Historyofeconomicthought

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Thehistoryofeconomicthoughtdealswithdifferentthinkersandtheoriesinthesubjectthatbecamepolitical
economyandeconomics,fromtheancientworldtothepresentday.Itencompassesmanydisparateschoolsof
economicthought.AncientGreekwriterssuchasthephilosopherAristotleexaminedideasabouttheartofwealth
acquisition,andquestionedwhetherpropertyisbestleftinprivateorpublichands.Inmedievaltimes,
scholasticistssuchasThomasAquinasarguedthatitwasamoralobligationofbusinessestosellgoodsatajust
price.
IntheWesternworld,economicswasnotaseparatediscipline,butpartofphilosophyuntilthe18th19thcentury
IndustrialRevolutionandthe19thcenturyGreatDivergence,whichacceleratedeconomicgrowth.[1]Longbefore
that,fromtheRenaissanceatleast,economicsasanintellectualdisciplineorsciencewasdominatedbyWestern
thinkersandtheiracademicinstitutions,schoolingeconomistsfromoutsidetheWest,althoughthereareisolated
instancesinothersocieties.

Contents
1 Ancienteconomicthought(before500AD)
1.1 China
1.2 India
1.3 GrecoRomanWorld
2 EconomicthoughtintheMiddleAges(5001500AD)
2.1 ThomasAquinas
2.2 DunsScotus
2.3 JeanBuridan
2.4 IbnKhaldun
2.5 NicoleOresme
2.6 AntoninofFlorence
3 Mercantilismandinternationaltrade(16thto18thcentury)
3.1 SchoolofSalamanca
3.2 SirThomasMore
3.3 NicolausCopernicus
3.4 JeanBodin
3.5 BarthlemydeLaffemas
3.6 LeonardusLessius
3.7 EdwardMisseldenandGerardMalynes
3.8 ThomasMun
3.9 SirWilliamPetty
3.10 PhilippvonHrnigk
3.11 JeanBaptisteColbertandPierreLePesant,SieurdeBoisguilbert
3.12 CharlesDavenant
3.13 SirJamesSteuart
4 PreClassical(17thand18thcentury)
4.1 TheBritishEnlightenment
4.1.1 JohnLocke
4.1.2 DudleyNorth
4.1.3 DavidHume
4.1.4 FrancisHutcheson
4.2 ThePhysiocratsandthecircularflow
5 Classical(18thand19thcentury)

5 Classical(18thand19thcentury)
5.1 AdamSmithandTheWealthofNations
5.2 AdamSmith'sInvisibleHand
5.2.1 Limitations
5.3 WilliamPitttheYounger
5.4 EdmundBurke
5.5 JeremyBentham
5.6 JeanBaptisteSay
5.7 DavidRicardo
5.8 JohnStuartMill
5.9 Classicalpoliticaleconomy
5.10 Capitalism,Communism,andKarlMarx
5.10.1 DasKapital
5.10.2 Marx'sdisciples
5.11 TheLondonSchoolofEconomics
6 Neoclassical(19thandearly20thcentury)
6.1 AngloAmericanneoclassical
6.1.1 WilliamStanleyJevons
6.1.2 AlfredMarshall
6.1.3 Newinstitutionalschools
6.2 Continentalneoclassical
6.2.1 LonWalras
6.2.2 TheAustrianschoolofeconomics
6.2.3 CarlMenger
6.2.4 FrancisYsidroEdgeworth
6.2.5 FriedrichHayek
7 Alternativeschools(19thcentury)
7.1 Businesscycletheory
7.2 Germanhistoricalschoolofeconomics
7.3 ThorsteinVeblenandtheAmericanWay
8 Worldwars,revolutionandgreatdepression(earlytomid20thcentury)
8.1 Econometrics
8.2 Meansandcorporategovernance
8.3 Industrialorganizationeconomics
8.4 Linearprogramming
8.5 Ecologyandenergy
8.5.1 Ecologicaleconomics
8.5.2 Energyaccounting
8.6 Institutionaleconomics
8.7 ArthurCecilPigou
8.8 Marketsocialism
8.9 TheStockholmschoolofeconomics
9 Alternativeschools(20thcentury)
9.1 TheAmericanEconomicAssociation
10 Keynesianism(20thcentury)
10.1 TheGeneralTheory
10.2 TheCambridgeCircus
10.3 NewKeynesianmacroeconomics
10.4 SidneyWeintraub,PaulDavidsonandPostKeynesianeconomics
10.5 Thecredittheoryofmoney
11 TheChicagoschoolofeconomics(20thcentury)
11.1 Newclassicalmacroeconomicsandsynthesis
11.2 Efficientmarkethypothesis
12 Games,evolutionandgrowth(20thcentury)
13 PostWorldWarIIandglobalization(midtolate20thcentury)

13 PostWorldWarIIandglobalization(midtolate20thcentury)
13.1 Internationaleconomics
13.2 Developmenteconomics
13.3 NewEconomicHistory(Cliometrics)
13.4 Publicchoicetheoryandconstitutionaleconomics
13.5 ImpossibleTrinity
13.6 Marketforcorporatecontrol
13.7 Informationeconomics
13.8 Marketdesigntheory
13.9 TheLaffercurveandReaganomics
13.10 Marketregulation
14 Post2008financialcrisis(21stcentury)
15 Seealso
16 References
16.1 Primarysources
16.2 Secondarysources
17 Furtherreading
17.1 Books
17.2 Journals
18 Externallinks

Ancienteconomicthought(before500AD)
China
FanLi(alsoknownasTaoZhuGong)(born517BC),[2]anadvisertoKingGoujianofYue,wroteoneconomic
issuesanddevelopedasetof"golden"businessrules.[3]

India
Chanakya(born350BC)wrotetheArthashastra,atreatiseonstatecraft,economicpolicyandmilitarystrategy.

GrecoRomanWorld
AncientAthens,aslavebasedsociety,developedanembryonicmodelofdemocracy.[4]
Xenophon's(c.430354BC)Oeconomicus(c.360BC)isadialogueprincipallyabout
householdmanagementandagriculture.
Plato'sdialogueTheRepublic(c.380360BC)describinganidealcitystaterunby
philosopherkingscontainedreferencestospecializationoflaborandtoproduction.Platowas
thefirsttoadvocatethecredittheoryofmoney,thatis,moneyasaunitofaccountfordebt.
Aristotle'sPolitics(c.350BC)analyzeddifferentformsofthestate(monarchy,aristocracy,
constitutionalgovernment,tyranny,oligarchy,anddemocracy)asacritiqueofPlato'smodel
ofaphilosopherkings.Ofparticularinterestforeconomists,Platoprovidedablueprintofa
societybasedoncommonownershipofresources.Aristotleviewedthismodelasan
oligarchicalanathema.ThoughAristotledidcertainlyadvocateholdingmanythingsin
common,hearguedthatnoteverythingcouldbe,simplybecauseofthe"wickednessofhuman
nature".[5]

Platoandhis
pupilAristotle
hadanenduring
effecton
Western
philosophy.

"Itisclearlybetterthatpropertyshouldbeprivate",wroteAristotle,"buttheuseofitcommonandthespecial
businessofthelegislatoristocreateinmenthisbenevolentdisposition."InPoliticsBookI,Aristotlediscussesthe
generalnatureofhouseholdsandmarketexchanges.Forhimthereisacertain"artofacquisition"or"wealth
getting",butbecauseitisthesamemanypeopleareobsessedwithitsaccumulation,and"wealthgetting"forone's
householdis"necessaryandhonorable",whileexchangeontheretailtradeforsimpleaccumulationis"justly
censured,foritisdishonorable".[6]Writingofthepeople,Aristotlestatedthattheyasawholethoughtacquisition
ofwealth(chrematistike)asbeingeitherthesameas,oraprincipleofoikonomia("householdmanagement"
oikonomos),[7][8]withoikosetymologicallymeaning"house"andwithnomosinfacttranslatableas"custom"oras
"law".[9]Aristotlehimselfhighlydisapprovedofusuryandcastscornonmakingmoneythroughamonopoly.[10]
AristotlediscardedPlato'scredittheoryofmoneyformetallism,thetheorythatmoneyderivesitsvaluefromthe
purchasingpowerofthecommodityuponwhichitisbased,andisonlyan"instrument",itssolepurposebeinga
mediumofexchange,whichmeansonitsown"itisworthless...notusefulasameanstoanyofthenecessitiesof
life".[11]

EconomicthoughtintheMiddleAges(5001500AD)
ThomasAquinas
ThomasAquinas(12251274)wasanItaliantheologianandeconomicwriter.Hetaughtin
bothCologneandParis,andwaspartofagroupofCatholicscholarsknownasthe
Schoolmen,whomovedtheirenquiriesbeyondtheologytophilosophicalandscientific
debates.InthetreatiseSummaTheologicaAquinasdealtwiththeconceptofajustprice,
whichheconsiderednecessaryforthereproductionofthesocialorder.Similarinmanyways
tothemodernconceptoflongrunequilibrium,ajustpricewasjustsufficienttocoverthe
costsofproduction,includingthemaintenanceofaworkerandhisfamily.Aquinasarguedit
wasimmoralforsellerstoraisetheirpricessimplybecausebuyershadapressingneedfora
product.

ThomasAquinas
(12251274)
taughtthathigh
pricesin
responsetohigh
demandistheft.

Aquinasdiscussesanumberoftopicsintheformatofquestionsandreplies,substantialtracts
dealingwithAristotle'stheory.Questions77and78concerneconomicissues,primarilywhat
ajustpricemightbe,andthefairnessofasellerdispensingfaultygoods.Aquinasargued
againstanyformofcheatingandrecommendedalwayspayingcompensationinlieuofgood
service.Whilsthumanlawsmightnotimposesanctionsforunfairdealing,divinelawdid,inhisopinion.

DunsScotus
OneofAquinas'maincritics[12]wasDunsScotus(12651308),originallyfromDuns
Scotland,whotaughtinOxford,Cologne,andParis.InhisworkSententiae(1295),hethought
itpossibletobemoreprecisethanAquinasincalculatingajustprice,emphasizingthecostsof
laborandexpenses,althoughherecognizedthatthelattermightbeinflatedbyexaggeration
becausebuyerandsellerusuallyhavedifferentideasofajustprice.Ifpeopledidnotbenefit
fromatransaction,inScotus'view,theywouldnottrade.Scotussaidmerchantsperforma
necessaryandusefulsocialrolebytransportinggoodsandmakingthemavailabletothe
public.[12]

JeanBuridan

DunsScotus
(12651308)

JeanBuridan(French:[byid]LatinJohannesBuridanusc.1300after1358)wasaFrenchpriest.Buridanus
lookedatmoneyfromtwoangles:itsmetalvalueanditspurchasingpower,whichheacknowledgedcanvary.He
arguedthataggregated,notindividual,demandandsupplydeterminemarketprices.Hence,forhimajustprice
waswhatthesocietycollectivelyandnotjustoneindividualiswillingtopay.

IbnKhaldun
UntilJosephJ.Spengler's
Businessesownedbyresponsibleandorganizedmerchantsshall
1964work"Economic
eventuallysurpassthoseownedbywealthyrulers.[13]
ThoughtofIslam:Ibn
IbnKhaldunoneconomicgrowthandtheidealsofPlatonism
Khaldun",[14]AdamSmith
(17231790)wasconsideredthe"FatherofEconomics".Nowthereisasecondcandidate,
ArabMuslimscholarIbnKhaldun(13321406)ofTunisia,althoughwhatinfluenceKhaldun
hadintheWestisunclear.ArnoldToynbeecalledIbnKhalduna"genius"who"appearsto
havebeeninspiredbynopredecessorsandtohavefoundnokindredsoulsamonghis
contemporaries...andyet,intheProlegomena(Muqaddimat)tohisUniversalHistoryhehas
conceivedandformulatedaphilosophyofhistorywhichisundoubtedlythegreatestworkof
IbnKhaldun
itskindthathaseveryetbeencreatedbyanymindinanytimeorplace."[15]IbnKhaldoun
(13321406)
expressedatheoryofthelifecycleofcivilizations,thespecializationoflabor,andthevalueof
moneyasameansofexchangeratherthanasastoreofinherentvalue.Hisideasontaxesbore
astrikingresemblancetosupplysideeconomics'Laffercurve,whichpositsthatbeyondacertainpointhigher
taxesdiscourageproductionandactuallycauserevenuestofall.[16]

NicoleOresme
FrenchphilosopherandpriestNicolasd'Oresme(13201382)wroteDeorigine,natura,jure
etmutationibusmonetarum,abouttheorigin,nature,law,andalterationsofmoney.Itisoneof
theearliestmanuscriptsontheconceptofmoney.

AntoninofFlorence
Nicolas
SaintAntoninusofFlorence(13891459),O.P.,wasanItalianDominicanfriar,whobecame
d'Oresme
ArchbishopofFlorence.Antoninus'writingsaddresssocialandeconomicdevelopment,and
(132082)
arguedthatthestatehasadutytointerveneinmercantileaffairsforthecommongood,andan
obligationtohelpthepoorandneedy.Inhisprimarywork,"summatheologica"hewas
mainlyconcernedaboutprice,justiceandcapitaltheory.LikeDunsScotus,hedistinguishesbetweenthenatural
valueofagoodanditspracticalvalue.Thelatterisdeterminedbyitssuitabilitytosatisfyneeds(virtuositas),its
rarity(raritas)anditssubjectivevalue(complacibilitas).Duetothissubjectivecomponenttherecannotonlybe
onejustprice,butabandwidthofmoreorlessjustprices.

Mercantilismandinternationaltrade(16thto18thcentury)
MercantilismdominatedEuropefromthe16thtothe18thcentury.[17]DespitethelocalismoftheMiddleAges,
thewaningoffeudalismsawnewnationaleconomicframeworksbegintostrengthen.Afterthe15thcentury
voyagesofChristopherColumbusandotherexplorersopenedupnewopportunitiesfortradewiththeNewWorld
andAsia,newlypowerfulmonarchieswantedamorepowerfulmilitarystatetoboosttheirstatus.Mercantilism
wasapoliticalmovementandaneconomictheorythatadvocatedtheuseofthestate'smilitarypowertoensure
thatlocalmarketsandsupplysourceswereprotected,spawningprotectionism.

Mercantiletheoristsheldthatinternationaltradecouldnot
benefitallcountriesatthesametime.Moneyandprecious
metalsweretheonlysourceofrichesintheirview,and
limitedresourcesmustbeallocatedbetweencountries,
thereforetariffsshouldbeusedtoencourageexports,
whichbringmoneyintothecountry,anddiscourage
importswhichsenditabroad.Inotherwords,apositive
balanceoftradeoughttobemaintainedthroughasurplus
Marquisde
ofexports,oftenbackedbymilitarymight.Despitethe
Mirabeau
prevalenceofthemodel,thetermmercantilismwasnot
(17151789)
coineduntil1763,byVictordeRiqueti,marquisde
Mirabeau(17151789),andpopularizedbyAdamSmith
in1776,whovigorouslyopposedit.

Frenchseaportduringtheheyday
ofmercantilism

SchoolofSalamanca
Inthe16thcenturytheJesuitSchoolofSalamancainSpaindevelopedeconomictheorytoahighlevel,onlyto
havetheircontributionsforgottenuntilthe20thcentury.

SirThomasMore
In1516EnglishhumanistSirThomasMore(14781535)publishedUtopia,whichdescribes
anidealsocietywherelandisownedincommonandthereisuniversaleducationandreligious
tolerance,inspiringtheEnglishPoorLaws(1587)andthecommunismsocialismmovement.

NicolausCopernicus
In1517PolishastronomerNicolausCopernicus(14731543)publishedthefirstknown
argumentforthequantitytheoryofmoney.In1519healsopublishedthefirstknownformof
Gresham'sLaw:"Badmoneydrivesoutgood".

JeanBodin

SirThomas
More(1478
1535)

In1568JeanBodin(15301596)ofFrancepublishedReplytoMalestroit,containingthefirst
knownanalysisofinflation,whichheclaimedwascausedbyimportationofgoldandsilver
fromSouthAmerica,backingthequantitytheoryofmoney.

BarthlemydeLaffemas
In1598FrenchmercantilisteconomistBarthlemydeLaffemas(15451612)publishedLes
Trsorsetrichessespourmettrel'Estatensplendeur,whichblastedthosewhofrownedon
Frenchsilksbecausetheindustrycreatedemploymentforthepoor,thefirstknownmentionof
underconsumptiontheory,whichwaslaterrefinedbyJohnMaynardKeynes.

Nicolaus
Copernicus
(14731543)

LeonardusLessius
In1605FlemishJesuittheologianLeonardusLessius(15541623)publishedOnJusticeandLaw,thedeepest
moraltheologicalstudyofeconomicssinceAquinas,whosejustpriceapproachheclaimedwasnolonger
workable.Aftercomparingmoney'sgrowthviaavaricetothepropagationofhares,hemadethefirststatementof
thepriceofinsuranceasbeingbasedonrisk.

EdwardMisseldenandGerardMalynes
In1622EnglishmerchantsEdwardMisseldenandGerardMalynesbeganadisputeoverfree
tradeandthedesirabilityofgovernmentregulationofcompanies,withMalynesarguing
againstforeignexchangeasunderthecontrolofbankers,andMisseldenarguingthat
internationalmoneyexchangeandfluctuationsintheexchangeratedependuponinternational
tradeandnotbankers,andthatthestateshouldregulatetradetoinsureexportsurpluses.
JeanBodin
(15301596)

ThomasMun
EnglisheconomistThomasMun(15711641)describesearlymercantilistpolicyinhisbook
England'sTreasurebyForeignTrade,whichwasnotpublisheduntil1664,althoughitwas
widelycirculatedinmanuscriptformduringhislifetime.AmemberoftheEastIndia
Company,hewroteabouthisexperiencesinADiscourseofTradefromEnglanduntotheEast
Indies(1621).hhjggjhf

SirWilliamPetty
In1662EnglisheconomistSirWilliamPetty(16231687)beganpublishingshortworks
applyingtherationalscientifictraditionofFrancisBacontoeconomics,requiringthatitonly
usemeasurablephenomenaandseekquantitativeprecision,coiningtheterm"political
arithmetic",introducingstatisticalmathematics,andbecomingthefirst
scientificeconomist.

Barthlemyde
Laffemas
(15451612)

PhilippvonHrnigk

SirWilliam
Petty(1623
1687)

PhilippvonHrnigk(16401712,sometimesspeltHornickorHorneck)
wasborninFrankfurtandbecameanAustriancivilservantwritingina
timewhenhiscountrywasconstantlythreatenedbyOttomaninvasion.In
sterreichberAlles,WannesNurWill(1684,AustriaOverAll,IfShe
OnlyWill)helaidoutoneofthecleareststatementsofmercantilepolicy,
listingnineprincipalrulesofnationaleconomy:
"Toinspectthecountry'ssoilwiththegreatestcare,andnot
toleavetheagriculturalpossibilitiesofasinglecorneror
clodofearthunconsidered...Allcommoditiesfoundina
country,whichcannotbeusedintheirnaturalstate,should
beworkedupwithinthecountry...Attentionshouldbegiven
tothepopulation,thatitmaybeaslargeasthecountrycan
support...goldandsilveronceinthecountryareunderno
circumstancestobetakenoutforanypurpose...The
inhabitantsshouldmakeeveryefforttogetalongwiththeir
domesticproducts...[Foreigncommodities]shouldbe
obtainednotforgoldorsilver,butinexchangeforother
domesticwares...andshouldbeimportedinunfinishedform,
andworkedupwithinthecountry...Opportunitiesshouldbe
soughtnightanddayforsellingthecountry'ssuperfluous
goodstotheseforeignersinmanufacturedform...No

Leonardus
Lessius(1554
1623)

importationshouldbeallowedunderanycircumstancesof
whichthereisasufficientsupplyofsuitablequalityat
home."
Nationalism,selfsufficiencyandnationalpowerwerethebasicpoliciesproposed.[18]

JeanBaptisteColbertandPierreLePesant,SieurdeBoisguilbert

JeanBaptiste
Colbert(1619
1683)

In16651683JeanBaptisteColbert(16191683)wasministeroffinance
underKingLouisXIVofFrance,andsetupnationalguildstoregulate
majorindustries.Silk,linen,tapestry,furnituremanufactureandwine
wereexamplesofthecraftsinwhichFrancespecialized,allofwhich
cametorequiremembershipinaguildtooperateinuntiltheFrench
Revolution.AccordingtoColbert,"Itissimplyandsolelytheabundance
ofmoneywithinastate[which]makesthedifferenceinitsgrandeurand
power."

Thetitlepageto
Philippvon
Hrnigk's
statementof
mercantilist
philosophy.

In1695FrencheconomistPierreLePesant,sieurdeBoisguilbert(1646
1714)wroteapleatoLouisXIVtoendColbert'smercantilistprogram,
containingthefirstnotionofaneconomicalmarket,becomingthefirst
economisttoquestionmercantileeconomicpolicyandvaluethewealthofacountrybyits
productionandexchangeofgoodsinsteaditsassets.

CharlesDavenant
In1696BritishmercantilistToryMemberofparliamentCharlesDavenant(16561714)
publishedEssayontheEastIndiaTrade,displayingthefirstunderstandingofconsumer
demandandperfectcompetition.

SirJamesSteuart

PierreLe
Pesant,sieurde
Boisguilbert
(16461714)

In1767ScottishmercantilisteconomistSirJamesSteuart(17131780)publishedAnInquiry
intothePrinciplesofPoliticalEconomy,thefirstbookinEnglishwiththeterm"political
economy"inthetitle,andthefirstcompleteeconomicstreatise.

PreClassical(17thand18thcentury)
TheBritishEnlightenment
SirJames

Inthe17thcenturyBritainwentthroughtroublingtimes,enduringnotonlypoliticaland
Steuart(1713
religiousdivisionintheEnglishCivilWar,KingCharlesI'sexecution,andtheCromwellian
1780)
dictatorship,butalsotheGreatPlagueofLondonandGreatFireofLondon.Therestorationof
themonarchyunderCharlesII,whohadRomanCatholicsympathies,ledtoturmoilandstrife,
andhisCatholicleaningsuccessorKingJamesIIwasswiftlyousted.InvitedinhisplacewereProtestantWilliam
ofOrangeandMary,whoassentedtotheBillofRights1689,ensuringthattheParliamentwasdominantinwhat
becameknownastheGloriousRevolution.

Theupheavalwasaccompaniedbyanumberofmajorscientificadvances,includingRobertBoyle'sdiscoveryof
thegaspressureconstant(1660)andSirIsaacNewton'spublicationofPhilosophiaeNaturalisPrincipia
Mathematica(1687),whichdescribedNewton'slawsofmotionandhisuniversallawofgravitation.
Allthesefactorsspurredtheadvancementofeconomicthought.Forinstance,RichardCantillon(16801734)
consciouslyimitatedNewton'sforcesofinertiaandgravityinthenaturalworldwithhumanreasonandmarket
competitionintheeconomicworld.[19]InhisEssayontheNatureofCommerceinGeneral,hearguedrationalself
interestinasystemoffreelyadjustingmarketswouldleadtoorderandmutuallycompatibleprices.Unlikethe
mercantilistthinkershowever,wealthwasfoundnotintradebutinhumanlabor.Thefirstpersontotietheseideas
intoapoliticalframeworkwasJohnLocke.
JohnLocke
JohnLocke(16321704)wasbornnearBristol,andeducatedinLondonandOxford.Heis
consideredoneofthemostsignificantphilosophersofhiseramainlyforhiscritiqueof
ThomasHobbes'defenseofabsolutisminLeviathan(1651)andofhissocialcontracttheory.
Lockebelievedthatpeoplecontractedintosociety,whichwasboundtoprotecttheirproperty
rights.[20]Hedefinedpropertybroadlytoincludepeople'slivesandliberties,aswellastheir
wealth.Whenpeoplecombinedtheirlaborwiththeirsurroundings,thatcreatedproperty
rights.InhiswordsfromhisSecondTreatiseonCivilGovernment(1689):
"Godhathgiventheworldtomenincommon...Yeteverymanhasapropertyin
hisownperson.Thelabourofhisbodyandtheworkofhishandswemaysayare
properlyhis.Whatsoever,then,heremovesoutofthestatethatnaturehath
providedandleftitin,hehathmixedhislabourwith,andjoinedtoitsomething
thatishisown,andtherebymakesithisproperty."[21]

JohnLocke
(16321704)
combined
philosophy,
politicsand
economicsinto
onecoherent
framework.

Lockearguedthatnotonlyshouldthegovernmentceaseinterferencewithpeople'sproperty
(ortheir"lives,libertiesandestates"),butalsothatitshouldpositivelyworktoensuretheirprotection.Hisviews
onpriceandmoneywerelaidoutinalettertoaMemberofParliamentin1691entitledSomeConsiderationson
theConsequencesoftheLoweringofInterestandtheRaisingoftheValueofMoney(1691),arguingthatthe"price
ofanycommodityrisesorfalls,bytheproportionofthenumberofbuyersandsellers",arulewhich"holds
universallyinallthingsthataretobeboughtandsold."[22]
DudleyNorth
DudleyNorth(16411691)wasawealthymerchantandlandownerwhoworkedforHerMajesty'sTreasuryand
opposedmostmercantilepolicy.HisDiscoursesupontrade(1691),publishedanonymously,arguedagainst
assuminganeedforafavorablebalanceoftrade.Trade,heargued,benefitsbothsides,promotesspecialization,
divisionoflaborandwealthforeveryone.Regulationoftradeinterfereswiththesebenefits,hesaid.
DavidHume
DavidHume(17111776)agreedwithNorth'sphilosophyanddenouncedmercantilistassumptions.His
contributionsweresetdowninPoliticalDiscourses(1752),andlaterconsolidatedinhisEssays,Moral,Political,
Literary(1777).Addingtotheargumentthatitwasundesirabletostriveforafavourablebalanceoftrade,Hume
arguedthatitis,inanycase,impossible.

Humeheldthatanysurplusofexportswouldbepaidforbyimportsof
goldandsilver.Thiswouldincreasethemoneysupply,causingpricesto
rise.Thatinturnwouldcauseadeclineinexportsuntilthebalancewith
importsisrestored.
FrancisHutcheson
FrancisHutcheson(16941746),theteacherofAdamSmithfrom1737to
1740[23]isconsideredtheendofalongtraditionofthoughtoneconomics
as"householdorfamily()management",[24][25][26]stemmingfrom
Xenophon'sworkOeconomicus.[27][28]
DavidHume
(171176)

ThePhysiocratsandthecircularflow

PierreSamuel
duPontde
Nemours,a
prominent
Physiocrat,
emigratedtothe
U.S.,andhis
sonfounded
DuPont,the
world'ssecond
biggest
chemicals
company.

Similarlydisenchantedwithregulationontradeinspiredbymercantilism,
aFrenchmannamedVincentdeGournay(17121759)isreputedtohave
askedwhyitwassohardtolaissezfaire("letitbe"),laissezpasser("let
itpass"),advocatingfreeenterpriseandfreetrade.Hewasoneofthe
earlyPhysiocrats,aGreekwordmeaning"Governmentofnature",who
heldthatagriculturewasthesourceofwealth.AshistorianDavidB.
Danbomwrote,thePhysiocrats"damnedcitiesfortheirartificialityand
praisedmorenaturalstylesofliving.Theycelebratedfarmers."[29]Over
theendoftheseventeenthandbeginningoftheeighteenthcenturybig
advancesinnaturalscienceandanatomyincludeddiscoveryofblood
circulationthroughthehumanbody.Thisconceptwasmirroredinthe
physiocrats'economictheory,withthenotionofacircularflowofincome
throughouttheeconomy.

DudleyNorth
(16411691)
arguedthatthe
resultsof
mercantile
policyare
undesirable.

Francis
Hutcheson
(16941746)

FranoisQuesnay(16941774)wasthecourtphysiciantoKingLouis
XVofFrance.Hebelievedthattradeandindustrywerenotsourcesof
wealth,andinsteadinhisbookTableauconomique(1758,Economic
Table)arguedthatagriculturalsurpluses,byflowingthroughthe
economyintheformofrent,wages,andpurchaseswerethereal
economicmovers.Firstly,saidQuesnay,regulationimpedestheflowof
Francois
incomethroughoutallsocialclassesandthereforeeconomic
Quesnay(1694
development.Secondly,taxesontheproductiveclasses,suchasfarmers,
1774)
shouldbereducedinfavourofrisesforunproductiveclasses,suchas
landowners,sincetheirluxuriouswayoflifedistortstheincomeflow.
DavidRicardolatershowedthattaxesonlandarenontransferabletotenantsinhisLawofRent.
JacquesTurgot(17271781)wasborninParistoanoldNormanfamily.Hisbestknownwork,Rflexionssurla
formationetladistributiondesrichesses(ReflectionsontheFormationandDistributionofWealth)(1766)
developedQuesnay'stheorythatlandistheonlysourceofwealth.Turgotviewedsocietyintermsofthreeclasses:
theproductiveagriculturalclass,thesalariedartisanclass(classestipendice)andthelandowningclass(classe
disponible).Hearguedthatonlythenetproductoflandshouldbetaxedandadvocatedthecompletefreedomof
commerceandindustry.
InAugust1774Turgotwasappointedtobeministeroffinance,andinthespaceoftwoyearsheintroducedmany
antimercantileandantifeudalmeasuressupportedbytheking.Astatementofhisguidingprinciples,giventothe
kingwere"nobankruptcy,notaxincreases,noborrowing."Turgot'sultimatewishwastohaveasingletaxonland

andabolishallotherindirecttaxes,butmeasuresheintroducedbeforethatweremetwith
overwhelmingoppositionfromlandedinterests.Twoedictsinparticular,onesuppressing
corves(chargesfromfarmerstoaristocrats)andanotherrenouncingprivilegesgivento
guilds,inflamedinfluentialopinion.Hewasforcedfromofficein1776.

Classical(18thand19thcentury)
AnneRobert
JacquesTurgot
(17271781)

AdamSmith
(17231790),
fatherofmodern
political
economy.

AdamSmithandTheWealthofNations
AdamSmith(17231790)ispopularlyseenasthefatherofmodernpoliticaleconomy.His
1776publicationAnInquiryIntotheNatureandCausesoftheWealthofNationshappenedto
coincidenotonlywiththeAmericanRevolution,shortlybeforetheEuropewideupheavalsof
theFrenchRevolution,butalsothedawnofanewindustrialrevolutionthatallowedmore
wealthtobecreatedonalargerscalethaneverbefore.
SmithwasaScottishmoralphilosopher,whosefirstbookwasTheTheoryofMoral
Sentiments(1759).Hearguedinitthatpeople'sethicalsystemsdevelopthroughpersonal
relationswithotherindividuals,thatrightandwrongaresensedthroughothers'reactionsto
one'sbehaviour.ThisgainedSmithmorepopularitythanhisnextwork,TheWealthof
Nations,whichthegeneralpublicinitiallyignored.[30]YetSmith'spoliticaleconomicmagnum
opuswassuccessfulincirclesthatmattered.

AdamSmith'sInvisibleHand

Smitharguedfora"systemofnatural
"Itisnotfromthebenevolenceofthebutcher,thebrewerorthebaker,
[32]
thatweexpectourdinner,butfromtheirregardtotheirownself
liberty" whereindividualeffortwasthe
producerofsocialgood.Smithbelievedeven interest.Weaddressourselves,nottotheirhumanitybuttotheirself
love,andnevertalktothemofourownnecessitiesbutoftheir
theselfishwithinsocietywerekeptunder
advantages."[31]
restraintandworkedforthegoodofallwhen
AdamSmith'sfamousstatementonselfinterest
actinginacompetitivemarket.Pricesare
oftenunrepresentativeofthetruevalueofgoodsandservices.FollowingJohnLocke,Smiththoughttruevalueof
thingsderivedfromtheamountoflabourinvestedinthem.
Everymanisrichorpooraccordingtothedegreeinwhichhecanaffordtoenjoythenecessaries,
conveniencies,andamusementsofhumanlife.Butafterthedivisionoflabourhasoncethoroughly
takenplace,itisbutaverysmallpartofthesewithwhichaman'sownlabourcansupplyhim.Thefar
greaterpartofthemhemustderivefromthelabourofotherpeople,andhemustberichorpoor
accordingtothequantityofthatlabourwhichhecancommand,orwhichhecanaffordtopurchase.
Thevalueofanycommodity,therefore,tothepersonwhopossessesit,andwhomeansnottouseor
consumeithimself,buttoexchangeitforothercommodities,isequaltothequantityoflabourwhich
itenableshimtopurchaseorcommand.Labour,therefore,istherealmeasureoftheexchangeable
valueofallcommodities.Therealpriceofeverything,whateverythingreallycoststothemanwho
wantstoacquireit,isthetoilandtroubleofacquiringit.
[33]
Whenthebutchers,thebrewersandthebakersactedundertherestraintofanopenmarketeconomy,theirpursuit
ofselfinterest,thoughtSmith,paradoxicallydrivestheprocesstocorrectreallifepricestotheirjustvalues.His
classicstatementoncompetitiongoesasfollows.

Whenthequantityofanycommoditywhichisbroughttomarketfallsshortoftheeffectualdemand,
allthosewhoarewillingtopay...cannotbesuppliedwiththequantitywhichtheywant...Someof
themwillbewillingtogivemore.Acompetitionwillbeginamongthem,andthemarketpricewill
rise...Whenthequantitybroughttomarketexceedstheeffectualdemand,itcannotbeallsoldtothose
whoarewillingtopaythewholevalueoftherent,wagesandprofit,whichmustbepaidtobringit
thither...Themarketpricewillsink...[34]
Limitations
Smith'svisionofafreemarketeconomy,basedonsecureproperty,capitalaccumulation,
wideningmarketsandadivisionoflabourcontrastedwiththemercantilisttendencytoattempt
to"regulateallevilhumanactions."[32]Smithbelievedtherewerepreciselythreelegitimate
functionsofgovernment.Thethirdfunctionwas...
...erectingandmaintainingcertainpublicworksandcertainpublicinstitutions,
whichitcanneverbefortheinterestofanyindividualorsmallnumberof
individuals,toerectandmaintain...Everysystemwhichendeavours...todraw
towardsaparticularspeciesofindustryagreatershareofthecapitalofthesociety
thanwhatwouldnaturallygotoit...retards,insteadofaccelerating,theprogress
ofthesocietytowardrealwealthandgreatness.

AdamSmith's
titlepageofThe
Wealthof
Nations.

InadditiontothenecessityofpublicleadershipincertainsectorsSmithargued,secondly,thatcartelswere
undesirablebecauseoftheirpotentialtolimitproductionandqualityofgoodsandservices.[35]Thirdly,Smith
criticisedgovernmentsupportofanykindofmonopolywhichalwayschargesthehighestprice"whichcanbe
squeezedoutofthebuyers".[36]Theexistenceofmonopolyandthepotentialforcartels,whichwouldlaterform
thecoreofcompetitionlawpolicy,coulddistortthebenefitsoffreemarketstotheadvantageofbusinessesatthe
expenseofconsumersovereignty.

WilliamPitttheYounger
WilliamPitttheYounger(17591806),ToryPrimeMinisterin17831801basedhistax
proposalsonSmith'sideas,andadvocatedfreetradeasadevoutdiscipleofTheWealthof
Nations.[37]SmithwasappointedacommissionerofcustomsandwithintwentyyearsSmith
hadafollowingofnewgenerationwriterswhowereintentonbuildingthescienceofpolitical
economy.[30]

EdmundBurke
AdamSmithexpressedanaffinitytotheopinionsofIrishMPEdmundBurke(17291797),
knownwidelyasapoliticalphilosopher:
"BurkeistheonlymanIeverknewwhothinksoneconomicsubjectsexactlyasI
dowithoutanypreviouscommunicationhavingpassedbetweenus.[38]

WilliamPittthe
Younger(1759
1806)

Burkewasanestablishedpoliticaleconomisthimself,knownforhisbookThoughtsand
DetailsonScarcity.Hewaswidelycriticalofliberalpolitics,andcondemnedtheFrench
Revolutionwhichbeganin1789.InReflectionsontheRevolutioninFrance(1790)hewrote
thatthe"ageofchivalryisdead,thatofsophisters,economistsandcalculatorshassucceeded,
andthegloryofEuropeisextinguishedforever."Smith'scontemporaryinfluencesincluded
FranoisQuesnayandJacquesTurgotwhomhemetonavisittoParis,andDavidHume,his
Scottishcompatriot.Thetimesproducedacommonneedamongthinkerstoexplainsocial
upheavalsoftheIndustrialrevolutiontakingplace,andintheseemingchaoswithoutthe
feudalandmonarchicalstructuresofEurope,showtherewasorderstill.

EdmundBurke
(17291797)

JeremyBentham

JeremyBentham
(17481832)
believedin"the
greatestgoodfor
thegreatest
number".

JeremyBentham(17481832)wasperhapsthemostradicalthinkerofhistime,anddeveloped
theconceptofutilitarianism.Benthamwasanatheist,aprisonreformer,animalrightsactivist,
believerinuniversalsuffrage,freedomofspeech,freetradeandhealthinsuranceatatime
whenfewdaredtoargueforanyoftheseideas.Hewasschooledrigorouslyfromanearlyage,
finishinguniversityandbeingcalledtothebarat18.Hisfirstbook,AFragmenton
Government(1776),publishedanonymously,wasatrenchantcritiqueofWilliamBlackstone's
CommentariesontheLawsofEngland.Thisgainedwidesuccessuntilitwasfoundthatthe
youngBentham,andnotareveredProfessorhadpennedit.InAnIntroductiontothe
PrinciplesofMoralsandLegislation(1789)Benthamsetouthistheoryofutility.[39][40]

JeanBaptisteSay

JeanBaptisteSay(17671832)wasaFrenchmanborninLyonwho
helpedpopularizeAdamSmith'sworkinFrance.[41]HisbookATreatise
onPoliticalEconomy(1803)containedabriefpassage,whichlater
becameorthodoxyinpoliticaleconomicsuntiltheGreatDepression,nowknownasSay'sLaw
ofmarkets.Sayarguedthattherecouldneverbeageneraldeficiencyofdemandorageneral
glutofcommoditiesinthewholeeconomy.Peopleproducethings,tofulfilltheirownwants
ratherthanthoseofothers,thereforeproductionisnotaquestionofsupplybutanindication
ofproducersdemandinggoods.
Sayagreedthatapartofincomeissavedbyhouseholds,butinthelongterm,savingsare
invested.Investmentandconsumptionarethetwoelementsofdemand,sothatproductionis
demand,thereforeitisimpossibleforproductiontooutrundemand,orfortheretobea
"generalglut"ofsupply.Sayalsoarguedthatmoneywasneutral,becauseitssoleroleisto
facilitateexchanges,therefore,peopledemandmoneyonlytobuycommodities"moneyisa
veil".[42]

DavidRicardo

Say'sLaw,by
JeanBaptiste
Say(1767
1832),which
statesthatsupply
alwaysequals
demand,was
rarely
challengeduntil
the20thcentury.

DavidRicardo(17721823)wasborninLondon.Bytheageof26,hehadbecomeawealthy
stockmarkettrader,andboughthimselfaconstituencyseatinIrelandtogainaplatformintheBritishparliament's
HouseofCommons.[43]Ricardo'sbestknownworkisOnthePrinciplesofPoliticalEconomyandTaxation(1817),
whichcontainshiscritiqueofbarrierstointernationaltradeandadescriptionofthemannerinwhichincomeis
distributedinthepopulation.Ricardomadeadistinctionbetweenworkers,whoreceivedawagefixedtoalevelat
whichtheycouldsurvive,thelandowners,whoearnarent,andcapitalists,whoowncapitalandreceiveaprofit,a
residualpartoftheincome.[44]

Ifpopulationgrows,itbecomesnecessarytocultivateadditionalland,whosefertilityislower
thanthatofalreadycultivatedfields,becauseofthelawofdecreasingproductivity.Therefore,
thecostoftheproductionofthewheatincreases,aswellasthepriceofthewheat:Therents
increasealso,thewages,indexedtoinflation(becausetheymustallowworkerstosurvive)as
well.Profitsdecrease,untilthecapitalistscannolongerinvest.Theeconomy,Ricardo
concluded,isboundtotendtowardsasteadystate.[42]
DavidRicardo
(17721823)is
renownedforhis
lawof
comparative
advantage.

JohnStuartMill

JohnStuartMill(18061873)wasthedominantfigureofpolitical
economicthoughtofhistime,aswellasaMemberofparliamentforthe
seatofWestminster,andaleadingpoliticalphilosopher.Millwasachild
prodigy,readingAncientGreekfromtheageof3,andbeingvigorously
schooledbyhisfatherJamesMill.[45]JeremyBenthamwasaclose
mentorandfamilyfriend,andMillwasheavilyinfluencedbyDavid
Ricardo.Mill'stextbook,firstpublishedin1848andtitledPrinciplesofPoliticalEconomy
wasessentiallyasummaryoftheeconomicthoughtofthemidnineteenthcentury.[46]
PrinciplesofPoliticalEconomy(1848)wasusedasthestandardtextbymostuniversitieswell
intothebeginningofthetwentiethcentury.OnthequestionofeconomicgrowthMilltriedto
findamiddlegroundbetweenAdamSmith'sviewofeverexpandingopportunitiesfortrade
andtechnologicalinnovationandThomasMalthus'viewoftheinherentlimitsofpopulation.
InhisfourthbookMillsetoutanumberofpossiblefutureoutcomes,ratherthanpredicting
oneinparticular.[42]

Classicalpoliticaleconomy

JohnStuartMill
(18061873),
weanedonthe
philosophyof
Jeremy
Bentham,wrote
themost
authoritative
economicstext
ofhistime.

TheclassicaleconomistswerereferredtoasagroupforthefirsttimebyKarlMarx.[47]Oneunifyingpartoftheir
theorieswasthelabourtheoryofvalue,contrastingtovaluederivingfromageneralequilibriumtheoryofsupply
anddemand.TheseeconomistshadseenthefirsteconomicandsocialtransformationbroughtbytheIndustrial
Revolution:ruraldepopulation,precariousness,poverty,apparitionofaworkingclass.
Theywonderedaboutpopulationgrowth,becausedemographictransitionhadbeguninGreatBritainatthattime.
Theyalsoaskedmanyfundamentalquestions,aboutthesourceofvalue,thecausesofeconomicgrowthandthe
roleofmoneyintheeconomy.Theysupportedafreemarketeconomy,arguingitwasanaturalsystembasedupon
freedomandproperty.However,theseeconomistsweredividedanddidnotmakeupaunifiedcurrentofthought.
Anotablecurrentwithinclassicaleconomicswasunderconsumptiontheory,asadvancedbytheBirmingham
SchoolandThomasRobertMalthusintheearly19thcentury.Thesearguedforgovernmentactiontomitigate
unemploymentandeconomicdownturns,andwereanintellectualpredecessorofwhatlaterbecameKeynesian
economicsinthe1930s.AnothernotableschoolwasManchestercapitalism,whichadvocatedfreetrade,against
thepreviouspolicyofmercantilism.

Capitalism,Communism,andKarlMarx
Justastheterm"mercantilism"hadbeencoinedandpopularizedbycriticslikeAdamSmith,sotheterm
"capitalism"coinedbyKarlMarx(18181883)wasusedbyitscritics.Socialismemergedinresponsetothe
miserablelivingandworkingconditionsoftheworkingclassinthenewindustrialera,andtheclassicaleconomics

fromwhichitsprang.TheeconomicandpoliticaltheorypublishedinThe
CommunistManifesto(1848)andDasKapital(1867)combinedwiththe
dialectictheoryofhistoryinspiredbyFriedrichHegel(17701831)to
providearevolutionarycritiqueofnineteenthcenturycapitalism.

KarlMarx
(18181883)
publisheda
fundamental
critiqueof
classical
economicsbased
onthelabor
theoryofvalue.

Thetitlepageofthe
firsteditionofDas
Kapital(1867)in
German.

In1845GermanradicalFriedrichEngels(18201895)publishedThe
ConditionoftheWorkingClassinEnglandin1844,[48]describing
workersinManchesteras"themostunconcealedpinnacleofsocial
miseryinourday."AfterMarxdied,Engelscompletedthesecond
volumeofDasKapitalfromhisnotes.
DasKapital
MarxwrotehismagnumopusDasKapital(1867)attheBritish
Museum'slibraryinLondon.KarlMarxbeginswiththeconceptof
commodities.Beforecapitalism,saysMarx,productionwasbasedon
slaveryinancientRomeforexamplethenserfdominthefeudal
societiesofmedievalEurope.Thecurrentmodeoflaborexchangehas
producedanerraticandunstablesituationallowingtheconditionsfor
revolution.Peoplebuyandselltheirlaboraspeoplebuyandsell
goodsandservices.Peoplethemselveshavebecomedisposable
commodities.AsMarxwroteinTheCommunistManifesto,
"Thehistoryofallhithertoexistingsocietyisthehistory
ofclassstruggles.Freemanandslave,patricianand
plebeian,lordandserf,guildmasterandjourneyman,ina
word,oppressorandoppressed,stoodinconstant
oppositiontooneanother...Themodernbourgeoissociety
thathassproutedfromtheruinsoffeudalsocietyhasnot
doneawaywithclassantagonisms.Ithasbutestablished
newclasses,newconditionsofoppression,newformsof
struggleinplaceoftheoldones."

WithMarx,
FriedrichEngels
(18201895)co
authoredThe
Communist
Manifestoand
thesecond
volumeofDas
Kapital.

GeorgeWilhelm
FriedrichHegel
(17701831)

FromthefirstpageofDasKapital:
"Thewealthofthosesocietiesinwhichthecapitalistmodeofproductionprevails,presentsitselfasan
immenseaccumulationofcommodities,itsunitbeingasinglecommodity.Ourinvestigationmust
thereforebeginwiththeanalysisofacommodity."[49]
Marxusestheword"commodity"inanextensivemetaphysicaldiscussionofthenatureofmaterialwealth,how
theobjectsofwealthareperceivedandhowtheycanbeused.Acommoditycontraststoobjectsofthenatural
world.Whenpeoplemixtheirlaborwithanobjectitbecomesa"commodity".Inthenaturalworldtherearetrees,
diamonds,ironoreandpeople.Intheeconomicworldtheybecomechairs,rings,factoriesandworkers.However,
saysMarx,commoditieshaveadualnature,adualvalue.Hedistinguishestheusevalueofathingfromits
exchangevalue,whichcanbeentirelydifferent.[50]Theusevalueofacommodityexistsonlyasthatcommodityis
usedorconsumed.Ifcommoditiesareconsideredabsolutelyisolatedfromtheirusefulqualitiesthecommon
propertyishumanlaborintheabstract.Inthissense,valueishumanlaborandisthemostabstractandcommon
propertyembodiedincommodities.Thisfollowstheclassicaleconomistsinthelabortheoryofvalue.Hebelieved

valuecanderivetoofromnaturalgoodsandrefinedhisdefinitionofvalueto"sociallynecessarylabortime",by
whichhemeantthetimepeopleneedtoproducethingswhentheyarenotlazyorinefficient.[51]Furthermore,
peoplesubjectivelyinflatethevalueofthings,forinstancebecausethere'sacommodityfetishforglimmering
diamonds,[52]andoppressivepowerrelationsinvolvedincommodityproduction.Thesetwofactorsmean
exchangevaluesdiffergreatly.Anoppressivepowerrelation,saysMarxapplyingtheuse/exchangedistinctionto
laboritself,inworkwagebargainsderivesfromthefactthatemployerspaytheirworkerslessin"exchangevalue"
thantheworkersproducein"usevalue".Thedifferencemakesupthecapitalist'sprofit,orinMarx'sterminology,
"surplusvalue".[53]Therefore,saysMarx,capitalismisasystemofexploitation.
Marx'sworkturnedthelabortheoryofvalue,astheclassicistscalledit,onitshead.Hisdark
ironygoesdeeperbyaskingwhatisthesociallynecessarylabortimefortheproductionof
labor(i.e.workingpeople)itself.Marxanswersthatthisisthebareminimumforpeopleto
subsistandtoreproducewithskillsnecessaryintheeconomy.[54]
Peoplearethereforealienatedfromboththefruitsofproductionandthemeanstorealizetheir
potential,psychologically,bytheiroppressedpositioninthelabormarket.Butthetaletold
alongsideexploitationandalienationisoneofcapitalaccumulationandeconomicgrowth.
Marxexplained
Employersareconstantlyunderpressurefrommarketcompetitiontodrivetheirworkers
theboomsand
harder,andatthelimitsinvestinlabordisplacingtechnology,byreplacinganassemblyline
busts,likethe
packer,forexample.witharobot.Thisincreasesprofitsandexpandsgrowth,butforthesole
Panicof1873,
benefitofthosewhohaveprivatepropertyinthesemeansofproduction.Theworkingclasses
aspartofan
meanwhilefaceprogressiveimmiseration,havinghadtheproductoftheirlaborexploited
inherent
fromthem,havingbeenalienatedfromthetoolsofproduction.Andhavingbeenfiredfrom
instabilityin
theirjobsandreplacedbymachines,theyendupunemployed.Marxbelievedthatareserve
capitalist
armyoftheunemployedwouldgrowandgrow,fuelingadownwardpressureonwagesas
economies.
desperatepeopleacceptedworkforless.Butthiswouldproduceadeficitofdemandasthe
people'spowertopurchaseproductslagged.Aglutofunsoldproductswouldresult,
productionwouldbecutback,andprofitsdeclineuntilcapitalaccumulationhaltedinaneconomicdepression.
Whentheglutcleared,theeconomywouldagainstarttoboombeforethenextcyclicalbustbegins.Withevery
boomandbust,witheverycapitalistcrisis,thoughtMarx,tensionandconflictbetweentheincreasinglypolarized
classesofcapitalistsandworkerswouldheighten.Moreover,smallerfirmsarebeinggobbledbylargeronesin
everybusinesscycle,aspowerisconcentratedinthehandsofthefewandawayfromthemany.Ultimately,ledby
theCommunistparty,Marxenvisagedarevolutionandthecreationofaclasslesssociety.Howthissocietymight
work,Marxneversuggested.Hisprimarycontributionwasnotablueprintforwhatanewsocietywouldbe,buta
criticismoftheonehesaw.
Marx'sdisciples
ThefirstvolumeofDasKapitalwastheonlyoneMarxalonepublished.Thesecondandthird
volumeswereproducedwiththehelpofFriedrichEngelsKarlKautsky,whohadbecomea
friendofEngels,sawthroughthepublicationofvolumefour.

Rosa
Luxembourg
(18711919)

Marxbeganatraditionofeconomistswhobecamepoliticalactivists,includingRosa
Luxemburg(18711919),amemberoftheSocialDemocraticPartyofGermanywholater
turnedtowardstheCommunistPartyofGermanybecauseoftheirstanceagainsttheFirst
WorldWar,andBeatriceWebb(18581943)ofEngland,asocialistwhohelpedfoundboth
theLondonSchoolofEconomics(LSE)andtheFabianSociety.

TheLondonSchoolofEconomics

In1895theLondonSchoolofEconomics(LSE)wasfoundedbyFabian
SocietymembersSidneyWebb(18591947),BeatriceWebb(1858
1943),andGeorgeBernardShaw(18561950),joiningtheUniversityof
Londonin1900.
SidneyWebb
(18591947)

Inthe1930sLSEmemberSirRoyG.D.Allen(19061983)popularized
theuseofmathematicsineconomics.

Neoclassical(19thandearly20thcentury)
Neoclassicaleconomicsdevelopedinthe1870s.Therewerethreemainindependentschools.
TheCambridgeSchoolwasfoundedwiththe1871publicationofJevons'
TheoryofPoliticalEconomy,developingtheoriesofpartialequilibrium
andfocusingonmarketfailures.ItsmainrepresentativeswereStanley
Jevons,AlfredMarshall,andArthurPigou.TheAustrianSchoolof
EconomicswasmadeupofAustrianeconomistsCarlMenger,Eugenvon
BhmBawerk,andFriedrichvonWieser,whodevelopedthetheoryof
capitalandtriedtoexplaineconomiccrises.Itwasfoundedwiththe1871
publicationofMenger'sPrinciplesofEconomics.TheLausanneSchool,
ledbyLonWalrasandVilfredoPareto,developedthetheoriesofgeneral
SirRoyAllen
equilibriumandParetoefficiency.Itwasfoundedwiththe1874
(19061983)
publicationofWalras'ElementsofPureEconomics.

BeatriceWebb
(18581943)

GeorgeBernard
Shaw(1856
1950)

AngloAmericanneoclassical
AmericaneconomistJohnBatesClark(18471938)promotedthemarginalistrevolution,
publishingTheDistributionofWealth(1899),whichproposedClark'sLawofCapitalism:
"Givencompetitionandhomogeneousfactorsofproductionlaborandcapital,therepartition
ofthesocialproductwillbeaccordingtotheproductivityofthelastphysicalinputofunitsof
laborandcapital",alsoexpressedas"Whatasocialclassgetsis,undernaturallaw,whatit
contributestothegeneraloutputofindustry."In1947theJohnBatesClarkMedalwas
establishedinhishonor.[40]
JohnBatesClark
(18471938)

WilliamStanleyJevons

In1871Menger'sEnglishcounterpartStanleyJevons(18351882)
independentlypublishedTheoryofPoliticalEconomy(1871),statingthatatthemarginthe
satisfactionofgoodsandservicesdecreases.AnexampleoftheTheoryofDiminishing
MarginalUtilityisthatforeveryorangeoneeats,onegetslesspleasureuntilonestopseating
orangescompletely.[40]
AlfredMarshall
AlfredMarshall(18421924)isalsocreditedwithanattempttoputeconomicsonamore
mathematicalfooting.ThefirstprofessorofeconomicsattheUniversityofCambridge,his
1890workPrinciplesofEconomics[55]abandonedtheterm"politicaleconomy"forhis
favorite"economics".Heviewedmathasawaytosimplifyeconomicreasoning,althoughhe
hadreservationsasrevealedinalettertohisstudentArthurCecilPigou:[40][56]

WilliamStanley
Jevons(1835
1882)helped
popularize
marginalutility
theory.

AlfredMarshall
(18421924)
wrotethemain
alternative
textbooktoJohn
StuartMillof
theday,
Principlesof
Economics
(1890)

"(1)Usemathematicsasshorthandlanguage,ratherthanasanengineofinquiry.(2)Keeptothemtill
youhavedone.(3)TranslateintoEnglish.(4)Thenillustratebyexamplesthatareimportantinreal
life.(5)Burnthemathematics.(6)Ifyoucan'tsucceedin4,burn3.ThisIdooften."
Newinstitutionalschools
In1972AmericaneconomistsHaroldDemsetz(1930)andArmenAlchian(19142013)
publishedProduction,InformationCostsandEconomicOrganization,foundingNew
InstitutionalEconomics,anupdatingoftheworksofRonaldCoase(19102013)with
mainstreameconomics.[40]

Continentalneoclassical
LonWalras

LonWalras
(18341910)

HaroldDemsetz
(1930)

In1874againworkingindependently,FrencheconomistLonWalras(18341910)
generalizedmarginaltheoryacrosstheeconomyinElementsofPureEconomics:Small
changesinpeople'spreferences,forinstanceshiftingfrombeeftomushrooms,wouldleadtoa
mushroompricerise,andbeefpricefallthisstimulatesproducerstoshiftproduction,
increasingmushroominginvestment,whichwouldincreasemarketsupplyandanewprice
equilibriumbetweentheproducts,e.g.loweringthepriceofmushroomstoalevelbetweenthe
twofirstlevels.Formanyproductsacrosstheeconomythesamewouldhappenifone
assumesmarketsarecompetitive,peoplechooseonthebasisofselfinterest,andthere'sno
costforshiftingproduction.[40]
TheAustrianschoolofeconomics

Friedrichvon
Wieser(1851
1926)

Whileeconomicsattheendofthenineteenthcenturyandthebeginning
ofthetwentiethwasdominatedincreasinglybymathematicalanalysis,
thefollowersofCarlMenger(18401921)andhisdisciplesEugenvon
BhmBawerk(18511914)andFriedrichvonWieser(18511926)
(coineroftheterm"marginalutility")followedadifferentroute,
advocatingtheuseofdeductivelogicinstead.Thisgroupbecameknown
astheAustrianSchoolofEconomics,reflectingtheAustrianoriginof
manyoftheearlyadherents.ThorsteinVebleninThePreconceptionsof
EconomicScience(1900)contrastedneoclassicalmarginalistsinthe
traditionofAlfredMarshallwiththephilosophiesoftheAustrian
School.[57][58]

Eugenvon
BhmBawerk
(18511914)

CarlMenger
In1871AustrianSchooleconomistCarlMenger(18401921)restatedthebasicprinciplesofmarginalutilityin
GrundstzederVolkswirtschaftslehre[59](PrinciplesofEconomics):Consumersactrationallybyseekingto
maximizesatisfactionofalltheirpreferencespeopleallocatetheirspendingsothatthelastunitofacommodity
boughtcreatesnomoresatisfactionthanalastunitboughtofsomethingelse.[40]
FrancisYsidroEdgeworth
In1881IrisheconomistFrancisYsidroEdgeworth(18451926)publishedMathematical
Psychics:AnEssayontheApplicationofMathematicstotheMoralSciences,which
introducedindifferencecurvesandthegeneralizedutilityfunction,alongwithEdgeworth's
LimitTheorem,extendingtheBertrandModeltohandlecapacityconstraints,andproposing
Edgeworth'sParadoxforwhenthereisnolimittowhatthefirmscansell.[40]
FriedrichHayek
FrancisYsidro
Edgeworth
(18451926)

LudwigvonMises'soutspokencriticismsofsocialismhadalarge
influenceontheeconomicthinkingofAustrianSchooleconomist
FriedrichHayek(18991992),who,whileinitiallysympathetic,became
oneoftheleadingacademiccriticsofcollectivisminthe20thcentury.[60]InechoesofSmith's
"systemofnaturalliberty",Hayekarguedthatthemarketisa"spontaneousorder"and
activelydisparagedtheconceptof"socialjustice".[61]Hayekbelievedthatallformsof
collectivism(eventhosetheoreticallybasedonvoluntarycooperation)couldonlybe
maintainedbyacentralauthority.Buthearguedthatcentralizingeconomicdecisionmaking
FriedrichHayek
wouldleadnotonlytoinfringementsoflibertybutalsotodepressedstandardsofliving
(18991992)
becausecentralizedexpertscouldnotgatherandassesstheknowledgerequiredtoallocate
scarceresourcesefficientlyorproductively.Inhisbook,TheRoadtoSerfdom(1944)andin
subsequentworks,Hayekclaimedthatsocialismrequiredcentraleconomicplanningandthatsuchplanninginturn
wouldleadtowardstotalitarianism.HayekattributedthebirthofcivilizationtoprivatepropertyinhisbookThe
FatalConceit(1988).Accordingtohim,pricesignalsaretheonlymeansofenablingeacheconomicdecision
makertocommunicatetacitknowledgeordispersedknowledgetoeachother,tosolvetheeconomiccalculation
problem.AlongwithhisSocialistSwedishcontemporaryandopponentGunnarMyrdal(18981987),Hayekwas
awardedtheNobelPrizeinEconomicsin1974.[62]

Alternativeschools(19thcentury)

Businesscycletheory
Intheearly19thcenturyGermanbornEnglishastronomerSirWilliam
Herschel(17381822)notedaconnectionbetween11yearsunspot
cyclesandwheatprices.In1860FrencheconomistClmentJuglar
(18191905)positedbusinesscyclesseventoelevenyearslong.In1925
theSovieteconomistNikolaiKondratiev(18921938)proposedthe
existenceofKondratievwavesinWesterncapitalisteconomiesfiftyto
sixtyyearslong.
ClmentJuglar
(18191905)

Germanhistoricalschoolofeconomics

SirWilliam
Herschel(1738
1822)

Inthemid1840sGermaneconomistWilhelmRoscher(18171894)
foundedtheGermanhistoricalschoolofeconomics,whichpromotedthecyclicaltheoryof
nationseconomiespassingthroughyouth,manhood,andsenilityandspreadthrough
academiainBritainandtheU.S.,dominatingitfortherestofthe19thcentury.[40]

ThorsteinVeblenandtheAmericanWay
ThorsteinVeblen(18571929),whocamefromruralmidwesternAmericaandworkedatthe
UniversityofChicagoisoneofthebestknownearlycriticsofthe"AmericanWay".InThe
Nikolai
TheoryoftheLeisureClass(1899)hescornedmaterialisticcultureandwealthypeoplewho
Kondratiev
conspicuouslyconsumedtheirrichesasawayofdemonstratingsuccess.InTheTheoryof
(18921938)
BusinessEnterprise(1904)Veblendistinguishedproductionforpeopletousethingsand
productionforpureprofit,arguingthattheformerisoftenhindered
becausebusinessespursuethelatter.Outputandtechnologicaladvance
arerestrictedbybusinesspracticesandthecreationofmonopolies.
Businessesprotecttheirexistingcapitalinvestmentsandemploy
excessivecredit,leadingtodepressionsandincreasingmilitary
expenditureandwarthroughbusinesscontrolofpoliticalpower.These
twobooks,focusingoncriticismofconsumerismandprofiteeringdidnot
advocatechange.However,in1918hemovedtoNewYorktobeginwork
asaneditorofamagazinecalledTheDial,andthenin1919,alongwith
Thorstein
Wilhelm
CharlesA.Beard,JamesHarveyRobinson,andJohnDeweyhehelped
Veblen(1857
Roscher(1817
foundtheNewSchoolforSocialResearch,knowntodayasTheNew
1929)
1894)
School)HewasalsopartoftheTechnicalAlliance,[63]createdin1919by
HowardScott.From1919through1926Veblencontinuedtowriteandto
beinvolvedinvariousactivitiesatTheNewSchool.DuringthisperiodhewroteTheEngineersandthePrice
System(1921).[40][64]

Worldwars,revolutionandgreatdepression(earlytomid20thcentury)
AttheoutbreakofWorldWarI(19141918),AlfredMarshallwasstillworkingonhislastrevisionsofhis
PrinciplesofEconomics.The20thcentury'sinitialclimateofoptimismwassoonviolentlydismemberedinthe
trenchesoftheWesternFront.Duringthewar,productioninBritain,Germany,andFrancewasswitchedtothe
military.In1917RussiacrumbledintorevolutionledbyVladimirLeninandwhopromotedMarxisttheoryand
collectivizedthemeansofproduction.Alsoin1917theUnitedStatesofAmericaenteredthewarAllies(France
andBritain),withPresidentWoodrowWilsonclaimingtobe"makingtheworldsafefordemocracy",devisinga
peaceplanofFourteenPoints.In1918Germanylaunchedaspringoffensivewhichfailed,andastheallies

counterattackedandmoremillionswereslaughtered,GermanyslidintotheGermanRevolution,itsinterim
governmentsuingforpeaceonthebasisofWilson'sFourteenPoints.Afterthewar,Europelayinruins,
financially,physically,psychologically,anditsfuturewasdependentonthedictatesoftheVersaillesConferencein
1919.
AfterWorldWarI,EuropeandtheSovietUnionlayinruins,andtheBritishEmpirewasnearingitsend,leaving
theUnitedStatesasthepreeminentglobaleconomicpower.BeforeWorldWarII,Americaneconomistshad
playedaminorrole.Duringthistimeinstitutionaleconomistshadbeenlargelycriticalofthe"AmericanWay"of
life,especiallytheconspicuousconsumptionoftheRoaringTwentiesbeforetheWallStreetCrashof1929.After
thecrashamoreorthodoxbodyofthoughttookroot,reactingagainsttheluciddebatingstyleofKeynes,and
remathematizingtheprofession.Theorthodoxcenterwasalsochallengedbyamoreradicalgroupofscholars
basedattheUniversityofChicago,whoadvocated"liberty"and"freedom",lookingbackto19thcenturystyle
noninterventionistgovernments.

Econometrics

RagnarFrisch
(18951973)

Inthe1930sNorwegianeconomistRagnarFrisch(18951973)and
DutcheconomistJanTinbergen(19031994)pioneeredEconometrics,
receivingthefirsteverNobelPrizeinEconomicsin1969.In1936
RussianAmericaneconomistWassilyLeontief(19051999)proposedthe
InputOutputModelofeconomics,whichuseslinearalgebraandis
ideallysuitedtocomputers,receivingthe1973NobelEconomicsPrize.
AfterWorldWarII,LawrenceKlein(1920)pioneeredtheuseof
computersineconometricmodeling,receivingthe1980Nobel
EconomicsPrize.In19631964asJohnTukeyofPrincetonUniversity
wasdevelopingtherevolutionaryFastFourierTransform,whichgreatly
speededupthecalculationofFourierTransforms,hisBritishassistantSir
CliveGranger(19342009)pioneeredtheuseofFourierTransformsin
economics,receivingthe2003NobelEconomicsPrize.RagnarFrisch's
assistantTrygveHaavelmo(19111999)receivedthe1989Nobel
EconomicsPrizeforclarifyingtheprobabilityfoundationsof
econometricsandforanalysisofsimultaneouseconomicstructures.

Meansandcorporategovernance

JanTinbergen
(19031994)

CliveGranger
(19342009)

TheGreatDepressionwasatimeofsignificantupheavalintheworldeconomy.Oneofthe
mostoriginalcontributionstounderstandingwhatwentwrongcamefromHarvardUniversity
lawyerAdolfBerle(18951971),wholikeJohnMaynardKeyneshadresignedfromhis
diplomaticjobattheParisPeaceConference,1919andwasdeeplydisillusionedbythe
VersaillesTreaty.InhisbookwithAmericaneconomistGardinerC.Means(18961988)The
ModernCorporationandPrivateProperty(1932)hedetailedtheevolutioninthecontemporaryeconomyofbig
business,andarguedthatthosewhocontrolledbigfirmsshouldbebetterheldtoaccount.Directorsofcompanies
areheldtoaccounttotheshareholdersofcompanies,ornot,bytherulesfoundincompanylawstatutes.This
mightincluderightstoelectandfirethemanagement,requireforregulargeneralmeetings,accountingstandards,
andsoon.In1930sAmericathetypicalcompanylaws(e.g.inDelaware)didnotclearlymandatesuchrights.
Berlearguedthattheunaccountabledirectorsofcompanieswerethereforeapttofunnelthefruitsofenterprise
profitsintotheirownpockets,aswellasmanageintheirowninterests.Theabilitytodothiswassupportedbythe
factthatthemajorityofshareholdersinbigpubliccompaniesweresingleindividuals,withscantmeansof
communication,inshort,dividedandconquered.BerleservedinPresidentFranklinDelanoRoosevelt's
administrationthroughtheGreatDepressionasakeymemberofhisBrainTrust,developingmanyNewDeal
policies.
Trygve
Haavelmo
(19111999)

In1967BerleandMeansissuedarevisededitionoftheirwork,inwhichtheprefaceaddeda
newdimension.Itwasnotonlytheseparationofcontrollersofcompaniesfromtheownersas
shareholdersatstake.Theyposedthequestionofwhatthecorporatestructurewasreally
meanttoachieve:
"Stockholderstoilnot,neitherdotheyspin,toearn[dividendsandshareprice
increases].Theyarebeneficiariesbypositiononly.Justificationfortheir
inheritance...canbefoundedonlyuponsocialgrounds...thatjustificationturnson
thedistributionaswellastheexistenceofwealth.Itsforceexistsonlyindirect
ratiotothenumberofindividualswhoholdsuchwealth.Justificationforthe
stockholder'sexistencethusdependsonincreasingdistributionwithinthe
Americanpopulation.Ideallythestockholder'spositionwillbeimpregnableonly
wheneveryAmericanfamilyhasitsfragmentofthatpositionandofthewealth
bywhichtheopportunitytodevelopindividualitybecomesfullyactualized."[65]

Industrialorganizationeconomics

AdolfAugustus
Berle,Jr.(1895
1971)with
GardinerMeans
wasa
foundational
figureof
modern
corporate
governance.

In1933AmericaneconomistEdwardChamberlin(18991967)publishedTheTheoryofMonopolistic
Competition.ThesameyearBritisheconomistJoanRobinson(19031983)publishedTheEconomicsofImperfect
Competition.TogethertheyfoundedIndustrialOrganizationEconomics.ChamberlinalsofoundedExperimental
Economics.

Linearprogramming
In1939RussianeconomistLeonidKantorovich(19121986)developedLinearProgramming
fortheoptimalallocationofresources,receivingthe1975NobelEconomicsPrize.

Ecologyandenergy
Bythetwentiethcentury,theindustrialrevolutionhadledtoanexponentialincreaseinthe
humanconsumptionofresources.Theincreaseinhealth,wealthandpopulationwasperceived
asasimplepathofprogress.However,inthe1930seconomistsbegandevelopingmodelsof
nonrenewableresourcemanagement(seeHotelling'srule)andthesustainabilityofwelfarein
aneconomythatusesnonrenewableresources.

Leonid
Kantorovich
(19121986)

Concernsabouttheenvironmentalandsocialimpactsofindustryhadbeenexpressedbysome
EnlightenmentpoliticaleconomistsandintheRomanticmovementofthe1800s.Overpopulationhadbeen
discussedinanessaybyThomasMalthus(seeMalthusiancatastrophe),whileJohnStuartMillforesawthe
desirabilityofastationarystateeconomy,thusanticipatingconcernsofthemoderndisciplineofecological
economics.[66][67][68][69][70]
Ecologicaleconomics
EcologicaleconomicswasfoundedintheworksofKennethE.Boulding,NicholasGeorgescuRoegen,Herman
Dalyandothers.Thedisciplinaryfieldofecologicaleconomicsalsobearssomesimilaritytothetopicofgreen
economics.[71]

AccordingtoecologicaleconomistMalteFaber,ecologicaleconomicsisdefinedbyitsfocusonnature,justice,
andtime.Issuesofintergenerationalequity,irreversibilityofenvironmentalchange,uncertaintyoflongterm
outcomes,thermodynamicslimitstogrowth,andsustainabledevelopmentguideecologicaleconomicanalysisand
valuation.[72]
Energyaccounting
Energyaccountingwasproposedintheearly1930sasascientificalternativetoapricesystem,ormoneymethod
ofregulatingsociety.[73][74]JosephTainter[75]suggeststhatadiminishingratioofenergyreturnedonenergy
investedisachiefcauseofthecollapseofcomplexsocieties.FallingEROEIduetodepletionofnonrenewable
resourcesalsoposesadifficultchallengeforindustrialeconomies.Sustainabilitybecomesanissueassurvivalis
threatenedduetoclimatechange.

Institutionaleconomics
In1919YaleeconomistWaltonH.Hamiltoncoinedtheterm"Institutionaleconomics".In
1934JohnR.Commons(18621945),anothereconomistfrommidwesternAmericapublished
InstitutionalEconomics(1934),basedontheconceptthattheeconomyisawebof
relationshipsbetweenpeoplewithdiverginginterests,includingmonopolies,large
corporations,labordisputes,andfluctuatingbusinesscycles.Theydohoweverhavean
interestinresolvingthesedisputes.Government,thoughtCommons,oughttobethemediator
betweentheconflictinggroups.Commonshimselfdevotedmuchofhistimetoadvisoryand
mediationworkongovernmentboardsandindustrialcommissions.

JohnR.
Commons
(18621945)

ArthurCecilPigou
In1920AlfredMarshall'sstudentArthurCecilPigou(18771959)publishedWealthand
Welfare,whichinsistedonthepossibilityofmarketfailures,claimingthatmarketsare
inefficientinthecaseofeconomicexternalities,andthestatemustinterferetopreventthem.
However,Pigouretainedfreemarketbeliefs,andin1933,inthefaceoftheeconomiccrisis,
heexplainedinTheTheoryofUnemploymentthattheexcessiveinterventionofthestateinthe
labormarketwastherealcauseofmassiveunemploymentbecausethegovernmentshad
establishedaminimalwage,whichpreventedwagesfromadjustingautomatically.Thiswasto
bethefocusofattackfromKeynes.In1943PigoupublishedthepaperTheClassical
StationaryState,whichpopularizedthePigou(RealBalance)Effect,thestimulationofoutput
andemploymentduringdeflationbyincreasingconsumptionduetoariseinwealth

Marketsocialism

FredM.Taylor
(18551932)

ArthurCecil
Pigou(1877
1959)

InresponsetotheEconomicCalculationProblemproposedbythe
AustrianSchoolofEconomicsthatdisputestheefficiencyofastaterun
economy,thetheoryofMarketSocialismwasdevelopedinthelate1920s
and1930sbyeconomistsFredM.Taylor(18551932),OskarR.Lange
(19041965),AbbaLerner(19031982)etal.,combiningMarxian
economicswithneoclassicaleconomicsafterdumpingthelabortheoryof
value.In1938AbramBergson(19142003)definedtheSocialWelfare
Function.

TheStockholmschoolofeconomics

OskarR.Lange
(19041965)

Inthe1930stheStockholmSchoolofEconomicswasfoundedbyEliHeckscher(18791952),
BertilOhlin(18991977),GunnarMyrdal(18981987)etal.basedontheworksofJohn
MaynardKeynesandKnutWicksell(18511926),advisingthefoundersoftheSwedish
Socialistwelfarestate.

AbbaLerner
(19031982)

In1933OhlinandHeckscherproposedtheHeckscherOhlinModelofInternationalTrade,
whichclaimsthatcountrieswillexportproductsthatusetheirabundantandcheapfactorsof
productionandimportproductsthatusetheirscarcefactorsofproduction.In1977Ohlinwas
awardedashareoftheNobelEconomicsPrize.
In1957MyrdalpublishedhistheoryofCircularCumulativeCausation,
inwhichachangeinoneinstitutionripplesthroughothers.In1974he
receivedashareoftheNobelEconomicsPrize.

Alternativeschools(20thcentury)
TheAmericanEconomicAssociation
EliHeckscher
(18791952)

In1885theAmericanEconomicAssociation(AEA)wasfoundedby
RichardT.Ely(18541943)etal.,publishingtheAmericanEconomic
Reviewstartingin1911.In1918ElypublishedPrivateColonizationof
Land,foundingLambdaAlphaInternationalin1930topromoteLand
Economics.[40]

BertilOhlin
(18991977)

Keynesianism(20thcentury)
JohnMaynardKeynes(18831946)wasborninCambridge,educatedat
Eton,andsupervisedbybothA.C.PigouandAlfredMarshallat
KnutWicksell
CambridgeUniversity.Hebeganhiscareerasalecturerbeforeworking
GunnarMyrdal
(18511926)
fortheBritishgovernmentduringtheGreatWar,risingtobetheBritish
(18981987)
government'sfinancialrepresentativeattheVersaillesConference,where
heprofoundlydisagreedwiththedecisionsmade.Hisobservations
werelaidoutinhisbookTheEconomicConsequencesofthePeace[76]
(1919),wherehedocumentedhisoutrageatthecollapseofAmerican
adherencetotheFourteenPoints[77]andthemoodofvindictiveness
thatprevailedtowardsGermany.,[78]andheresignedfromthe
conference,usingextensiveeconomicdataprovidedbytheconference
recordstoarguethatifthevictorsforcedwarreparationstobepaidby
thedefeatedAxis,thenaworldfinancialcrisiswouldensue,leadingto
RichardT.Ely
[79]
(18541943)
asecondworldwar. Keynesfinishedhistreatisebyadvocating,
JohnMaynard
first,areductioninreparationpaymentsbyGermanytoarealistically
Keynes(1883
manageablelevel,increasedintragovernmentalmanagementofcontinentalcoal
1946)(right)with
productionandafreetradeunionthroughtheLeagueofNations[80]second,an
hisAmerican
counterpartHarry
arrangementtosetoffdebtrepaymentsbetweentheAlliedcountries[81]third,complete
WhiteattheBretton
reformofinternationalcurrencyexchangeandaninternationalloanfund[82]andfourth,a
Woodsconference.
reconciliationoftraderelationswithRussiaandEasternEurope.[83]

Thebookwasanenormoussuccess,andthoughitwascriticizedforfalsepredictionsbyanumberofpeople,[84]
withoutthechangesheadvocated,Keynes'sdarkforecastsmatchedtheworld'sexperiencethroughtheGreat
Depressionwhichbeganin1929,andthedescentintoWorldWarIIin1939.WorldWarIhadbeentoutedasthe
"wartoendallwars",andtheabsolutefailureofthepeacesettlementgeneratedanevengreaterdeterminationto
notrepeatthesamemistakes.WiththedefeatofFascism,theBrettonWoodsConferencewasheldinJuly1944to
establishaneweconomicorder,inwhichKeyneswasagaintoplayaleadingrole.

TheGeneralTheory
DuringtheGreatDepression,Keynespublishedhismostimportantwork,TheGeneralTheoryofEmployment,
InterestandMoney(1936).TheGreatDepressionhadbeensparkedbytheWallStreetCrashof1929,leadingto
massiverisesinunemploymentintheUnitedStates,leadingtodebtsbeingrecalledfromEuropeanborrowers,and
aneconomicdominoeffectacrosstheworld.Orthodoxeconomicscalledforatighteningofspending,until
businessconfidenceandprofitlevelscouldberestored.Keynesbycontrast,hadarguedinATractonMonetary
Reform(1923)(whicharguesforastablecurrency)thatavarietyoffactorsdeterminedeconomicactivity,andthat
itwasnotenoughtowaitforthelongrunmarketequilibriumtorestoreitself.AsKeynesfamouslyremarked:
"...thislongrunisamisleadingguidetocurrentaffairs.Inthelongrunwearealldead.Economistsset
themselvestooeasy,toouselessataskifintempestuousseasonstheycanonlytellusthatwhenthe
stormislongpasttheoceanisflatagain."[85]
Ontopofthesupplyofmoney,Keynesidentifiedthepropensitytoconsume,inducementtoinvest,marginal
efficiencyofcapital,liquiditypreference,andmultipliereffectasvariableswhichdeterminethelevelofthe
economy'soutput,employment,andpricelevels.MuchofthisesotericterminologywasinventedbyKeynes
especiallyforhisGeneralTheory.Keynesarguedthatifsavingswerebeingwithheldfrominvestmentinfinancial
markets,totalspendingfalls,leadingtoreducedincomesandunemployment,whichreducessavingsagain.This
continuesuntilthedesiretosavebecomesequaltothedesiretoinvest,whichmeansanew"equilibrium"is
reachedandthespendingdeclinehalts.Thisnew"equilibrium"isadepression,wherepeopleareinvestingless,
havelesstosaveandlesstospend.
Keynesarguedthatemploymentdependsontotalspending,whichiscomposedofconsumerspendingand
businessinvestmentintheprivatesector.Consumersonlyspend"passively",oraccordingtotheirincome
fluctuations.Businesses,ontheotherhand,areinducedtoinvestbytheexpectedrateofreturnonnewinvestments
(thebenefit)andtherateofinterestpaid(thecost).So,saidKeynes,ifbusinessexpectationsremainedthesame,
andgovernmentreducesinterestrates(thecostsofborrowing),investmentwouldincrease,andwouldhavea
multipliedeffectontotalspending.Interestrates,inturn,dependonthequantityofmoneyandthedesiretohold
moneyinbankaccounts(asopposedtoinvesting).Ifnotenoughmoneyisavailabletomatchhowmuchpeople
wanttohold,interestratesriseuntilenoughpeopleareputoff.Soifthequantityofmoneywereincreased,while
thedesiretoholdmoneyremainedstable,interestrateswouldfall,leadingtoincreasedinvestment,outputand
employment.Forboththesereasons,Keynesthereforeadvocatedlowinterestratesandeasycredit,tocombat
unemployment.
ButKeynesbelievedinthe1930s,conditionsnecessitatedpublicsectoraction.Deficitspending,saidKeynes,
wouldkickstarteconomicactivity.ThishehadadvocatedinanopenlettertoU.S.PresidentFranklinD.Roosevelt
intheNewYorkTimes(1933).TheNewDealprogrammeintheU.S.hadbeenwellunderwaybythepublicationof
theGeneralTheory.Itprovidedconceptualreinforcementforpoliciesalreadypursued.Keynesalsobelievedina
moreegalitariandistributionofincome,andtaxationonunearnedincomearguingthathighratesofsavings(to
whichricherfolkareprone)arenotdesirableinadevelopedeconomy.Keynesthereforeadvocatedbothmonetary
managementandanactivefiscalpolicy.

TheCambridgeCircus
DuringWorldWarIIKeynesactedasadvisertoHMTreasuryagain,negotiatingmajorloansfromtheU.S.,
helpingformulatetheplansfortheInternationalMonetaryFund,theWorldBank,andtheInternationalTrade
Organisation[86]atthe1944BrettonWoodsConference,apackagedesignedtostabilizeworldeconomy
fluctuationsthathadoccurredinthe1920sandcreatealeveltradingfieldacrosstheglobe.Keynesdiedlittlemore
thanayearlater,buthisideashadalreadyshapedanewglobaleconomicorder,andallWesterngovernments
followedtheKeynesianeconomicsprogramofdeficitspendingtoavertcrisesandmaintainfullemployment.
OneofKeynes'spupilsatCambridgewasJoanRobinson(19031983),amemberofKeynes's
CambridgeCircus,whocontributedtothenotionthatcompetitionisseldomperfectina
market,anindictmentofthetheoryofmarketssettingprices.InTheProductionFunctionand
theTheoryofCapital(1953)Robinsontackledwhatshesawtobesomeofthecircularityin
orthodoxeconomics.Neoclassicistsassertthatacompetitivemarketforcesproducersto
minimizethecostsofproduction.Robinsonsaidthatcostsofproductionaremerelytheprices
ofinputs,likecapital.Capitalgoodsgettheirvaluefromthefinalproducts.Andifthepriceof
thefinalproductsdeterminesthepriceofcapital,thenitis,arguedRobinson,utterlycircular
JoanRobinson
tosaythatthepriceofcapitaldeterminesthepriceofthefinalproducts.Goodscannotbe
(19031983)
priceduntilthecostsofinputsaredetermined.Thiswouldnotmatterifeverythinginthe
economyhappenedinstantaneously,butintherealworld,pricesettingtakestimegoodsare
pricedbeforetheyaresold.Sincecapitalcannotbeadequatelyvaluedinindependentlymeasurableunits,howcan
oneshowthatcapitalearnsareturnequaltothecontributiontoproduction?
AlfredEichner(March23,1937February10,1988)wasanAmericanpostKeynesianeconomistwhochallenged
theneoclassicalpricemechanismandassertedthatpricesarenotsetthroughsupplyanddemandbutratherthrough
markuppricing.EichnerisoneofthefoundersofthepostKeynesianschoolofeconomicsandwasaprofessorat
RutgersUniversityatthetimeofhisdeath.Eichner'swritingsandadvocacyofthought,differedwiththetheories
ofJohnMaynardKeynes,whowasanadvocateofgovernmentinterventioninthefreemarketandproponentof
publicspendingtoincreaseemployment.Eichnerarguedthatinvestmentwasthekeytoeconomicexpansion.He
wasconsideredanadvocateoftheconceptthatgovernmentincomespolicyshouldpreventinflationarywageand
pricesettlementsinconnectiontothecustomaryfiscalandmonetarymeansofregulatingtheeconomy.
RichardKahn(19051989)wasamemberoftheCambridgeCircuswhoin1931proposedtheMultiplier.
PieroSraffa(18981983)cametoEnglandfromFascistItalyinthe1920s,andbecamea
memberoftheCambridgeCircus.In1960hepublishedasmallbookcalledProductionof
CommoditiesbyMeansofCommodities,whichexplainedhowtechnologicalrelationshipsare
thebasisforproductionofgoodsandservices.Pricesresultfromwageprofittradeoffs,
collectivebargaining,labourandmanagementconflictandtheinterventionofgovernment
planning.LikeRobinson,Sraffawasshowinghowthemajorforceforpricesettinginthe
economywasnotnecessarilymarketadjustments.
JohnHicks(19041989)ofEnglandwasaKeynesianwhoin1937proposedtheInvestment
SavingLiquidityPreferenceMoneySupplyModel,whichtreatstheintersectionoftheIS
andLMcurvesasthegeneralequilibriuminbothmarkets.

PieroSraffa
(18981983)

NewKeynesianmacroeconomics
In1977EdmundPhelps(1933)(whowasawardedthe2006NobelEconomicsPrize)andJohnB.Taylor(1946)
publishedapaperprovingthatstaggeredsettingofwagesandpricesgivesmonetarypolicyaroleinstabilizing
economicfluctuationsifthewages/pricesaresticky,evenwhenallworkersandfirmshaverationalexpectations,

whichcausedKeynesianeconomicstomakeacomebackamong
mainstreameconomistswithNewKeynesianMacroeconomics.Itscentral
themeistheprovisionofamicroeconomicfoundationforKeynesian
macroeconomics,obtainedbyidentifyingminimaldeviationsfromthe
standardmicroeconomicassumptionswhichyieldKeynesian
macroeconomicconclusions,suchasthepossibilityofsignificantwelfare
benefitsfrommacroeconomicstabilization.[87]
In1985GeorgeAkerlof(1940)andhiseconomistwifeJanetYellen
(1946)publishedmenucostsargumentsshowingthat,underimperfect
competition,smalldeviationsfromrationalitygeneratesignificant(in
welfareterms)pricestickiness.[88]
In1987BritisheconomistHuwDixon(1958)publishedAsimplemodelof
imperfectcompetitionwithWalrasianfeatures,[89]thefirstworkto
demonstrateinasimplegeneralequilibriummodelthatthefiscalmultiplier
couldbeincreasingwiththedegreeofimperfectcompetitionintheoutput
Top:Phelps(1933),Yellen(1946)
market,helpingdevelopNewKeynesianeconomics.Thereasonforthisis
Bottom:Taylor(1946),Dixon
thatimperfectcompetitionintheoutputmarkettendstoreducethereal
(1958)
wage,leadingtothehouseholdsubstitutingawayfromconsumption
towardsleisure.Whengovernmentspendingisincreased,the
correspondingincreaseinlumpsumtaxationcausesbothleisureandconsumptiontodecrease(assumingthatthey
arebothanormalgood).Thegreaterthedegreeofimperfectcompetitionintheoutputmarket,thelowerthereal
wageandhencethemorethereductionfallsonleisure(i.e.householdsworkmore)andlessonconsumption.
Hencethefiscalmultiplierislessthanone,butincreasinginthedegreeofimperfectcompetitionintheoutput
market.[90]
In1997AmericaneconomistMichaelWoodford(1955)andArgentineeconomistJulioRotemberg(1953)
publishedthefirstpaperdescribingamicrofoundedDSGENewKeynesianmacroeconomicmodel.

SidneyWeintraub,PaulDavidsonandPostKeynesianeconomics
In1975AmericaneconomistsSidneyWeintraub(19141983)andHenryWallich(19141988)publishedATax
BasedIncomesPolicy,promotingTaxBasedIncomesPolicy(TIP),usingtheincometaxmechanismtoimplement
anantiinflationaryincomespolicy.In1978WeintraubandAmericaneconomistPaulDavidson(1930)founded
theJournalofPostKeynesianEconomics.ThisopenedthedoortomanyyoungereconomistssuchasE.Ray
Canterbery(1935).AlwaysPostKeynesianinhisstyleandapproach,Canterberywentontomakecontributions
outsidetraditionalPostKeynesianism.Hisfriend,JohnKennethGalbraith,wasalongtimeinfluence.

Thecredittheoryofmoney
In1913EnglisheconomistdiplomatAlfredMitchellInnes(18641950)publishedWhatisMoney?,whichwas
reviewedfavorablybyJohnMaynardKeynes,followedin1914byTheCreditTheoryofMoney,advocatingthe
CreditTheoryofMoney,whicheconomistL.RandallWraycalled"Thebestpairofarticlesonthenatureof
moneywritteninthetwentiethcentury."[91]

TheChicagoschoolofeconomics(20thcentury)

JacobMincer
(19222006)

Thegovernmentinterventionistmonetaryandfiscalpoliciesthatthe
postwarKeynesianeconomistsrecommendedcameunderattackbya
groupoftheoristsworkingattheUniversityofChicago,whichcamein
the1950stobeknownastheChicagoSchoolofEconomics.Before
WorldWarII,theOldChicagoSchoolofstrongKeynesianswasfounded
byFrankKnight(18851972),JacobViner(18921970),andHenry
CalvertSimons(18991946).Thesecondgenerationwasknownfora
moreconservativelineofthought,reassertingalibertarianviewof
marketactivitythatpeoplearebestlefttothemselvestobefreetochoose
howtoconducttheirownaffairs.[40]

Milton
Friedman
(19122006)

RonaldCoase(19102013)oftheChicagoSchoolofEconomicswasthe
mostprominenteconomicanalystoflaw,andthe1991NobelPrizein
Economicswinner.HisfirstmajorarticleTheNatureoftheFirm(1937)
arguedthatthereasonfortheexistenceoffirms(companies,partnerships,
etc.)istheexistenceoftransactioncosts.Homoeconomicustrades
throughbilateralcontractsonopenmarketsuntilthecostsoftransactions
maketheuseofcorporationstoproducethingsmorecosteffective.His
secondmajorarticleTheProblemofSocialCost(1960)arguedthatifwe
livedinaworldwithouttransactioncosts,peoplewouldbargainwithone
GaryBecker
RichardPosner
anothertocreatethesameallocationofresources,regardlessofthewaya
(19302014)
(1939)
courtmightruleinpropertydisputes.Coaseusedtheexampleofanold
legalcaseaboutnuisancenamedSturgesvBridgman,whereanoisy
sweetsmakerandaquietdoctorwereneighborsandwenttocourttoseewhoshouldhavetomove.[92]Coasesaid
thatregardlessofwhetherthejudgeruledthatthesweetsmakerhadtostopusinghismachinery,orthatthedoctor
hadtoputupwithit,theycouldstrikeamutuallybeneficialbargainaboutwhomoveshousethatreachesthesame
outcomeofresourcedistribution.Onlytheexistenceoftransactioncostsmaypreventthis.[93]Sothelawoughtto
preemptwhatwouldhappen,andbeguidedbythemostefficientsolution.Theideaisthatlawandregulationare
notasimportantoreffectiveathelpingpeopleaslawyersandgovernmentplannersbelieve.[94]Coaseandothers
likehimwantedachangeofapproach,toputtheburdenofproofforpositiveeffectsonagovernmentthatwas
interveninginthemarket,byanalyzingthecostsofaction.[95]
Inthe1960sGaryBecker(19302014)andJacobMincer(19222006)oftheChicagoSchoolofEconomics
foundedNewHomeEconomics,whichspawnedFamilyEconomics.
In1973CoasediscipleRichardPosner(1939)publishedEconomicAnalysisofLaw,whichbecameastandard
textbook,causinghimtobecomethemostcitedlegalscholarofthe20thcentury.In1981hepublishedThe
EconomicsofJustice,whichclaimedthatjudgeshavebeeninterpretingcommonlawasittheyweretryingto
maximizeeconomicwelfare.
MiltonFriedman(19122006)oftheChicagoSchoolofEconomicsisoneofthemostinfluentialeconomistsofthe
late20th,century,receivingtheNobelPrizeinEconomicsin1976.HeisknownforAMonetaryHistoryofthe
UnitedStates(1963),inwhichhearguedthattheGreatDepressionwascausedbythepoliciesoftheFederal
Reserve.Friedmanarguesthatlaissezfairegovernmentpolicyismoredesirablethangovernmentinterventionin
theeconomy.Governmentsshouldaimforaneutralmonetarypolicyorientedtowardlongruneconomicgrowth,
bygradualexpansionofthemoneysupply.Headvocatesthequantitytheoryofmoney,thatgeneralpricesare
determinedbymoney.Therefore,activemonetary(e.g.easycredit)orfiscal(e.g.taxandspend)policycanhave
unintendednegativeeffects.InCapitalismandFreedom(1962),Friedmanwrote:

"Thereislikelytobealagbetweentheneedforactionandgovernmentrecognitionoftheneeda
furtherlagbetweenrecognitionoftheneedforactionandthetakingofactionandastillfurtherlag
betweentheactionanditseffects."[96]
Friedmanwasalsoknownforhisworkontheconsumptionfunction,thePermanentIncomeHypothesis(1957),
whichFriedmanreferredtoashisbestscientificwork.[97]Thisworkcontendedthatrationalconsumerswould
spendaproportionalamountofwhattheyperceivedtobetheirpermanentincome.Windfallgainswouldmostlybe
saved.Taxreductionslikewise,asrationalconsumerswouldpredictthattaxeswouldhavetoriselatertobalance
publicfinances.OtherimportantcontributionsincludehiscritiqueofthePhillipsCurve,andtheconceptofthe
naturalrateofunemployment(1968).[40]

Newclassicalmacroeconomicsandsynthesis
Intheearly1970sAmericanChicagoSchooleconomistRobertE.Lucas,
Jr.(1937)foundedNewClassicalMacroeconomicsbasedonMilton
Friedman'smonetaristcritiqueofKeynesianmacroeconomics,andtheidea
ofrationalexpectations,[98]firstproposedin1961byJohnF.Muth,
opposingtheideathatgovernmentinterventioncanorshouldstabilizethe
economy.[99]ThePolicyIneffectivenessProposition(1975)[100]ofThomas
J.Sargent(1943)andNeilWallace(1939),whichseemedtorefutea
basicassumptionofKeynesianeconomicswasalsoadopted.TheLucas
aggregatesupplyfunctionstatesthateconomicoutputisafunctionof
moneyorprice"surprise."Lucaswasawardedthe1995NobelEconomics
Prize.

Prescott(1940),Sargent(1943),
Kydland(1948)

Lucas'modelwassupersededasthestandardmodelofNewClassicalMacroeconomicsbytheRealBusinessCycle
Theory,proposedin1982byFinnKydland(1943)andEdwardC.Prescott(1940),whichseekstoexplain
observedfluctuationsinoutputandemploymentintermsofrealvariablessuchaschangesintechnologyand
tastes.Assumingcompetitivemarkets,realbusinesscycletheoryimpliesthatcyclicalfluctuationsareoptimal
responsestovariabilityintechnologyandtastes,andthatmacroeconomicstabilizationpoliciesmustreduce
welfare.[101]
In1982KydlandandPrescottalsofoundedthetheoryofDynamicStochasticGeneralEquilibrium(DSGE),large
systemsofmicroeconomicequationscombinedintomodelsofthegeneraleconomy,whichbecamecentraltothe
NewNeoclassicalSynthesis,incorporatingtheoreticalelementssuchasstickypricesfromNewKeynesian
Macroeconomics.Theysharedthe2004NobelEconomicsPrize.[40]

Efficientmarkethypothesis
In1965ChicagoSchooleconomistEugeneFama(1939)publishedTheBehaviorofStockMarketPrices,which
foundthatstockmarketpricesfollowarandomwalk,proposingtheEfficientMarketHypothesis,thatrandomness
ischaracteristicofaperfectlyfunctioningfinancialmarket.ThesameyearPaulSamuelsonpublishedapaper
concludingthesamethingwithamathematicalproof,sharingthecredit.Earlierin1948HolbrookWorking(1895
1985)publishedapapersayingthesamething,butnotinamathematicalform.In1970FamapublishedEfficient
CapitalMarkets:AReviewofTheoryandEmpiricalWork,proposingthatefficientmarketscanbestrong,semi
strong,orweak,andalsoproposingtheJointHypothesisProblem,thattheideaofmarketefficiencycan'tbe
rejectedwithoutalsorejectingthemarketmechanism.

Games,evolutionandgrowth(20thcentury)
In1898ThorsteinVeblenpublishedWhyisEconomicsnotanEvolutionaryScience,which
coinsthetermEvolutionaryeconomics,makinguseofanthropologytodenythatthereisa
universalhumannature,emphasizingtheconflictbetween"industrial"orinstrumentaland
"pecuniary"orceremonialvalues,whichbecameknownastheCeremonial/Instrumental
Dichotomy.[40]
JosephAloisSchumpeter(18831950)wasanAustrianSchooleconomistandpolitical
scientistbestknownforhisworksonbusinesscyclesandinnovation.He
insistedontheroleoftheentrepreneursinaneconomy.InBusiness
Cycles:Atheoretical,historicalandstatisticalanalysisoftheCapitalist
process(1939),Schumpetersynthesizedthetheoriesaboutbusiness
cycles,suggestingthattheycouldexplaintheeconomicsituations.
AccordingtoSchumpeter,capitalismnecessarilygoesthroughlongterm
cyclesbecauseitisentirelybaseduponscientificinventionsand
innovations.Aphaseofexpansionismadepossiblebyinnovations,
becausetheybringproductivitygainsandencourageentrepreneursto
invest.However,wheninvestorshavenomoreopportunitiestoinvest,
JohnForbes
theeconomygoesintorecession,severalfirmscollapse,closuresand
NashJr.(1928
bankruptcyoccur.Thisphaselastsuntilnewinnovationsbringacreative
2015)
destructionprocess,i.e.theydestroyoldproducts,reducethe
employment,buttheyallowtheeconomytostartanewphaseofgrowth,
baseduponnewproductsandnewfactorsofproduction.[40][102]

RobertSolow
(1924)

In1944HungarianAmericanmathematicianJohnvonNeumannand
OskarMorgensternpublishedTheoryofGamesandEconomicBehavior,
foundingGameTheory,whichwaswidelyadoptedbyeconomists.In
1951PrincetonmathematicianJohnForbesNashJr.publishedthearticle
NonCooperativeGames,becomingthefirsttodefineaNashEquilibrium
fornonzerosumgames.

EugeneFama
(1939)

Johnvon
Neumann
(19031957)

JosephAlois
Schumpeter
(18831950)

In1956AmericaneconomistRobertSolow(1924)andAustralianeconomistTrevorSwan
(19181989)proposedtheSolowSwanmodel,basedonproductivity,capitalaccumulation,
populationgrowth,andtechnologicalprogress.In1956SwanalsoproposedtheSwandiagramoftheinternal
externalbalance.In1987SolowwasawardedtheNobelEconomicsPrize.[103]:440441

PostWorldWarIIandglobalization(midtolate20thcentury)
TheglobalizationerabeganwiththeendofWorldWarIIandtheriseoftheU.S.astheworld'sleadingeconomic
power,alongwiththeUnitedNations.Topreventanotherglobaldepression,thevictoriousU.S.forgaveGermany
itswardebtsanduseditssurplusestorebuildEuropeandencouragereindustrializationofGermanyandJapan.In
the1960sitchangeditsroletorecyclingglobalsurpluses.[104]
AfterWorldWarII,CanadianbornJohnKennethGalbraith(19082006)becameoneofthestandardbearersfor
proactivegovernmentandliberaldemocratpolitics.InTheAffluentSociety(1958),Galbraitharguedthatvoters
reachingacertainmaterialwealthbegintovoteagainstthecommongood.Healsoarguedthatthe"conventional
wisdom"oftheconservativeconsensuswasnotenoughtosolvetheproblemsofsocialinequality.[105]Inanageof
bigbusiness,heargued,itisunrealistictothinkofmarketsoftheclassicalkind.Theysetpricesanduse
advertisingtocreateartificialdemandfortheirownproducts,distortingpeople'srealpreferences.Consumer

preferencesactuallycometoreflectthoseofcorporationsa
"dependenceeffect"andtheeconomyasawholeisgearedtoirrational
goals.[106]InTheNewIndustrialStateGalbraitharguedthateconomic
decisionsareplannedbyaprivatebureaucracy,atechnostructureof
expertswhomanipulatemarketingandpublicrelationschannels.This
hierarchyisselfserving,profitsarenolongertheprimemotivator,and
evenmanagersarenotincontrol.Becausetheyarethenewplanners,
corporationsdetestrisk,requiresteadyeconomicandstablemarkets.
PaulSamuelson
Theyrecruitgovernmentstoservetheirinterestswithfiscalandmonetary
(19152009)
policy,forinstanceadheringtomonetaristpolicieswhichenrichmoney
wrotethebest
lendersintheCitythroughincreasesininterestrates.Whilethegoalsof
selling
anaffluentsocietyandcomplicitgovernmentservetheirrational
economicstexts.
technostructure,publicspaceissimultaneouslyimpoverished.Galbraith
paintsthepictureofsteppingfrompenthousevillasontounpavedstreets,
fromlandscapedgardenstounkemptpublicparks.InEconomicsandthePublicPurpose
(1973)Galbraithadvocatesa"newsocialism"asthesolution,nationalisingmilitary
productionandpublicservicessuchashealthcare,introducing
disciplinedsalaryandpricecontrolstoreduceinequality.[107]

GrardDebreu
(19212004)

IncontrasttoGalbraith'slinguisticstyle,thepostwareconomics
professionbegantosynthesizemuchofKeynes'workwithmathematical
representations.Introductoryuniversityeconomicscoursesbeganto
presenteconomictheoryasaunifiedwholeinwhatisreferredtoasthe
neoclassicalsynthesis."Positiveeconomics"becamethetermcreatedto
describecertaintrendsand"laws"ofeconomicsthatcouldbeobjectively
observedanddescribedinavaluefreeway,separatefrom"normative
economic"evaluationsandjudgments.

JohnK.
Galbraith
(19082006)
workedunder
theNewDeal
administration
ofFranklin
Delano
Roosevelt

KennethArrow
(1921)

ThePaulSamuelson's(19152009)FoundationsofEconomicAnalysispublishedin1947was
anattempttoshowthatmathematicalmethodscouldrepresentacoreoftestableeconomictheory.Samuelson
startedwithtwoassumptions.First,peopleandfirmswillacttomaximizetheirselfinterestedgoals.Second,
marketstendtowardsanequilibriumofprices,wheredemandmatchessupply.Heextendedthemathematicsto
describeequilibratingbehaviorofeconomicsystems,includingthatofthethennewmacroeconomictheoryof
JohnMaynardKeynes.WhilstRichardCantillonhadimitatedIsaacNewton'smechanicalphysicsofinertiaand
gravityincompetitionandthemarket,[19]thephysiocratshadcopiedthebody'sbloodsystemintocircularflowof
incomemodels,WilliamJevonshadfoundgrowthcyclestomatchtheperiodicityofsunspots,Samuelsonadapted
thermodynamicsformulaetoeconomictheory.Reassertingeconomicsasahardsciencewasbeingdoneinthe
UnitedKingdomalso,andonecelebrated"discovery",ofA.W.Phillips,wasofacorrelativerelationshipbetween
inflationandunemployment.Theworkablepolicyconclusionwasthatsecuringfullemploymentcouldbetraded
offagainsthigherinflation.SamuelsonincorporatedtheideaofthePhillipscurveintohiswork.Hisintroductory
textbookEconomicswasinfluentialandwidelyadopted.Itbecamethemostsuccessfuleconomicstextever.Paul
SamuelsonwasawardedthenewNobelPrizeinEconomicsin1970forhismergingofmathematicsandpolitical
economy.
AmericaneconomistKennethArrow's(1921)publishedSocialChoiceandIndividualValuesin1951.Itconsider
connectionsbetweeneconomicsandpoliticaltheory.Itgaverisetosocialchoicetheorywiththeintroductionof
his"PossibilityTheorem".Thissparkedwidespreaddiscussionoverhowtointerpretthedifferentconditionsofthe
theoremandwhatimplicationsithadfordemocracyandvoting.Mostcontroversialofhisfour(1963)orfive
(1950/1951)conditionsistheindependenceofirrelevantalternatives.[108]

Inthe1950sKennethArrowandGrardDebreu(19212004)developedtheArrowDebreumodelofgeneral
equilibria.In1963ArrowpublishedapaperwhichfoundedHealthEconomics.
In1971ArrowandFrankHahnpublishedGeneralCompetitiveAnalysis(1971),whichreassertedatheoryof
generalequilibriumofpricesthroughtheeconomy.In1971,USPresidentRichardNixon'shaddeclaredthat"We
areallKeynesiansnow"[109]

Internationaleconomics

JamesE.Meade
(19071995)

In1951EnglisheconomistJamesE.Meade(19071995)publishedThe
BalanceofPayments,volume1of"TheTheoryofInternational
EconomicPolicy",whichproposedthetheoryofdomesticdivergence
(internalandexternalbalance),andpromotedpolicytoolsfor
governments.In1955hepublishedvolume2TradeandWelfare,which
proposedthetheoryofthe"secondbest",andpromotedprotectionism.
Hesharedthe1977NobelEconomicPrizewithBertilOhlin.
PaulKrugman

In1979AmericaneconomistPaulKrugman(1953)publishedapaperfoundingNewtrade
(1953)
theory,whichattemptstoexplaintheroleofincreasingreturnstoscaleandnetworkeffectsin
internationaltrade.In1991hepublishedapaperfoundingNeweconomicgeography.His
textbookInternationalEconomics(2007)appearsonmanyundergraduatereadinglists.HewasawardedtheNobel
PrizeinEconomicsin2008.

Developmenteconomics
In1954SaintLucianeconomistSirArthurLewis(19151991)proposedtheDualSector
ModelofDevelopmentEconomics,whichclaimsthatcapitalismexpandsbymakinguseofan
unlimitedsupplyoflaborfromthebackwardnoncapitalist"subsistencesector"untilit
reachestheLewisianbreakingpointwherewagesbegintorise,receivingthe1979Nobel
EconomicsPrize.
In1955RussianbornAmericaneconomistSimonKuznets(19011985),whointroducedthe
conceptofGrossdomesticproduct(GDP)in1934publishedanarticlerevealinganinverted
Ushapedrelationbetweenincomeinequalityandeconomicgrowth,meaningthateconomic
growthincreasesincomedisparitybetweenrichandpoorinpoorcountries,butdecreasesitin
wealthycountries.In1971hereceivedtheNobelEconomicsPrize.

AmartyaSen
(1933)

IndianeconomistAmartyaSen(1933)expressedconsiderableskepticismaboutthevalidity
ofneoclassicalassumptions,andwashighlycriticalofrationalexpectationstheory,devotinghisworkto
DevelopmentEconomicsandhumanrights.
In1981,SenpublishedPovertyandFamines:AnEssayonEntitlementandDeprivation(1981),abookinwhich
hearguedthatfamineoccursnotonlyfromalackoffood,butfrominequalitiesbuiltintomechanismsfor
distributingfood.SenalsoarguedthattheBengalfaminewascausedbyanurbaneconomicboomthatraisedfood
prices,therebycausingmillionsofruralworkerstostarvetodeathwhentheirwagesdidnotkeepup.[110]
Inadditiontohisimportantworkonthecausesoffamines,Sen'sworkinthefieldofdevelopmenteconomicshas
hadconsiderableinfluenceintheformulationofthe"HumanDevelopmentReport",[111]publishedbytheUnited
NationsDevelopmentProgramme.[112]Thisannualpublicationthatrankscountriesonavarietyofeconomicand
socialindicatorsowesmuchtothecontributionsbySenamongothersocialchoicetheoristsintheareaof
economicmeasurementofpovertyandinequality.SenwasawardedtheNobelPrizeinEconomicsin1998.

NewEconomicHistory(Cliometrics)
In1958AmericaneconomistsAlfredH.Conrad(19241970)andJohnR.Meyer(19272009)foundedNew
EconomicHistory,whichin1960wascalledCliometricsbyAmericaneconomistStanleyReiter(19252014)after
Clio,themuseofhistory.Itusesneoclassicaleconomictheorytoreinterprethistoricaldata,spreadingthroughout
academia,causingeconomichistoriansuntrainedineconomicstodisappearfromhistorydepartments.American
cliometriceconomistsDouglassCecilNorth(1920)andRobertWilliamFogel(19262013)wereawardedthe
1993NobelEconomicsPrize.

Publicchoicetheoryandconstitutionaleconomics
In1962AmericaneconomistsJamesM.Buchanan(19192013)and
GordonTullock(19222014)publishedTheCalculusofConsent,which
revivedPublicChoiceTheorybydifferentiatingpolitics(therulesofthe
game)frompublicpolicy(thestrategiestoadoptwithintherules),
foundingConstitutionalEconomics,theeconomicanalysisofconstitutional
law.Buchananwasawardedthe1986NobelEconomicsPrize.

ImpossibleTrinity

RobertMundell
(1932)

JamesBuchanan(19192013),
In19621963ScottisheconomistMarcusFleming
GordonTullock(19222014)
(19111976)andCanadianeconomistRobertMundell
(1932)publishedtheMundellFlemingModelofthe
Economy,anextensionoftheISLMModeltoan
openeconomy,proposingtheImpossibleTrinityoffixedexchangerate,freecapital
movement,andanindependentmonetarypolicy,onlytwoofwhichcanbemaintained
simultaneously.Mundellreceivedthe1999NobelEconomicsPrize.

Marketforcorporatecontrol
In1965AmericaneconomistHenryG.Manne(19282015)publishedMergersandtheMarketforCorporate
ControlinJournalofPoliticalEconomy,[113]whichclaimsthatchangesinthepriceofashareofstockinthestock
marketwilloccurmorerapidlywheninsidertradingisprohibitedthanwhenitispermitted,foundingthetheoryof
marketforcorporatecontrol.

Informationeconomics
In1970GeorgeAkerlof(1940)publishedthepaperTheMarketfor
Lemons,foundingthetheoryofInformationEconomics,receivingthe2001
NobelEconomicsPrize.
JosephE.Stiglitz(1943)alsoreceivedtheNobelEconomicsPrizein2001
forhisworkinInformationEconomics.Hehasservedaschairmanof
PresidentClinton'sCouncilofEconomicAdvisers,andaschiefeconomist
fortheWorldBank.Stiglitzhastaughtatmanyuniversities,including
Columbia,Stanford,Oxford,Manchester,Yale,andMIT.Inrecentyearshe
hasbecomeanoutspokencriticofglobaleconomicinstitutions.InMaking
GlobalizationWork(2007)heoffersanaccountofhisperspectiveson
issuesofinternationaleconomics:

GeorgeAkerlof(1940),Joseph
Stiglitz(1943)

"Thefundamentalproblemwiththeneoclassicalmodelandthecorrespondingmodelundermarket
socialismisthattheyfailtotakeintoaccountavarietyofproblemsthatarisefromtheabsenceof
perfectinformationandthecostsofacquiringinformation,aswellastheabsenceorimperfectionsin
certainkeyriskandcapitalmarkets.Theabsenceorimperfectioncan,inturn,toalargeextentbe
explainedbyproblemsofinformation."[114]
StiglitztalksabouthisbookMakingGlobalizationWorkhere.[115]

Marketdesigntheory
In1973RussianAmericanmathematicianeconomist
LeonidHurwicz(19172008)foundedMarket
(Mechanism)DesignTheory,a.k.a.ReverseGame
Theory,whichallowspeopletodistinguishsituations
inwhichmarketsworkwellfromthoseinwhichthey
donot,aidingtheidentificationofefficienttrading
LeonidHurwicz
mechanisms,regulationschemes,andvoting
(19172008)
procedureshedevelopedthetheorywithEricMaskin
(1950)andRogerMyerson(1951),sharingthe2007
NobelEconomicsPrizewiththem.

EricMaskin(1950),RogerMyerson
(1951)

TheLaffercurveandReaganomics
In1974AmericaneconomistArthurLafferformulatedtheLafferCurve,whichpostulatesthatnotaxrevenuewill
beraisedattheextremetaxratesof0%and100%,andthattheremustbeatleastoneratewheretaxrevenue
wouldbeanonzeromaximum.ThisconceptwasadoptedbyU.S.PresidentRonaldReaganintheearly1980s,
becomingthecornerstoneofReaganomics,whichwascofoundedbyAmericaneconomistPaulCraigRoberts.

Marketregulation
In1986FrencheconomistJeanTirole(1953)published"DynamicModelsofOligopoly",followedby"The
TheoryofIndustrialOrganization"(1988),launchinghisquesttounderstandmarketpowerandregulation,
resultinginthe2014NobelEconomicsPrize.

Post2008financialcrisis(21stcentury)
In2008,therewasafinancialcrisiswhichledtoa
globalrecession.Thispromptedsomeeconomiststo
questionthecurrentorthodoxy.
OneresponsewastheKeynesianResurgence.This
emergedasaconsensusamongsomepolicymakers
andeconomistsforaKeynesiansolutions.As
Olivier
contrastedsharplywiththepreviouseconomic
Blanchard
orthodoxyinitssupportforgovernmentinterventionin
(1948)
theeconomy.Figuresinthisschoolincluded
DominiqueStraussKahn,OlivierBlanchard,Gordon
Brown,PaulKrugman,andMartinWolf.[116][117][118]

CarmenReinhart(1955)andKenneth
Rogoff(1953)

Austeritywasanotherresponse,thepolicyofreducinggovernmentbudgetdeficits.Austeritypoliciesmayinclude
spendingcuts,taxincreases,oramixtureofboth.[119][120]Twoinfluentialacademicpaperssupportthisposition.
ThefirstwasLargeChangesinFiscalPolicy:TaxesVersusSpending,publishedinOctober2009byAlberto
AlesinaandSilviaArdagna.Itshowedthatfiscalausteritymeasuresdidnothurteconomies,andactuallyhelped
theirrecovery.[121]ThesecondGrowthinaTimeofDebt,publishedin2010byCarmenReinhartandKenneth
Rogoff.ItanalyzedpublicdebtandGDPgrowthamong20advancedeconomiesandclaimedthathighdebt
countriesgrewat0.1%sinceWWII.Manygovernmentsacceptedthisandfollowedtheausteritycourse.
InApril2013theIMFandtheRooseveltInstituteexposedbasiccalculationflawsintheReinhartRogoffpaper,
claimingthatwhentheflawswerecorrected,thegrowthofthe"highdebt"countrieswas+2.2%,muchhigherthan
theoriginalpaperpredicted.Followingthis,onJune6,2013PaulKrugmanpublishedHowtheCaseforAusterity
HasCrumbledinTheNewYorkReviewofBooks,arguingthatthecaseforausteritywasfundamentallyflawed,and
callingforanendtoausteritymeasures.[122]

Seealso
Constitutionaleconomics
Corporatelaw
Economichistory
Energyeconomics
Indexofinternationaltradetopics
Labourlaw
Listofeconomicsjournals
Listofeconomists
Listofimportantpublicationsineconomics

Listofimportantpublicationsineconomics
MarshallPlan
Outlineofeconomics
Perspectivesoncapitalism
Timelineofinternationaltrade
Tort

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public.econ.duke.edu/~erw/190/HowShouldWeWrite.pd
f).

(2002).HowEconomicsBecameaMathematical
Science.DukeUniversityPress.Description(http://ww
w.dukeupress.edu/Catalog/ViewProduct.php?productid=
6807&viewby=series&categoryid=47&sort=newest)and
preview(https://books.google.com/books?hl=en&lr=&i
d=ntc_Fs36AoQC&oi=fnd&pg=PR7&dq=&f=false#v=
onepage&q&f=false).

Furtherreading
Books
AnOutlineoftheHistoryofEconomicThought(2ndEdition),(2003)ErnestoScrepantiandStefano
Zamagni
ThePenguinHistoryofEconomics,(2002),RogerBackhouse.
Blaug,Mark(1985).EconomicTheoryinRetrospect(PDFcontainsfullbook)(4thed.).Cambridge:Cambridge
UniversityPress.ISBN0521316448.

Journals
EuropeanJournaloftheHistoryofEconomicThought(http://www.tandf.co.uk/journals/titles/09672567.asp)
(U.K.)
HistoryofEconomicIdeas(http://www.historyofeconomicideas.com/)(Italy)
HistoryofEconomicsReview(http://www.hetsa.org.au/historyeconreview.html)(Australia)
HistoryofEconomicThought(http://jshet.net/old///annals/annals.html)(Japan)
HistoryofPoliticalEconomy(http://www.dukeupress.edu/Catalog/ViewProduct.php?viewby=journal&prod
uctid=45614)(U.S.)
JournaloftheHistoryofEconomicThought(http://journals.cambridge.org/action/displayJournal?jid=HE
T)(U.K.)

Externallinks
TheHistoryofEconomicThoughtWebsite(https://web.archive.org/web/20100302181941id_/http://homepa
ge.newschool.edu/~het/)attheWaybackMachine(archivedMarch2,2010)
ArchivefortheHistoryofEconomicThought(http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/)
"Familytree"ofeconomics(http://www.ceeportal.at/Econ/poster.pdf)posterfromthe16thcenturyon.
PioneersofthesocialsciencesLondonSchoolofEconomicsandPoliticalScience(http://www2.lse.ac.uk/re
searchAndExpertise/PioneersOfTheSocialSciences/PioneersOfTheSocialSciences.aspx)
LibraryofEconomicsandLiberty(http://www.econlib.org)
"AHistoryofBehaviouralFinanceinPublishedResearch:19441988"(http://www.moneyscience.com/pg/b
log/Admin/read/50567/ahistoryofbehaviouralfinanceinpublishedresearch19441988)ashort
bibliographylistfocusedonquantitativefinance
GreatEconomists,"OriginsofEconomicThought"lecturebyEconomistTylerCowen,May2013(http://mr
university.com/courses/greateconomistsclassicaleconomicsanditsforerunners)
1.http://www.rba.gov.au/publications/rdp/2000/pdf/rdp200004.pdf

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