History of economy

 

History of economics

Economics is the science that concerns itself with economies; that is, it studies how societies produce goods and services as well as how they consume them. It has influenced global finance at many important junctions throughout history and is a vital part of our everyday lives. However, the assumptions that guide the study of economics have changed dramatically throughout history. Here we take just a brief look at the history of modern economic thought. What we present is just a narrow snapshot, which focuses primarily on Western European and American strands of thought.

 

KEY TAKEAWAYS

Economics is the science of how goods and services are produced and consumed. 

Adam Smith used the ideas of French writers to create a thesis on how economies should work, while Karl Marx and Thomas Malthus expanded on his work—focusing on how scarcity drives economies.

Leon Walras and Alfred Marshall used statistics and mathematics to express economic concepts, such as economies of scale.

John Maynard Keynes' economic theories are still used today by the Federal Reserve to manage monetary policy.

Most modern economic theories are based on the work of Milton Friedman, which suggests more capital in the system lessens the need for government involvement.

 

The Father of Economics

Economic thought goes as far back as the ancient Greeks and is known to have been an important topic in the ancient Middle East. Today, Scottish thinker Adam Smith is widely credited for creating the field of economics. However, he was inspired by French writers who shared his hatred of mercantilism. In fact, the first methodical study of how economies work was undertaken by these French physiocrats. Smith took many of their ideas and expanded them into a thesis about how economies should work, as opposed to how they do work.

 

 

Smith believed that competition was self-regulating and governments should take no part in business through tariffs, taxes, or other means unless it was to protect free market competition. Many economic theories today are, at least in part, a reaction to Smith's pivotal work in the field, namely his 1776 masterpiece The Wealth of Nations. In this book, Smith laid out several of the mechanisms of capitalist production, free markets, and value. Smith showed that individuals acting in their own self-interest could, as if guided by an "invisible hand," create social and economic stability and prosperity for all.

 

 

The Dismal Science: Marx and Malthus

Karl Marx and Thomas Malthus had decidedly poor reactions to Smith's treatise. Malthus predicted that growing populations would outstrip the food supply.1 He was proven wrong, however, as he didn't foresee technological innovations that would allow production to keep pace with a growing population. Nonetheless, his work shifted the focus of economics to the scarcity of things, rather than the demand for them.

 

 

This increased focus on scarcity led Karl Marx to declare the means of production were the most important components in any economy. Marx took his ideas further and became convinced a class war was going to be initiated by the inherent instabilities he saw in capitalism.2 However, Marx underestimated the flexibility of capitalism. Instead of creating a clear owner and worker class, investing created a mixed class where owners and workers hold the interests of both parties. Despite his overly rigid theory, Marx did accurately predicted one trend: businesses grew larger and more powerful, to the degree that free-market capitalism allowed.

 

 

The Marginal Revolution

As the ideas of wealth and scarcity developed in economics, economists turned their attention to asking more specific questions about how markets operate and how market prices are determined. English economist William Stanley Jevons, Austrian economist Carl Menger, and French economist Leon Walras independently developed a new perspective in economics known as marginalism.345 Their key insight was that in practice, people aren't actually faced with big picture decisions over entire general classes of economic goods. Instead, they make their decisions around specific units of an economic good as they choose to buy, sell, or produce each additional (or marginal) unit. In doing so, people balance the scarcity of each good against the value of the use of the good at the margin. These decisions explain, for example, why the price of an individual diamond is relatively higher than the price of an individual unit of water. While water is a basic need to live, it is often plentiful, and while diamonds are often purely decorative they are scarce. 

 

 

Marginalism quickly became, and remains, a central concept in economics.    

 

 

Speaking in Numbers

Walras went on to mathematize his theory of marginal analysis and made models and theories that reflected what he found there. General equilibrium theory came from his work, as did the tendency to express economic concepts statistically and mathematically instead of just in prose. Alfred Marshall took the mathematical modeling of economies to new heights, introducing many concepts that are still not widely understood, such as economies of scale, marginal utility, and the real-cost paradigm.