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Classical economics From Wikipedia, the free encyclopedia

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 1830–70 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

o 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 price-determining, 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 Thünen.

[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. 351–369

5. ^ Kaldor, Nicholas (1956) "Alternative Theories of Distribution", Review of Economic Studies, V. 23: pp. 83–

100

6. ^ Pasinetti, Luigi L. (1959–60) "A Mathematical Formulation of the Ricardian System", Review of Economic

Studies: pp. 78–98

7. ^ Pasinetti, Luigi L. (1977) Lectures on the Theory of Production, Columbia University Press

8. ^ 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. 1415–1434

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", Unwin-

Hyman

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: 187–232 (2000)

14. ^ Terry Peach (1993), "Interpreting Ricardo", Cambridge University Press

[edit]External links

Classical economics, Encyclopædia Britannica [edit]

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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 domains—ranging 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 ends—in 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


[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 (1874–1877). 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. Profit-

maximizing 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 English-

speaking 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 1960s—the

"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 non-

rational 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


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. ^ Clark, B. (1998). Principles of political economy: A comparative approach. Westport, CT: Praeger.

3. ^ Veblen, T. (1900). The Preconceptions of Economic Science - III. The Quarterly Journal of Economics,

14(2), 240-269. (Term on pg. 261).

4. ^ a b Colander, David; The Death of Neoclassical Economics.

5. ^ Aspromourgos, T. (1986). On the origins of the term ‘neoclassical’. Cambridge Journal of Economics,

10(3), 265 -270. [1]

6. ^ a b George J. Stigler (1941 [1994]). Production and Distribution Theories. New York: Macmillan.Preview.

7. ^ Fonseca G. L.; “Introduction to the Neoclassicals”, The New School.

8. ^ 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 Jaffé (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 From Wikipedia, the free encyclopedia

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 never-ending dispute about which scholars are "institutionalists" or not—and 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

o 1.1 Thorstein Veblen

o 1.2 John R. Commons

o 1.3 Wesley Mitchell

o 1.4 Clarence Ayres

o 1.5 Adolf Berle

o 1.6 John Kenneth Galbraith

• 2 New institutional economics

• 3 Institutionalism today

• 4 See also

• 5 Notes

• 6 References

• 7 Journals


[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 (1857–1929) 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 (1862–1945) 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. Mitchell’s 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 (1895–1971) 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 (1908–2006) 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 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]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 Wisconsin–Madison), 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


Institutional logic

Institutionalist political economy


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. ^ Berle (1967) p. xxiii

7. ^ 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. ^ Galbraith (1958) Chapter 11

9. ^ 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. Ménard 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 Non-Exclusive Resource," J. of Law and Economics 13:49-70.

Commons, John R. (1931). "Institutional Economics," American Economic Review Vol. 21 : p p.648–657.

_____ (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. 43–51.

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. Ménard 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 From Wikipedia, the free encyclopedia

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"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 2.1 Criticism of the neoclassical model of individual behavior

o 2.2 Criticism of the neoclassical model of market equilibrium

o 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


• 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, post-Keynesians and others, who object to applications of microeconomic theory to real-world 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 economics—opening 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

consensus—there 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:

483–505. doi:10.1093/cje/bei093.

4. ^ C. Barry, 1998. Political-economy: A comparative approach. Westport, CT: Praeger.[page needed]

5. ^ 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. ^ Eric Zencey, 2009. "Mr. Soddy’s Ecological Economy",] The New York Times, April 12, p. WK 9.

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

Review (40): 23–30.

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): 157–170. 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 0-631-22573-

0 p. 452 [edit]

Economic system From Wikipedia, the free encyclopedia

Part of a series on

Economic systems

Ideological systems

Anarchist · Capitalist

Communist · Corporatist

Fascist · Georgist

Islamic · Laissez-faire

Market socialist · (Neo-) Mercantilist

Participatory

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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 employee-employer 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 2.1 Types of socialist systems

o 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


[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 decision-making, 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., non-ownership). 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 Đổi Mới 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


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 Encyclopædia Britannica, v. 17, pp. 908–15.

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. ^ NA (2007). "economic systems," The New Encyclopædia Britannica, v. 4, p. 357.

2. ^ Comparing Economic Systems in the Twenty-First Century, 2003, by Gregory and Stuart. ISBN 0-618-

26181-8.

3. ^ David W. Conklin (1991), Comparative Economic Systems, University of Calgary Press, p.1.

4. ^ 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 post-

scarcity 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 0-618-

26181-8. [edit]

Difference Between Classical & Neoclassical Economics By Andrew Button, eHow Contributor updated February 07, 2011

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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

o 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-neoclassical-economics.html#ixzz1UKJyeJQO

Schools of economic thought From Wikipedia, the free encyclopedia

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 8th–12th 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, long-

distance 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 al-

mal),[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-Nu‘man

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

Nasīr al-Dīn al-Tūsī (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. Niccolò

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

François 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 (1729–1803) 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 Léonard de Sismondi

Johann Heinrich von Thünen

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

Frédéric Bastiat

Maurice Block

Pierre Paul Leroy-Beaulieu

Gustave de Molinari

Yves Guyot

Jean-Baptiste Say

Léon 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 Bücher, 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

Émile Levasseur

François 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 Acemoğlu

[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

Léon 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). New-

Keynesian 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 alternative—the 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


In the late 20th Century three of the areas of study which are producing change in economic thinking are: risk-

based 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


Schools of economic thought and methodology JEL: B Subcategories of the JEL classification codes

Kameralism

Manchester school

School of Salamanca


[edit]Notes

1. ^ The Cambridge economic history of Europe, p. 437. Cambridge University Press, ISBN 0521087090.

2. ^ Subhi Y. Labib (1969), "Capitalism in Medieval Islam", The Journal of Economic History 29 (1), pp. 79–96

[81, 83, 85, 90, 93, 96].

3. ^ Jairus Banaji (2007), "Islam, the Mediterranean and the rise of capitalism", Historical Materialism15 (1),

pp. 47–74, 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. 785–834 [798–9].

6. ^ Subhi Y. Labib (1969), "Capitalism in Medieval Islam", The Journal of Economic History 29 (1): 79–96

[92–3]

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. 263–93. Cambridge University Press.

9. ^ Samir Amin (1978), "The Arab Nation: Some Conclusions and Problems", MERIP Reports 68, pp. 3–14

[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-Roegen’s 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 From Wikipedia, the free encyclopedia

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

















Lists





Contents

[hide]

• 1 Early economic thought

o 1.1 Aristotle

o 1.2 Middle Ages

• 2 Mercantilists and nationalism

o 2.1 Thomas Mun

o 2.2 Philipp von Hörnigk

o 2.3 Jean Baptiste Colbert

• 3 British enlightenment

o 3.1 John Locke

o 3.2 Dudley North

o 3.3 David Hume

• 4 The circular flow

• 5 Adam Smith and The Wealth of Nations

o 5.1 Context

o 5.2 The invisible hand

o 5.3 Limitations

• 6 Classical political economy

o 6.1 Jeremy Bentham

o 6.2 Jean-Baptiste Say

o 6.3 Thomas Malthus

o 6.4 David Ricardo

o 6.5 John Stuart Mill

• 7 Capitalism and Marx

o 7.1 Context

o 7.2 Das Kapital

o 7.3 After Marx

• 8 Neoclassical thought

o 8.1 Marginal utility

o 8.2 Mathematical analysis

o 8.3 The Austrian school

• 9 Depression and reconstruction

o 9.1 John Maynard Keynes

o 9.2 The General Theory

o 9.3 Keynesian economics

• 10 The "American Way"

o 10.1 Institutionalism

o 10.2 John Kenneth Galbraith

o 10.3 Paul Samuelson

o 10.4 Kenneth Arrow

• 11 Monetarism and the Chicago school

o 11.1 Ronald Coase

o 11.2 Milton Friedman

• 12 Global times

o 12.1 Amartya Sen

o 12.2 Joseph E. Stiglitz

o 12.3 Paul Krugman

• 13 Contemporary economic thought

o 13.1 Macroeconomics since the Bretton Woods era

• 14 See also

• 15 Notes

• 16 References

• 17 Journals


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v · d · e

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 (1225–1274) 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 (1265–1308) 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 Niccolò 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 (1571–1641) 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 Hörnigk

The title page to Philipp von Hörnigkstatement of mercantilist philosophy.

Main article: Philipp von Hörnigk

Philipp von Hörnigk (1640–1712, 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 Österreich Über 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 (1619–1683) 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 (1680–1734) 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 (1632–1704) was born near Bristol and educated in London and Oxford. He is considered one of

the most significant philosophers of his era mainly for his critique of Thomas Hobbes' defense of absolutism

in Leviathan (1651) and 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 (1641–1691) 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 (1711–1776) 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 (1712–1759) 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.

François Quesnay (1694–1774) 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 économique (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 (1727–1781) was born in Paris and from an old Norman family. His best known

work, Réflexions 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 suppressingcorvées (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 (1723–1790) 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 (1748–1832) 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 (1767–1832) 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 (1773–1836) 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 (1766–1834) 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 (1772–1823) 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 (1806–1873) 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 (1818–1883) 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 (1771–1858) 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 Pierre-

Joseph 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 Böhm-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 (1840–1921), an Austrian economist stated the basic principle of marginal utility in Grundsätze 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 (1835–1882) 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 (1834–1910), 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 variations—are connected as effect and cause.[61]

[edit]Mathematical analysis Main articles: Vilfredo Pareto, Alfred Marshall, Francis Edgeworth, and Johann Heinrich von Thünen

Alfred Marshall wrote the main alternative textbook to John Stuart Mill of the day, Principles of Economics (1882)

Vilfredo Pareto (1848–1923) 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 Böhm-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 Böhm-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 (1883–1950) 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 (1881–1973) 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 (1899–1992), 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 (1914–1918). 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 (1883–1946) 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 2008–2009 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 (1857–1929), 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 (1862–1945) 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 (1895–1971),

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 (1908–2006) 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 corporations—a "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(1915–2009). 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 2007–2010.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 (1912–2006) 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

[edit]Macroeconomics since the Bretton Woods era 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


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


Lists

List of economists

List of economics topics

List of economic systems

List of international trade topics

List of publications in economics

List of scholarly journals in economics

[edit]Notes

1. ^ Mattick, Paul (2001-07-08). "Who Is the Real Adam Smith?". The New York Times. Retrieved 2008-05-14.

2. ^ Hoaas, David J.; Madigan, Lauren J. (1999). "A citation analysis of economists in principles of economics

textbooks". The Social Science Journal 36 (3): 525–532. doi:10.1016/S0362-3319(99)00022-1

3. ^ Mark Blaug.Economic theory in retrospect. Cambridge University Press. 1997. ISBN 9780521577014 p.

34

4. ^ David Held, Models of Democracy (Polity, 2006) 3rd Ed., p.11 ff.

5. ^ a b Aristotle (350BC) Politics Book II, Part V

6. ^ Aristotle (350BC) Politics Book I, Part IX

7. ^ Aristotle (350BC) Politics Book I, Part X

8. ^ Aristotle (350BC) Politics Book I, Part XI

9. ^ 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 26–27.

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.





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 (1766–1834), BBC

33. ^ "Thomas Robert Malthus, 1766–1834.". 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, 1772–1823, 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, 1806–1873, 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. 1–15

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. 291–302.

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) Grundsätze der Volkswirtschaftslehre,full text in html

61. ^ Jevons (1878) p.334

62. ^ • Alan Kirman (2008). "Pareto, Vilfredo (1848–1923)," Efficiency or ‘Pareto optimality', The New Palgrave

Dictionary of Economics. Abstract.

• Pareto (1897). Cours d'économie 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 (1899–1992)". 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




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, 43–44.

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, 1647–1648.

97. ^ Mankiw, 1649.

98. ^ Mankiw, 1653.

99. ^ Mankiw, 1655.

100. ̂ Mankiw, 1657.

[edit]References

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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

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. 386–405

Coase, Ronald H. (1960) The Problem of Social

Cost (this online version excludes some parts)

Journal of Law and Economics, Vol.3, pp. 1–44

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

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, François (1758) Tableau économique

Ricardo, David (1827) Principles of Political Economy

and Taxation

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. 1–19

Sen, Amartya (1976–7) "Rational Fools: A Critique of the

Behavioural Foundations of Economic

Theory," Philosophy and Public Affairs, 6, pp. 317–44

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–

Galbraith, J.K. (1967) The New Industrial State

Galbraith, J.K. (1973) Economics and the

Public Purpose

Hobbes, Thomas (1651) Leviathan

Hume, David (1777) Essays, Moral, Political,

Literary

Jevons, William (1871) The Theory of Political

Economy

Jevons, William (1878) The Periodicity of

Commercial Crises

Keynes, John Maynard (1919) The Economic

Consequences of the Peace

Keynes, John Maynard (1936) The General

Theory of Employment, Interest and Money

Locke, John (1689) Second Treatise on Civil

Government

Locke, John (1691) Some Considerations on the

consequences of the Lowering of Interest and

the Raising of the Value of Money

Markwell, Donald (2006) John Maynard

Keynes and International Relations: Economic

Paths to War and Peace, Oxford.

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Stiglitz, Joseph E. (1996) Whither Socialism?

Thornton, Henry (1802) The Paper Credit of Great

Britain

Turgot, Jacques (1766) Réflexions sur la formation et la

distribution des richesses inFrench and English

Veblen, Thorsten, The Theory of the Leisure Class: an

economic study of institutions(1899)

Veblen, Thorsten (1904) Theory of Business Enterprise

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X

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Evolutionary economics From Wikipedia, the free encyclopedia

This article needs additional citations for verification. Please help improve this article by adding reliable references. Unsourced material may be challenged and removed. (September 2008)

Economics


General categories






Game theory

















Lists





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 decision-

maker 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


[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 "développement", 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


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, Thorbjørn Knudsen, Joel Mokyr and Viktor J.

Vanberg (2008) ‘In Defence of Generalized Darwinism’, Journal of Evolutionary Economics, 18(5),

October, pp. 577–96.

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. 614–17.

Veblen, Thorstein B. (1898) ‘Why Is Economics Not an Evolutionary Science?’, Quarterly Journal of

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3, pp. 67–73. 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 •

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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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