Economic Theorists Beyond Smith and Marx

Sources Wiley Economics Focus

Father of Classical Economics Adam Smith –free markets provide the greatest good to the greatest number of people. –“invisible hand” –Inquiry into the Nature and Causes of the Wealth of Nations –Theory of Moral Sentiments

Classical Economists David Ricardo Labor theory of Value Theory of rent Comparative advantage-free trade The Principles of Political Economy

By far the greatest part of those goods which are the objects of desire, are procured by labour; and they may be multiplied, not in one country alone, but in many, almost without any assignable limit, if we are disposed to bestow the labour necessary to obtain them.

Thomas Robert Malthus Food increases arithmetically, populations increase geometrically Populations studies An Essay on Population

While food production tends to increase arithmetically, population tends to increase naturally at a (faster) geometric rate, Malthus argued that it is no surprise that people thus choose to reduce (or “check”) population growth. People can increase food production, Malthus thought, only by slow, difficult methods such as reclaiming unused land or intensive farming; but they can check population growth more effectively by marrying late, using contraceptives, emigrating, or, in more extreme circumstances, resorting to reduced health care, tolerating vicious social diseases or impoverished living conditions, warfare, or even infanticide. Malthus was fascinated not with the inevitability of human demise, but with why humans do not die off in the face of such overwhelming odds. health care

Jean-Baptiste Say Say’s Law "production of commodities creates, and is the one and universal cause which creates, a market for the commodities produced."

It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products. (J.B. Say, 1803

John Stuart Mill Utilitarianism opportunity cost, comparative advantage On Liberty

Actions are right in proportion as they tend to promote happiness; wrong as they tend to produce the reverse of happiness. By happiness is intended pleasure and the absence of pain. the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number, is self-protection.”

Industrial Revolution poses a challenge to Classical Economics

Marginalists In addition to the costs of production setting prices, demand plays a role supply and demand models marginal choices Alfred Marshall ( ) Principles of Economics

Marxism Karl Marx – capitalism will ultimately destroy itself and be succeeded by a world without private property. The Communist Manifesto Das Kapital

F.A. Hayek ( ) Socialism will fail. –planners will never have perfect info. –leads to totalitarianism The Road to Serfdom Austrian School

Great Depression is cataclysmic for Classical Economics

John Maynard Keynes General Theory of Employment, Interest, and Money Recessions may not be self-correcting Government spending can help to end a recession free markets cannot be counted upon to provide full employment Keynesian Economics

Stagflation of the 1970s Reaction to Keynesianism

Neoclassic Economics “invisible hand” free markets will always yield the best outcomes monetarism rational expectations theory supply-side economics

Monetarism return to free markets emphasizes the role of monetary policy –(how much money supplied) Chicago School –laissez-faire –deregulation Milton Friedman

Rational Expectations Theory the market's ability to anticipate government policy actions limits their effectiveness. buyer’s predictions influence price –“efficient markets” –random walk theory

Supply-side Economics Back to Smith’s ideal of production bettering society Incentives to producers to promote the economy changes in tax rates exert an impact on total output

Important Contemporary Economists Paul Krugman Jeffrey Sachs Thomas Sowell “heterodox economics” behavioral economics, complexity economics, evolutionary economics, experimental economics, neuroeconomics blah, blah, blah...