Friday, March 20, 2009

ECONOMIC THEORY: An Extremely Brief History

classical economics, also known as “Modern Economics" (inclusive of classical economics) begins in 1776 with the Publication of An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith because Smith used modern rational argument (reads opposition) to compare and contrast actual examples of free versus constrained markets. However, Aristotle first struggled with the idea of wealth acquisition and ethics (private versus public ownership of wealth) in the 4th Century BC. Between Smith and Aristotle Thomas Aquinas argued in the 13th Century AD that goods ought to be sold at equitable value. Today economists operate under many of the assumptions of classical economics begun by Adam Smith and further developed by John Stuart Mill and others at a time in which the industrial revolution was creating the modern economy based in capitalism as opposed to feudal societies that existed in the middle ages and into the Renaissance. For example, Smith and it appears also that Francois Quesnay were the first to understand that modern economies were based on production of goods by the people as opposed to the value of the King’s treasury. *1

There appear to be two competing ideas concerning the determination of the value of goods in early classical economic theory: 1) the cost of production theory, and 2) the cost of labor theory. Later this dichotomy is broadened to include three more factors: 1) the level of output, 2)technology and 3) wages. Strangely enough Carl Marx can be considered a classical economist despite his opposition to the classical free trade economy because he based his argument for a communist (Proletariat society in which wealth is distributed according to need) in all the assumed fundamentals of classical economics.

Thomas Robert Malthus, in the 18th century, was the guy who proposed that an economy is better served by spending as opposed to saving. Later, Neoclassical economics, identified with Alfred Marshall dispensed with Carl Marx’s labor based economy in favor of a precisely formulated supply and demand economy. Keynesian Economics derives from John Maynard KeynesThe General Theory of Employment, Interest and Money (1936). It is the most revolutionary piece of economic theory fabricated during the 20th Century. Keynes work ushered in the era of Macroeconomics, and in direct response to the Great Depression Keynes proposed that the labor market may not be corrected through flexibility of price and market regulation. Thus the origin of the idea many consider to be truth in contemporary economics, that regulation of the marketplace is not effective. Ironically, it was also Keynes who deployed the idea that government must spend money in order to correct the downward spiral of public confidence and demand for goods in a depression.

In reaction to Keynesian and Macroeconomics, Milton Friedman (1912 - 2006) showed that stabilization policy in a modern economy is extremely complex. He further explicated in detail the necessity that government minimize involvement in the economy in favor of self-regulation of the private sector. Thus, he emphasized the Keynesian idea that market regulation is ineffective even while reacting against the increased government spending that both Republicans and Democrats advocated during the fourth through sixth decades of the 20th Century. Friedman’s “monetarism” contained the idea of stagflation thus predicting the era of poor economic growth coupled with high inflation during the 1970’s.

I leave summary and further conclusions of this all too brief examination of “The History of Economic Theory 101” to my next entry.

*1 I wonder, in countries were there still are monarchs why the value of the king’s treasury isn’t considered as part of that formula, however slight, or is it?

Works Consulted

This is a partial list that is most relevant to this particular entry. I will publish a separate and complete journal entry for works consulted toward the end of this exploration of economic theory.

Smith, Adam, An Inquiry into the Wealth of Nations. (London) W. Strahan and T. Cadell, 1776.
Marx, Carl, Das Kapital, Vol. I, II and III. (New York) L. W. Schmidt, 1867 – 1871.

Marx, Carl, Das Kapital, Vol. I. On line edition, Viewed and downloaded 9:58 AM EDT., Monday, March 9, 2009.

Das Kapital, Wikepedia, Last modified 8:30 GMT, March 9, 2009. Viewed and downloaded as PDF file, 10:00 AM EDT., March 9, 2009.

History of Economic Thought, Wikepedia, Last modified 02:29, March 5 2009. Viewed and downloaded as PDF file, 10:04 A.M. EDT.

Friedman, Milton, Capitalism and Freedom. (Chicago) Chicago University Press, 1962.

Keynes, John Maynard, The General Theory of Employment, Interest and Money. (Cambridge) Macmillan Cambridge University Press, 1936.

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