History of Economic Thought

Why Study past economic thinkers? –This helps us to explain and teach the ideas of economics –The thoughts of brilliant people are always worth studying – even their mistakes are insightful. –We will understand our own thoughts better by observing the development of thought

Why did economics as a field of study show up in the middle Ages and not before? national political units individuality Commerce material wealth thought and invention

Mercantilists Tenants and thoughts include emphasis on building national power, building exports and accumulation of money Josiah Child was 17th century mercantilist. Jean-Baptiste Colbert was French Minister of finance from 1661 to Bernard Mandeville, a social satirist, wrote “The Fable of the Bees” David Hume questioned the mercantilist assumptions of his day.

Physiocracy The Physiocrats rose in reaction to Cobert The “Tableau Economique” highlighted key thoughts Held a “laissez-faire” attitude Important social impact

Adam Smith Smith published The Wealth of Nations in 1776 The starting point of wealth is a division of labor which allows people specialize The propensity to trade is the second building block Smith thought the “invisible hand” would guide people who act in their own self interest to provide benefits for each other and for society

Thomas Malthus Malthus studied at Cambridge, became a minister in the church of England and a professor of history and political economy Malthus wrote and discussed mainly his principles on population Malthus began with two postulates –First, that food is necessary –Second, that the affection between the sexes would continue

Thomas Malthus Malthus leave the population and the food supply would grow with different rates –Population would grow geometrically –The food supply would grow arithmetically –Therefore population would out strip the food supply, and mass starvation would result

David Ricardo Ricardo’s economic career focused on inflation in the distribution of income He believed that increasing the money supply during the bullion controversy caused inflation Malthus and Ricardo had differing views of economics and debated till Ricardo died.

John Stuart Mill James Mill raised John Stewart as a child prodigy who would carry the flag for a new type of economics Mill wrestled with Jeremy Bentham’s utilitarianism Mill wrote on economic and non economic topics Mill laid out the foundations of supply and demand He raised the problems of economies of scale and market break down

John Stuart Mill He clarified that really ideas regarding international trade He was open to government intervention under certain circumstances He developed the idea of “Homo Economicus” or economic man Mill influenced both utilitarianism and utopianism

Karl Marx and Socialism The industrial revolution disrupted the conventional thought. Marx criticized capitalism and the new and often dreadful working conditions that it produced He believed capitalism was doomed for scientific reasons

Was Marx responsible for Soviet totalitarianism? Some have tried to hold Marx responsible for Stalin Although he may have been wrong an unpleasant, he cannot be held responsible for the many uses to which his ideas have been put

Marginalist Thought Marginalism applied the concepts of physics to economics The Marginalists theorized about how people valued and demanded goods and services

Alfred Marshall Marginal thinking led to the formation of the demand curve Marginal costs of production led to the formulation of the supply curve Marshall’s writings ended the dispute over value Marshall developed economic diagrams still in use today

The Socialist Calculation Debate Socialists had to come up with a different basis for their thought since Marshall destroyed the foundation of Marx’s theory. Enrico Barone replaced the invisible hand with the ministry of planning. He proposed the establishment of a planned society in which markets would operate.

Austrian economics The Austrian’s responded to the concept of market socialism They saw the market as the best mechanism for calculating, coordinating and making choices. The Austrians saw markets and competition as a method for discovering information In the Austrian view, prices were an information signal in the market. They thought the competition led to desirable decentralized social planning. They also proposed that the business cycle was created based upon expansions and contractions of the money supply.

Socialist Responce The market socialists proposed an involved version of pure socialism in which the free markets would determine both buying and selling prices. But the means of production would be socially controlled. Oscar Lange epitomize this new market socialism.

Who won? We must take various factors into account and trying to decide which side won in this debate –Each side thought it had prevailed over the other –The feelings about winners and losers were based on timing –At the time of the debate it was commonly felt that the socialists had won –Current thought is that the Austrians have scored the victory. –However one must define what socialism really is. To the economists from the nineteen thirties, our present economic system would be considered socialism.

Joseph Schumpeter and Entrepreneurialism Schumpeter believed that entrepreneurs were central to the business cycle He believed that “creative destruction” of entrepreneurs drove an economic growth. He thought entrepreneurs should think up new things and devise new ways of doing things. He believed people acted as entrepreneurs only occasionally, not continually.

Joseph Schumpeter and Entrepreneurialism Wrote book on the Business Cycle –On the upside, innovation led to new investment opportunities –the investment climate would lead people to overbuild and borrow thinking that the good times would continue indefinitely –believed there were different types of waves

Joseph Schumpeter and Socialism He argued that with pure productive power, capitalism would continue He believe that over time, large firms would make entrepreneurs obsolete He thought that the political weakness of entrepreneurs would undermine efforts of capitalism He believed that intellectual complainers would become disgruntled and that they would undermine the moral stability of capitalism He claimed that socialism could work and that it was possible to plan the economy. He was not for socialism but he believed that central planning was inevitable.

John Maynard Keynes and Keynesian Economics He believed that in long run economic progress He concluded that, barring wars, the economic problem would be solved within 100 years

Keynesian Economics He tried to give reasons for the Great Depression –He distinguished between the decision to save and the decision to invest –He criticizes stock market investors in the disease of speculation. –Keynes claimed that a lack of effective demand caused economic problems. He believed that when savings increased and investment was discouraged, buying power, and in turn production, would decrease, causing a vicious circle to develop.

Keynesian Economics He felt the businesses had two choices when demand fell. They could respond to the lack of demand by cutting wages or laying off workers. He defended the government’s ability to pump up demand. He wanted the government to inject money into the economy.

Milton Friedman and the Chicago School Friedman began his career as a statistician. Friedman worked on the permanent income hypothesis –He found that current consumption also depended on expectations of future income –Friedman believes that people would spend extra income on an investment, such as a car or a major appliance

the Chicago School Friedman found that as income rose over time, 90% of income went to consumption. In cross section analysis, Freidman found that poor families spent a larger percentage (100%) of their incomes than rich people did (50-60%). The study had harsh implications for Keynesian thought.

Milton Friedman Friedman brought market oriented thinking and economic freedom into public discourse –He believed that the system of fixed exchange rates would not work. And twenty years later it collapsed. –In 1952 he argued for an all volunteer army, which was later adopted. –He argued for school vouchers in 1962 –He proposed both replacing welfare with cash payments and instituting a negative income tax –He supports the flat rate income tax –He proposed that government should cease printing money and let private enterprise handle it. –He opposed Social Security because he thought people took it for granted