as well as heterodox school of economic thought that is inspired by evolutionary biology. Much likemainstream economics, it stresses complex interdependencies, competition, growth, structural change, and resource constraints but differs in the approaches which are used to analyze these phenomena (Hodgson 1993). Evolutionary economics deals with the study of processes that transform economy for firms, institutions, industries, employment, production, trade and growth within, through the actions of diverse agents from experience and interactions, using evolutionary methodology. Mainstream economic reasoning begins with the postulates of scarcity and rational agents (that is, agents modeled as maximizing their individual welfare), with the "rational choice" for any agent being a straightforward exercise in mathematical optimization. There has been renewed interest in treating economic systems as evolutionary systems in the developing field of Complexity economics. Evolutionary economics does not take the characteristics of either the objects of choice or of the decisionmaker as fixed. Rather its focus is on the non-equilibriumprocesses that transform the economy from within and their implications. The processes in turn emerge from actions of diverse agents with bounded rationality who may learn from experience and interactions and whose differences contribute to the change. The subject draws on the evolutionary methodology of Charles Darwinand the non-equilibrium economics principle of circular and cumulative causation. It is naturalistic in purging earlier notions of economic change as teleological or necessarily improving the human condition.[1]
Contents
[hide]
1 Predecessors 2 Schumpeter's "Entwicklung" 3 Present state of discussion 4 See also 5 Notes 6 References
7 External links
[edit]Predecessors
In the mid-19th century was presented[by whom?] a schema of stages of historical development, by introducing the notion that "human nature" was not constant and was not determinative of the nature of the social system; on the contrary, he made it a principle that human behavior was a function of the social and economic system in which it occurred. Karl Marx based his theory of economic development on the premise of evolving economic systems; specifically, over the course of history superior economic systems would replace inferior ones. Inferior systems were beset by internal contradictions and inefficiencies that make them impossible to survive over the long term. In Marx's scheme, feudalism was replaced by capitalism, which would eventually be superseded by communism.[2] At approximately the same time, Charles Darwin developed a general framework for comprehending any process whereby small, random variations could accumulate and predominate over time into large-scale changes that resulted in the emergence of wholly novel forms ("speciation"). This was followed shortly after by the work of the American pragmatic philosophers (James, Peirce, Dewey) and the founding of two new disciplines, psychology and anthropology, both of which were oriented toward cataloging and developing explanatory frameworks for the variety of behavior patterns (both individual and collective) that were becoming increasingly obvious to all systematic observers. The state of the world converged with the state of the evidence to make almost inevitable the development of a more "modern" framework for the analysis of substantive economic issues. Thorstein Veblen (1898) coined the term "evolutionary economics" in English. He began his career in the midst of this period of intellectual ferment, and as a young scholar came into direct contact with some of the leading figures of the various movements that were to shape the style and substance of social sciences into the next century and beyond. Veblen saw the need for taking account of cultural variation in his approach; no universal "human nature" could possibly be invoked to explain the variety of norms and behaviors that the new science of anthropology showed to be the rule, rather than the exception. He emphasised the conflict between "industrial" and "pecuniary" values and in the hands of later writers this was interpreted as the "ceremonial / instrumental dichotomy" (Hodgson 2004); Veblen saw that every culture is materially-based and dependent on tools and skills to support the "life process", while at the same time, every culture appeared to have a stratified structure of status ("invidious distinctions") that ran entirely contrary to the imperatives of the "instrumental" (read: "technological") aspects of group life. The "ceremonial" was related to the past, and conformed to and supported the tribal legends; "instrumental" was oriented toward the technological imperative to judge value by the ability to control future consequences. The "Veblenian dichotomy" was a specialized variant of the
"instrumental theory of value" due to John Dewey, with whom Veblen was to make contact briefly at the University of Chicago. Arguably the most important works by Veblen include, but are not restricted to, his most famous works (Theory of the Leisure Class; Theory of Business Enterprise), but his monograph Imperial Germany and the Industrial Revolution and the 1898 essay entitled Why is Economics not an Evolutionary Science have both been influential in shaping the research agenda for following generations ofsocial scientists. TOLC and TOBE together constitute an alternative construction on the neoclassical marginalist theories of consumption and production, respectively. Both are founded on his dichotomy, which is at its core a valuational principle. The ceremonial patterns of activity are not bound to any past, but to one that generated a specific set of advantages and prejudices that underlie the current institutions. "Instrumental" judgments create benefits according to a new criterion, and therefore are inherently subversive. This line of analysis was more fully and explicitly developed byClarence E. Ayres of the University of Texas at Austin from the 1920s. Kenneth Boulding was one of the advocates of the evolutionary methods in social science, as is evident from Kenneth Boulding's Evolutionary Perspective. Kenneth Arrow, Ronald Coase and Douglass North are some of the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel winners who are known for their sympathy to the field. More narrowly the works Jack Downie[3] and Edith Penrose[4] offer many insights for those thinking about evolution at the level of the firm in an industry.
[edit]Schumpeter's
"Entwicklung"
Joseph Schumpeter, who lived in the first half of 20th century, was the author of the book The Theory of Economic Development (1911, transl. 1934). It is important to note that for the word developmenthe used in his native language, the German word "Entwicklung", which can be translated as development or evolution. The translators of the day used the word "development" from the French "dveloppement", as opposed to "evolution" as this was used by Darwin. (Schumpeter, in his later writings in English as a professor at Harvard, used the word "evolution".) The current term in common use is economic development.[citation needed] In Schumpeter's book he proposed an idea radical for its time: the evolutionary perspective. He based his theory on the assumption of usual macroeconomic equilibrium, which is something like "the normal mode of economic affairs". This equilibrium is being perpetually destroyed by entrepreneurs who try to introduce innovations. A successful introduction of an innovation disturbs the normal flow of economic life, because it forces some of the already existing technologies and means of production to lose their positions within the economy.[citation needed]
[edit]Present
state of discussion
One of the major contributions to the emerging field of evolutionary economics has been the publication of 'An Evolutionary Theory of Economic Change' by Richard Nelson and Sidney Winter. These authors have focused mostly on the issue of changes in technology and routines, suggesting a framework for their analysis. If the change occurs constantly in the economy, then some kind of evolutionary process must be in act, and there has been a proposal that this process is Darwinian in nature. Then, mechanisms that provide selection, generate variation and establish self-replication, must be identified. Milton Friedman proposed that markets act as major selection vehicles. As firms compete, unsuccessful rivals fail to capture an appropriate market share, go bankrupt and have to exit[5]. The variety of competing firms is both in their products and practices, that are matched against markets. Both products and practices are determined by routines that firms use: standardized patterns of actions implemented constantly. By imitating these routines, firms propagate them and thus establish inheritance of successful practices.[6][7] A key contribution to the current discussion is Esben Andersen's book Schumpeter's Evolutionary Economics (2009).
[edit]See
also
Business and economics portal
Behavioral economics Complexity economics Creative destruction Cultural economics Darwinism EAEPE Ecological model of competition Economics Evolutionary socialism Hypergamy Institutional economics Natural selection Population dynamics Social Darwinism Innovation system Non-equilibrium economics Universal Darwinism
[edit]Notes
1. ^ Ulrich Witt, (2008). "evolutionary economics." The New Palgrave Dictionary of Economics, 2nd Edition, v. 3, pp. 67-68 Abstract. 2. ^ Gregory and Stuart. (2005) Comparing Economic Systems in the Twenty-First Century, Seventh Edition, South-Western College Publishing, ISBN 0-618-26181-8 3. ^ Jack Downie (1958) The Competitive Process 4. ^ E. Penrose (1959) The Theory of the Growth of the Firm 5. ^ Mazzucato, M. (2000), Firm Size, Innovation and Market Structure: The Evolution of Market Concentration and Instability, Edward Elgar, Northampton, MA, ISBN 1-84064-346-3, 138 pages. 6. ^ Friedman, Milton (1953). Essays in Positive Economics, University of Chicago Press. Chapter preview links. 7. ^ Page 251: Jon Elster, Explaining Technical Change : a Case Study in the Philosophy of Science, Second ed.
[edit]References
Aldrich, Howard E., Geoffrey M. Hodgson, David L. Hull, Thorbjrn Knudsen, Joel Mokyr and Viktor J. Vanberg (2008) In Defence of Generalized Darwinism, Journal of Evolutionary Economics, 18(5), October, pp. 57796.
Hodgson, Geoffrey M. (1993) Economics and Evolution: Bringing Life Back Into Economics (Cambridge, UK and Ann Arbor, MI: Polity Press and University of Michigan Press).
Hodgson, Geoffrey M. (2004) The Evolution of Institutional Economics: Agency, Structure and Darwinism in American Institutionalism (London and New York: Routledge).
Richard R. Nelson and Sidney G. Winter. (1982). An Evolutionary Theory of Economic Change. Harvard University Press.
Sidney G. Winter. (1987). "natural selection and evolution," The New Palgrave Dictionary of Economics, v. 3, pp. 61417.
Veblen, Thorstein B. (1898) Why Is Economics Not an Evolutionary Science?, Quarterly Journal of Economics, 12(3), July, pp. 37397.
Ulrich Witt, (2008). "Evolutionary Economics" The New Palgrave Dictionary of Economics, 2nd Edition, v. 3, pp. 6773. Abstract.
[edit]External
links
Evolutionary economics at the Open Directory Project "Evolutionary Economics et al." by Prof. Esben S. Andersen - Aalborg University, Denmark
Evolutionary Economics by J.P. Birchall
Economics in Nursing
By Sam Grover, eHow Contributor updated February 24, 2011
Print this article
Nurses are affected by economic principles.
Economics is present in and has effects on everything. This is because economics covers such a wide range of subtopics. Not only does the science deal with what people buy and sell, it also describes how people interact with one another in non-monetary ways. It's important to understand a few of the ways in which nursing interacts with economics.
1. Employment Supply and Demand

o
As of 2011, nursing was a reasonably well-paid job, with RNs making an average of $33 an hour in California, for example. This is because of supply and demand. As the population ages and more people need health care, the demand for nurses is increasing. This increases the "price" of an hour of a nurse's time, as people require an economic incentive to come to work. Because fewer qualified nurses exist than jobs for them, they need to be attracted with high wages. This is a classic example of the law of supply and demand. If more people study nursing based on these high salaries, the supply of nursing labor will increase, thus decreasing the price. If, on the other hand, demand increases faster than supply, the hourly wage will increase as competition for qualified nurses also increases.
2. Subsidies
o
Another economic principle involved in nursing is the effect of subsidies. When the government or other large institution funds nursing students' education (which is increasingly common because of
the low supply of nurses), the market is skewed. This is because there is a contingent of nurses who paid for their education and therefore need to charge higher wages, but a contingent of nurses who did not pay for their education therefore don't need to charge as much in order to pay for it. This means that the presence of a third party in the supply/demand equation is skewing the value of labor. Because prices are set on an aggregate basis, the nurses who paid for their education are forced to settle for marginally less than they otherwise would have. The nurses who did not pay, on the other hand, are paid marginally more than they need to fund their education. The overall result is that nobody is getting what the market actually determines her to be worth.
3. Incentives
o
Economics also affects nurses' individual decisions. For example, shifts are often paid at different rates depending on when they are scheduled, how difficult they are and other factors. Rapides Regional Medical Center in Alexandria, Louisiana, for example, pays its nurses 25 percent more in exchange for working on the weekend. This creates a classic opportunity cost decision. A nurse can make more money by working on the weekend, but he has to weigh that against intangibles, such as the fact that most social events happen on weekends. The extra 25 percent, like everything, comes at a cost, such as missing a social baseball game, and the nurse needs to consider that when he decides to work.
4. Elasticity of Supply
o
Elasticity of supply is an economic term that describes the fact that supply of a product is sometimes subject to factors such as price, but other times it is not. It also describes the extent to which supply is elastic or inelastic. Nursing labor is a fairly elastic product. This means that as wages increase, the number of nurses available also increases. The elasticity for nurses, according to David M Blau, is 1.1, meaning a 10 percent increase in wages will result in 1 percent increase in the number of nurses available. This doesn't seem like much, but many careers have much lower elasticity, with doctors clocking in at a paltry 0.3. This shows the flexible, accessible nature of nursing and how it is affected by the economy as a whole.
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References
Medscape: Politics, Economics and Nursing Shortages: A Look at U.S. Policies: The Economics of Nursing Workforce Subsidies Here for Good: Nursing Incentives Web Books: Price Elasticity of Supply
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Classical economics

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Classical economics, Encyclopdia Britannica [edit]

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Economic liberalism Classical economics Keynesian economics Constitutional economics Monetarism

Colander, David; The Death of Neoclassical Economics.

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hand, heterodox economics may be labeled as falling in a "institutions-history-social structure" nexus.[3][10]

of the neoclassical model of labor markets

or schools of heterodox economics

Technocracy (Energy Accounting) Thermoeconomics

Davis, John B. (2006). "The Nature of Heterodox Economics". Post-Autistic Economics

Deregulation Socialization Collectivization Common ownership Marketization Expropriation Financialization

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