The history of economic thought deals with different thinkers and theories in the subject that became political economy and economics from the ancient world to the present day. It encompasses many disparate schools of economic thought. Greek writers such as the philosopher Aristotle examined ideas about the "art" of wealth acquisition and questioned whether property is best left in private or public hands. In medieval times, scholars such as Thomas Aquinas argued that it was a moral obligation of businesses to sell goods at a just price.
British philosopher Adam Smith is often cited as the father of modern economics for his treatise The Wealth of Nations (1776).[1][2] His ideas built upon a considerable body of work from predecessors in the eighteenth century particularly the Physiocrats. His book appeared on the eve of the Industrial Revolution with associated major changes in the economy.[3] Smith's successors included such classical economists as the Rev. Thomas Malthus, Jean-Baptiste Say, David Ricardo, and John Stuart Mill. They examined ways the landed, capitalist and labouring classes produced and distributed national output and modeled the effects of population and international trade. In London, Karl Marx castigated the capitalist system, which he described as exploitative and alienating. From about 1870, neoclassical economics attempted to erect a positive, mathematical and scientifically grounded field above normative politics.
After the wars of the early twentieth century, John Maynard Keynes led a reaction against what has been described as governmental abstention from economic affairs, advocating interventionist fiscal policy to stimulate economic demand and growth. With a world divided between the capitalist first world, the communist second world, and the poor of the third world, the post-war consensus broke down. Others like Milton Friedman and Friedrich von Hayek warned of The Road to Serfdom and socialism, focusing their theories on what could be achieved through better monetary policy and deregulation. As Keynesian policies seemed to falter in the 1970s there emerged the so called New Classical school, with prominent theorists such as Robert Lucas and Edward Prescott. Governmental economic policies from the 1980s were challenged, and development economists like Amartya Sen and information economists like Joseph Stiglitz introduced new ideas to economic thought in the twenty first century.
The earliest discussions of economics date back to ancient times (e.g. Chanakya's Arthashastra or Xenophon's Oeconomicus). Back then, and until the industrial revolution, economics was not a separate discipline but part of philosophy. In Ancient Athens, a slave based society but also one developing an embryonic model of democracy,[4] Plato's book The Republic contained references to specialization of labour and production. But it was his pupil Aristotle that made some of the most familiar arguments, still in economic discourse today.
Aristotle's Politics (c.a. 350 BC) was mainly concerned to analyse different forms of a state (monarchy, aristocracy, constitutional government, tyranny, oligarchy, democracy) as a critique of Plato's advocacy of a ruling class of "philosopher-kings". In particular for economists, Plato had drawn a blueprint of society on the basis of common ownership of resources. Aristotle viewed this model as an oligarchical anathema.
In Politics Book I, Aristotle discusses the general nature of households and market exchanges. For him there is a certain "art of acquisition" or "wealth-getting". Money itself has the sole purpose of being a medium of exchange, which means on its own "it is worthless... not useful as a means to any of the necessities of life".[5] Nevertheless, points out Aristotle, because the "instrument" of money is the same many people are obsessed with the simple accumulation of money. "Wealth-getting" for one's household is "necessary and honourable", while exchange on the retail trade for simple accumulation is "justly censured, for it is dishonourable".[6] Aristotle disapproved highly of usury and also cast scorn on making money through monopoly.[7]
Thomas Aquinas (1225-1274) was an Italian theologian and writer on economic issues. He taught in both Cologne and Paris, and was part of a group of Catholic scholars known as the Schoolmen, who moved their enquiries beyond theology to philosophical and scientific debates. In the treatise Summa Theologica Aquinas dealt with the concept of a just price, which he considered necessary for the reproduction of the social order. Bearing many similarities with the modern concept of long run equilibrium a just price was supposed to be one just sufficient to cover the costs of production, including the maintenance of a worker and his family. He argued it was immoral for sellers to raise their prices simply because buyers were in pressing need for a product.
Aquinas discusses a number of topics in the format of questions and replies, substantial tracts dealing with Aristotle's theory. Questions 77 and 78 concern economic issues, mainly relate to what a just price is, and to the fairness of a seller dispensing faulty goods. Aquinas argued against any form of cheating and recommended compensation always be paid in lieu of good service. Whilst human laws might not impose sanctions for unfair dealing, divine law did, in his opinion. One of Aquinas' main critics[8] was Duns Scotus (1265-1308) in his work Sententiae (1295). Originally from Duns Scotland, he taught in Oxford, Cologne and Paris. Scotus thought it possible to be more precise than Aquinas in calculating a just price, emphasising the costs of labour and expenses - though he recognised that the latter might be inflated by exaggeration, because buyer and seller usually have different ideas of what a just price comprises. If people did not benefit from a transaction, in Scotus' view, they would not trade. Scotus defended merchants as performing a necessary and useful social role, transporting goods and making them available to the public.
From the localism of the Middle Ages, the waning feudal lords, new national economic frameworks began to be strengthened. From 1492 and explorations like Christopher Columbus' voyages, new opportunities for trade with the New World and Asia were opening. New powerful monarchies wanted a powerful state in order to boost their status. Mercantilism was a political movement and an economic theory that advocated the use of the state's military power to ensure local markets and supply sources were protected. Mercantile theorists thought international trade could not benefit all countries at the same time. Because money and gold were the only source of riches, there was a limited quantity of resources to be shared between countries. Therefore, tariffs could be used to encourage exports (meaning more money comes into the country) and discourage imports (sending wealth abroad). In other words a positive balance of trade ought to be maintained, with a surplus of exports. The term mercantilism was not in fact coined until the late 1763 by Victor de Riqueti, marquis de Mirabeau and popularised by Adam Smith, who vigorously opposed its ideas.
English businessman Thomas Mun (1571-1641) represents early mercantile policy in his book England's Treasure by Foraign Trade . Although it was not published until 1663 it was widely circulated as a manuscript before then. He was a member of the East India Company and also wrote about his experiences there in A Discourse of Trade from England unto the East Indies (1621). According to Mun, trade was the only way to increase England’s treasure (i.e., national wealth) and in pursuit of this end he suggested several courses of action. Important were frugal consumption in order to increase the amount of goods available for export, increased utilisation of land and other domestic natural resources to reduce import requirements, lowering of export duties on goods produced domestically from foreign materials, and the export of goods with inelastic demand because more money could be made from higher prices.
Philipp von Hörnigk (1640-1712, sometimes spelt Hornick or Horneck) was born in Frankfurt am Main and became an Austrian civil servant writing in a time when his country was constantly threatened by Ottoman invasion. In Österreich Über Alles, Wenn Sie Nur Will (1684, Austria Over All, If She Only Will) he laid out one of the clearest statements of mercantile policy. He listed nine principal rules of national economy.
"To inspect the country's soil with the greatest care, and not to leave the agricultural possibilities of a single corner or clod of earth unconsidered... All commodities found in a country, which cannot be used in their natural state, should be worked up within the country... Attention should be given to the population, that it may be as large as the country can support... gold and silver once in the country are under no circumstances to be taken out for any purpose... The inhabitants should make every effort to get along with their domestic products... [Foreign commodities] should be obtained not for gold or silver, but in exchange for other domestic wares... and should be imported in unfinished form, and worked up within the country... Opportunities should be sought night and day for selling the country's superfluous goods to these foreigners in manufactured form... No importation should be allowed under any circumstances of which there is a sufficient supply of suitable quality at home."
Nationalism, self-sufficiency and national power were the basic policies proposed.[9]
Jean Baptiste Colbert (1619-1683) was Minister of Finance under King Louis XIV of France. He set up national guilds to regulate major industries. Silk, linen, tapestry, furniture manufacture and wine were examples of the crafts in which France specialised, all of which came to require membership of a guild to operate in. These remained until the French revolution. According to Colbert, "It is simply, and solely, the abundance of money within a state [which] makes the difference in its grandeur and power."
Britain had gone through some of its most troubling times through the 17th century, enduring not only political and religious division in the English Civil War, King Charles I's execution and the Cromwellian dictatorship, but also the plagues and fires. The monarchy was restored under Charles II, who had catholic sympathies, but his successor King James II was swiftly ousted. Invited in his place were Protestant William of Orange and Mary, who assented to the Bill of Rights 1689 ensuring that the Parliament was dominant in what became known as the Glorious revolution. The upheaval had seen a number of huge scientific advances, including Robert Boyle's discovery of the gas pressure constant (1660) and Sir Isaac Newton's publication of Philosophiae Naturalis Principia Mathematica (1687), which described the three laws of motion and his law of universal gravitation. All these factors spurred the advancement of economic thought. For instance, Richard Cantillon (1680-1734) consciously imitated Newton's forces of inertia and gravity in the natural world with human reason and market competition in the economic world.[10] In his Essay on the Nature of Commerce in General, he argued rational self interest in a system of freely adjusting markets would lead to order and mutually compatible prices. Unlike the mercantilist thinkers however, wealth was found not in trade but in human labour. The first person to tie these ideas into a political framework was John Locke.
John Locke (1632-1704) was born near Bristol and educated in London and Oxford. He is considered one of the most significant philosophers of his era mainly for his critique of Thomas Hobbes' defense of absolutism in Leviathan (1651) and the development of social contract theory. Locke believed that people contracted into society which was bound to protect their rights of property.[11] He defined property broadly to include people's lives and liberties, as well as their wealth. When people combined their labour with their surroundings, then that created property rights. In his words from his Second Treatise on Civil Government (1689),
God hath given the world to men in common... Yet every man has a property in his own person. The labour of his body and the work of his hands we may say are properly his. Whatsoever, then, he removes out of the state that nature hath provided and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property.[12]
Locke was arguing that not only should the government cease interference with people's property (or their "lives, liberties and estates") but also that it should positively work to ensure their protection. His views on price and money were laid out in a letter to a Member of Parliament in 1691 entitled Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money (1691). Here Locke argued that the "price of any commodity rises or falls, by the proportion of the number of buyers and sellers," a rule which "holds universally in all things that are to be bought and sold."[13]
Dudley North (1641-1691) was a wealthy merchant and landowner. He worked as an official for the Treasury and was opposed to most mercantile policy. In his Discourses upon trade (1691), which he published anonymously, he argued that the assumption of needing a favourable trade balance was wrong. Trade, he argued, benefits both sides, it promotes specialisation, the division of labour and produces an increase in wealth for everyone. Regulation of trade interfered with these benefits by reducing the flow of wealth.
David Hume (1711-1776) agreed with North's philosophy and denounced mercantile assumptions. His contributions were set down in Political Discourses (1752), later consolidated in his Essays, Moral, Political, Literary (1777). Added to the fact that it was undesirable to strive for a favourable balance of trade it is, said Hume, in any case impossible. Hume held that any surplus of exports that might be achieved would be paid for by imports of gold and silver. This would increase the money supply, causing prices to rise. That in turn would cause a decline in exports until the balance with imports is restored.
Similarly disenchanted with regulation on trademarks inspired by mercantilism, a Frenchman name Vincent de Gournay (1712-1759) is reputed to have asked why it was so hard to laissez faire, laissez passer (free enterprise, free trade). He was one of the early physiocrats, a word from Greek meaning "government of nature", who held that agriculture was the source of wealth. As historian David B. Danbom wrote, the Physiocrats "damned cities for their artificiality and praised more natural styles of living. They celebrated farmers."[14] Over the end of the seventeenth and beginning of the eighteenth century big advances in natural science and anatomy were being made, including the discovery of blood circulation through the human body. This concept was mirrored in the physiocrats' economic theory, with the notion of a circular flow of income throughout the economy.
François Quesnay (1694-1774) was the court physician to King Louis XV of France. He believed that trade and industry were not sources of wealth, and instead in his book, Tableau économique (1758, Economic Table) argued that agricultural surpluses, by flowing through the economy in the form of rent, wages and purchases were the real economic movers. Firstly, said Quesnay, regulation impedes the flow of income throughout all social classes and therefore economic development. Secondly, taxes on the productive classes, such as farmers, should be reduced in favour of rises for unproductive classes, such as landowners, since their luxurious way of life distorts the income flow.
Jacques Turgot (1727-1781) was born in Paris and from an old Norman family. His best known work, Réflexions sur la formation et la distribution des richesses (1766, Reflections on the Formation and Distribution of Wealth) developed Quesnay's theory that land is the only source of wealth. Turgot viewed society in terms of three classes: the productive agricultural class, the salaried artisan class (classe stipendice) and the landowning class (classe disponible). He argued that only the net product of land should be taxed and advocated the complete freedom of commerce and industry. In August 1774, Turgot was appointed to be Minister of Finance and in the space of two years introduced many anti-mercantile and anti-feudal measures supported by the King. A statement of his guiding principles, given to the King were "no bankruptcy, no tax increases, no borrowing." Turgot's ultimate wish was to have a single tax on land and abolish all other indirect taxes, but measures he introduced before that were met with overwhelming opposition from landed interests. Two edicts in particular, one suppressing corvées (charges from farmers to aristocrats) and another renouncing privileges given to guilds inflamed influential opinion. He was forced from office in 1776.
Adam Smith (1723-1790) is popularly seen as the father of modern political economy. His publication of the An Inquiry Into the Nature and Causes of the Wealth of Nations in 1776 happened to coincide not only with the American Revolution, shortly before the Europe wide upheavals of the French Revolution, but also the dawn of a new industrial revolution that allowed more wealth to be created on a larger scale than ever before. Smith was a Scottish moral philosopher, whose first break was The Theory of Moral Sentiments (1759). He argued in this that people's ethical systems develop through personal relations with other individuals, that right and wrong are sensed through others' reactions to one's behaviour. This gained Smith more popularity than his next work, The Wealth of Nations, which the general public initially ignored.[15] Yet Smith's political economic magnum opus was successful in circles that mattered.
William Pitt, the Tory Prime Minister in the late 1780s based his tax proposals on Smith's ideas and advocated free trade as a devout disciple of The Wealth of Nations.[16] Smith was appointed a commissioner of customs and within twenty years Smith had a following of new generation writers who were intent on building the science of political economy.[17]
Smith expressed an affinity himself to the opinions of Edmund Burke, known widely as a political philosopher, a Member of Parliament.
"Burke is the only man I ever knew who thinks on economic subjects exactly as I do without any previous communication having passed between us".[18]
Burke was an established political economist himself, with his book Thoughts and Details on Scarcity. He was widely critical of liberal politics, and condemned the French Revolution which began in 1789. In Reflections on the Revolution in France (1790) he wrote that the "age of chivalry is dead, that of sophisters, economists and calculators has succeeded, and the glory of Europe is extinguished forever." Smith's contemporary influences included Francois Quesnay and Jacques Turgot who he met on a stay in Paris, and David Hume, his Scottish compatriot. The times produced a common need among thinkers to explain social upheavals of the Industrial revolution taking place, and in the seeming chaos without the feudal and monarchical structures of Europe, show there was order still.
| "It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."[19] |
| Adam Smith's famous statement on self interest |
Smith argued for a "system of natural liberty"[20] where individual effort was the producer of social good. Smith believed even the selfish within society were kept under restraint and worked for the good of all when acting in a competitive market. Prices are often unrepresentative of the true value of goods and services. Following John Locke Smith thought true value of things derived from the amount of labour invested in them.
"Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniencies, and amusements of human life. But after the division of labour has once thoroughly taken place, it is but a very small part of these with which a man's own labour can supply him. The far greater part of them he must derive from the labour of other people, and he must be rich or poor according to the quantity of that labour which he can command, or which he can afford to purchase. The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities. The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it."[21]
When the butchers, the brewers and the bakers acted under the restraint of an open market economy, their pursuit of self interest, thought Smith, paradoxically drives the process to correct real life prices to their just values. His classic statement on competition goes as follows.
"When the quantity of any commodity which is brought to market falls short of the effectual demand, all those who are willing to pay... cannot be supplied with the quantity which they want... Some of them will be willing to give more. A competition will begin among them, and the market price will rise... When the quantity brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of the rent, wages and profit, which must be paid in order to bring it thither... The market price will sink..."[22]
Smith believed that a market produced what he dubbed the "progress of opulence". This involved a chain of concepts, that the division of labour is the driver of economic efficiency, yet it is limited to the widening process of markets. Both labour division and market widening requires more intensive accumulation of capital by the entrepreneurs and leaders of business and industry. The whole system is underpinned by maintaining the security of property rights.
Smith's vision of a free market economy, based on secure property, capital accumulation, widening markets and a division of labour contrasted with the mercantilist tendency to attempt to "regulate all evil human actions."[23] Smith believed there were precisely three legitimate functions of government. The first function was...
"...erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual or small number of individuals, to erect and maintain... Every system which endeavours... to draw towards a particular species of industry a greater share of the capital of the society than what would naturally go to it... retards, instead of accelerating, the progress of the society toward real wealth and greatness."
In addition to the necessity of public leadership in certain sectors Smith argued, secondly, that cartels were bad because of their potential to limit production and quality of goods and services.[24] Thirdly, Smith criticised government support of any kind of monopoly which always charges the highest price "which can be squeezed out of the buyers"[25] The existence of monopoly and the potential for cartels, which would later form the core of competition law policy, could distort the benefits of free markets to the advantage of businesses at the expense of consumer sovereignty.
The classical economists were referred to as a group for the first time by Karl Marx.[26] One unifying part of their theories was the labour theory of value, contrasting to value deriving from a general equilibrium of supply and demand. These economists had seen the first economic and social transformation brought by the Industrial Revolution: rural depopulation, precariousness, poverty, apparition of a working class. They wondered about the population growth, because the demographic transition had begun in Great Britain at that time. They also asked many fundamental questions, about the source of value, the causes of economic growth and the role of money in the economy. They supported a free-market economy, arguing it was a natural system based upon freedom and property. However, these economists were divided and did not make up a unified current of thought.
Jeremy Bentham (1748-1832) was perhaps the most radical thinker of his time, and developed the concept of utilitarianism. Bentham was an atheist, a prison reformer, animal rights activist, believer in universal suffrage, free speech, free trade and health insurance at a time when few dared to argue for any. He was schooled rigorously from an early age, finishing university and being called to the bar at 18. His first book, Fragment of Government (1776) published anonymously was a trenchant critique of William Blackstone's Commentaries of the laws of England. This gained wide success until it was found that the young Bentham, and not a revered Professor had penned it. In The Principles of Morals and Legislation (1791) Bentham set out his theory of utility.[27]
The aim of legal policy must be to decrease misery and suffering so far as possible while producing the greatest happiness for the greatest number.[28] Bentham even designed a comprehensive methodology for the calculation of aggregate happiness in society that a particular law produced, a felicific calculus.[29] Society, argued Bentham, is nothing more than the total of individuals,[30] so that if one aims to produce net social good then one need only to ensure that more pleasure is experienced across the board than pain, regardless of numbers. For example, a law is proposed to make every bus in the city wheel chair accessible, but slower moving as a result than its predecessors because of the new design. Millions of bus users will therefore experience a small amount of displeasure (or "pain") in increased traffic and journey times, but a minority of people using wheel chairs will experience a huge amount of pleasure at being able to catch public transport, which outweighs the aggregate displeasure of other users. Interpersonal comparisons of utility were allowed by Bentham, the idea that one person's vast pleasure can count more than many others' pain. Much criticism later showed how this could be twisted, for instance, would the felicific calculus allow a vastly happy dictator to outweigh the dredging misery of his exploited populus? Despite Bentham's methodology there were severe obstacles in measuring people's happiness.
Jean-Baptiste Say (1767-1832) was a Frenchman, born in Lyon who helped to popularise Adam Smith's work in France.[31] His book, A Treatise on Political Economy (1803) contained a brief passage, which later became orthodoxy in political economics until the Great Depression and known as Say's Law of markets. Say argued that there could never be a general deficiency of demand or a general glut of commodities in the whole economy. People produce things, said Say, to fulfill their own wants, rather than those of others. Production is therefore not a question of supply, but an indication of producers demanding goods. Say agreed that a part of the income is saved by the households, but in the long term, savings are invested. Investment and consumption are the two elements of demand, so that production is demand, so it is impossible for production to outrun demand, or for there to be a "general glut" of supply. Say also argued that money was neutral, because its sole role is to facilitate exchanges: therefore, people demand money only to buy commodities. Say said that "money is a veil". To sum up these two ideas, Say said "products are exchanged for products". At most, there will be different economic sectors whose demands are not fulfilled. But over time supplies will shift, businesses will retool for different production and the market will correct itself. An example of a "general glut" could be unemployment, in other words, too great a supply of workers, and too few jobs. Say's Law advocates would suggest that this necessarily means there is an excess demand for other products that will correct itself. This remained a foundation of economic theory until the 1930s. Say's Law was first put forward by James Mill (1773-1836) in English, and was advocated by David Ricardo, Henry Thornton[32] and John Stuart Mill. However two political economists, Thomas Malthus and Sismondi, were unconvinced.
Thomas Malthus (1766-1834) was a Tory minister in the United Kingdom Parliament who, contrasting to Bentham, believed in strict government abstention from social ills.[33] Malthus devoted the last chapter of his book Principles of Political Economy (1820) to rebutting Say's law, and argued that the economy could stagnate with a lack of "effectual demand".[34] In other words, wages if less than the total costs of production cannot purchase the total output of industry and that this would cause prices to fall. Price falls decrease incentives to invest, and the spiral could continue indefinitely. Malthus is more notorious however for his earlier work, An Essay on the Principle of Population. This argued that intervention was impossible because of two factors. "Food is necessary to the existence of man," wrote Malthus. "The passion between the sexes is necessary and will remain nearly in its present state," he added, meaning that the "power of the population is infinitely greater than the power in the Earth to produce subsistence for man."[35] Nevertheless growth in population is checked by "misery and vice". Any increase in wages for the masses would cause only a temporary growth in population, which given the constraints in the supply of the Earth's produce would lead to misery, vice and a corresponding readjustment to the original population.[36] However more labour could mean more economic growth, either one of which was able to be produced by an accumulation of capital.
David Ricardo (1772-1823) was born in London. By the age of 26, he had become a wealthy stock market trader and bought himself a constituency seat in Ireland to gain a platform in the British parliament's House of Commons.[37] Ricardo's best known work is his Principles of Political Economy and Taxation, which contains his critique of barriers to international trade and a description of the manner the income is distributed in the population. Ricardo made a distinction between the workers, who received a wage fixed to a level at which they can survive, the landowners, who earn a rent, and capitalists, who own capital and receive a profit, a residual part of the income.[38] If population grows, it becomes necessary to cultivate additional land, whose fertility is lower than that of already cultivated fields, because of the law of decreasing productivity. Therefore, the cost of the production of the wheat increases, as well as the price of the wheat: The rents increase also, the wages, indexed to inflation (because they must allow workers to survive) too. Profits decrease, until the capitalists can no longer invest. The economy, Ricardo concluded, is bound to tend towards a steady state.
To postpone the steady state, Ricardo advocates to promote international trade to import wheat at a low price to fight landowners. The Corn Laws of the UK had been passed in 1815, setting a fluctuating system of tariffs to stabilise the price of wheat in the domestic market. Ricardo argued that raising tariffs, despite being intended to benefit the incomes of farmers, would merely produce a rise in the prices of rents that went into the pockets of landowners.[39] Furthermore, extra labour would be employed leading to an increase in the cost of wages across the board, and therefore reducing exports and profits coming from overseas business. Economics for Ricardo was all about the relationship between the three "factors of production": land, labour and capital. Ricardo demonstrated mathematically that the gains from trade could outweigh the perceived advantages of protectionist policy. The idea of comparative advantage suggests that even if one country is inferior at producing all of its goods than another, it may still benefit from opening its borders since the inflow of goods produced more cheaply than at home, produces a gain for domestic consumers.[40] According then to Ricardo, this concept would lead to a shift in prices, so that eventually England would be producing goods in which its comparative advantages were the highest.
John Stuart Mill (1806-1873) was the dominant figure of political economic thought of his time, as well as being a Member of Parliament for the seat of Westminster, and a leading political philosopher. Mill was a child prodigy, reading Ancient Greek from the age of 3, and being vigorously schooled by his father James Mill.[41] Jeremy Bentham was a close mentor and family friend, and Mill was heavily influenced by David Ricardo. Mill's textbook, first published in 1848 and titled Principles of Political Economy was essentially a summary of the economic wisdom of the mid nineteenth century.[42] It was used as the standard texts by most universities well into the beginning of the twentieth century. On the question of economic growth Mill tried to find a middle ground between Adam Smith's view of ever expanding opportunities for trade and technological innovation and Thomas Malthus' view of the inherent limits of population. In his fourth book Mill set out a number of possible future outcomes, rather than predicting one in particular. The first followed the Malthusian line that population grew quicker than supplies, leading to falling wages and rising profits.[43] The second, per Smith, said if capital accumulated faster than population grew then real wages would rise. Third, echoing David Ricardo, should capital accumulate and population increase at the same rate, yet technology stay stable, there would be no change in real wages because supply and demand for labour would be the same. However growing populations would require more land use, increasing food production costs and therefore decreasing profits. The fourth alternative was that technology advanced faster than population and capital stock increased.[44] The result would be a prospering economy. Mill felt the third scenario most likely, and he assumed technology advanced would have to end at some point.[45] But on the prospect of continuing economic growth, Mill was more ambivalent.
"I confess I am not charmed with the ideal of life held out by those who think that the normal state of human beings is that of struggling to get on; that the trampling, crushing, elbowing, and treading on each other's heels, which form the existing type of social life, are the most desirable lot of human kind, or anything but the disagreeable symptoms of one of the phases of industrial progress.[46]
Mill is also credited with being the first person to speak of supply and demand as a relationship rather than mere quantities of goods on markets,[47] the concept of opportunity cost and the rejection of the wage fund doctrine.[48]
Just as the term "mercantilism" had been coined and popularised by its critics, like Adam Smith, so was the term "capitalism" or Kapitalismus used by its dissidents, primarily Karl Marx. Karl Marx (1818-1883) was, and in many ways still remains the pre-eminent socialist economist. His combination of political theory represented in the Communist Manifesto and the dialectic theory of history inspired by Friedrich Hegel provided a revolutionary critique of capitalism as he saw it in the nineteenth century. The socialist movement that he joined had emerged in response to the conditions of people in the new industrial era and the classical economics which accompanied it. He wrote his magnum opus Das Kapital at the British Museum's library.
Robert Owen (1771-1858) was one industrialist who determined to improve the conditions of his workers. He bought textile mills in New Lanark, Scotland where he forbade children under ten to work, set the workday from 6 a.m. to 7 p.m. and provided evening schools for children when they finished. Such meagre measures were still substantial improvements and his business remained solvent through higher productivity, though his pay rates were lower than the national average.[49] He published his vision in The New View of Society (1816) during the passage of the Factory Acts, but his attempt from 1824 to begin a new utopian community in New Harmony, Indiana ended in failure. One of Marx's own influences was the French philosopher Pierre Proudhon. While deeply critical of capitalism, he also objected to those contemporary socialists who idolized association. In his book The Philosophy of Poverty Proudhon made a political economic attack on the classical subsistence theory of wages.(1846)[50] In his book What is Property? (1840) he argue that property is theft, a different view than the classical Mill, who had written that "partial taxation is a mild form of robbery".[51] However, towards the end of his life, Proudhon modified some of his earlier views. In the posthumously published Theory of Property, he argued that "property is the only power that can act as a counterweight to the State."[52] Friedrich Engels, a published radical author, released a book titled The Condition of the Working Class in England in 1844[53] describing people's positions as "the most unconcealed pinnacle of social misery in our day." After Marx died, it was Engels that completed the second volume of Das Kapital from Marx's notes.
The first volume of Das Kapital was the only one Marx alone published. The second and third volumes were done with the help of Friedrich Engels and Karl Kautsky, who had become a friend of Engels, saw through the publication of volume four.
Marx had begun a tradition of economists who concentrated equally on political affairs. Also in Germany, Rosa Luxembourg was a member of the SPD, who later turned towards the Communist Party because of their stance against the First World War. Beatrice Webb in England was a socialist, who helped found both the London School of Economics (LSE) and the Fabian Society.
In the 1860s, a revolution took place in economics. The new ideas were that of the Marginalist school. Writing simultaneously and independently, a Frenchman (Leon Walras), an Austrian (Carl Menger) and an Englishman (Stanley Jevons) were developing the theory, which had some antecedents. Instead of the price of a good or service reflecting the labor that has produced it, it reflects the marginal usefulness (utility) of the last purchase. This meant that in equilibrium, people's preferences determined prices, including, indirectly the price of labor.
This current of thought was not united, and there were three main schools working independently. The Lausanne school, whose two main representants were Walras and Vilfredo Pareto, developed the theories of general equilibrium and optimality. The main written work of this school was Walras' Elements of Pure Economics. The Cambridge school appeared with Jevons' Theory of Political Economy in 1871. This English school has developed the theories of the partial equilibrium and has insisted on markets' failures. The main representatives were Alfred Marshall, Stanley Jevons and Arthur Pigou. The Vienna school was made up of Austrian economists Menger, Eugen von Böhm-Bawerk and Friedrich von Wieser. They developed the theory of capital and has tried to explain the presence of economic crises. It appeared in 1871 with Menger's Principles of Economics.
Carl Menger (1840-1921), an Austrian economist stated the basic principle of marginal utility in Grundsätze der Volkswirtschaftslehre[54] (1871, Principles of Economics). Consumers act rationally by seeking to maximise satisfaction of all their preferences. People allocate their spending so that the last unit of a commodity bought creates no more than a last unit bought of something else. Stanley Jevons (1835-1882) was his English counterpart, and worked as tutor and later professor at Owens College, Manchester and University College, London. He emphasised in the Theory of Political Economy (1871) that at the margin, the satisfaction of goods and services decreases. An example of the theory of diminishing returns is that for every orange one eats, the less pleasure one gets from the last orange (until one stops eating). Then Leon Walras (1834-1910), again working independently, generalised marginal theory across the economy in Elements of Pure Economics (1874). Small changes in people's preferences, for instance shifting from beef to mushrooms, would lead to a mushroom price rise, and beef price fall. This stimulates producers to shift production, increasing mushrooming investment, which would increase market supply and a new price equilibrium between the products - e.g. lowering the price of mushrooms to a level between the two first levels. For many products across the economy the same would go, if one assumes markets are competitive, people choose on self interest and no cost in shifting production.
Early attempts to explain away the periodical crises of which Marx had spoken were not initially as successful. After finding a statistical correlation of sunspots and business fluctuations and following the common belief at the time that sunspots had a direct effect on weather and hence agricultural output, Stanley Jevons wrote,
"when we know that there is a cause, the variation of the solar activity, which is just of the nature to affect the produce of agriculture, and which does vary in the same period, it becomes almost certain that the two series of phenomena— credit cycles and solar variations—are connected as effect and cause.[55]
Vilfredo Pareto (1848-1923) was an Italian economist, best known for developing the concept of the circumstance under which nobody need be made worse off, and nobody better off through wealth redistribution. When this situation exists, the economy is said to be "Pareto efficient". Pareto devised mathematical representations for this optimal resource allocation, which when represented on a graph would yield a curve. Different points along the curve represent different allocations, but each would be optimally efficient. Rather than using the persuasive language of classical economists like Mill, the Pareto efficient curve could be represented with a precise mathematical formula:
.
Alfred Marshall is also credited with an attempt to put economics on a more mathematical footing. He was the first Professor of Economics at the University of Cambridge and his work, Principles of Economics[56] coincided with the transition of the subject from "political economy" to his favoured term, "economics". He viewed maths as a way to simplify economic reasoning, though had reservations, revealed in a letter to his student Arthur Cecil Pigou.
"(1) Use mathematics as shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This I do often."[57]
Coming after the marginal revolution, Marshall concentrated on reconciling the classical labour theory of value, which had concentrated on the supply side of the market, with the new marginalist theory that concentrated on the consumer demand side. Marshall's graphical representation is the famous supply and demand graph, the "Marshallian cross". He insisted it is the intersection of both supply and demand that produce an equilibrium of price in a competitive market. Over the long run, argued Marshall, the costs of production and the price of goods and services tend towards the lowest point consistent with continued production. Arthur Cecil Pigou in Wealth and Welfare (1920), insisted on the existence of market failures. Markets are inefficient in case of economic externalities, and the State must interfere. However, Pigou retained free-market beliefs, and in 1933, in the face of the economic crisis, he explained in The Theory of Unemployment that the excessive intervention of the state in the labor market was the real cause of massive unemployment, because the governments had established a minimal wage, which prevented the wages from adjusting automatically. This was to be the focus of attack from Keynes.
While the end of the nineteenth century and the beginning of the twentieth were dominated increasingly by mathematical analysis, the followers of Carl Menger, in the tradition of Eugen von Böhm-Bawerk, followed a different route, advocating the use of deductive logic instead. This group became known as the Austrian School, reflecting the Austrian origin of many of the early adherents. Thorstein Veblen in 1900, in his Preconceptions of Economic Science, contrasted neoclassical marginalists in the tradition of Alfred Marshall from the philosophies of the Austrian school.[58][59]
Joseph Alois Schumpeter (1883 – 1950) was an Austrian economist and political scientist mostly known for his works on business cycles and innovation. He insisted on the role of the entrepreneurs in an economy. In Business Cycles: A theoretical, historical and statistical analysis of the Capitalist process, Schumpeter made a synthesis of the theories about business cycles. He suggested that those cycles could explain the economic situations. According to Schumpeter, capitalism necessarily goes through long-term cycles, because it is entirely based upon on scientific inventions and innovations. A phase of expansion is made possible by innovations, because they bring productivity gains and encourage entrepreneurs to invest. However, when investors have no more opportunities to invest, the economy goes into recession, several firms collapse, closures and bankruptcy occur. This phase lasts until new innovations bring a creative destruction process, i.e. they destroy old products, reduce the employment, but they allow the economy to start a new phase of growth, based upon new products and new factors of production.[60]
Ludwig von Mises (1881 – 1973) was an Austrian economist who contributed the idea of praxeology, "The science of human action". Praxeology views economics as a series of voluntary trades that increase the satisfaction of the involved parties. Mises also argued that socialism suffers from an unsolvable economic calculation problem, which according to him, could only be solved through free market price mechanisms.
Mises' outspoken criticisms of socialism had a large influence on the economic thinking of Friedrich von Hayek (1899-1992), who, while initially sympathetic to socialism, became one of the leading academic critics of collectivism in the 20th century.[61] In echoes of Smith's "system of natural liberty", Hayek argued that the market is a "spontaneous order" and actively disparaged the concept of "social justice".[62] Hayek believed that all forms of collectivism (even those theoretically based on voluntary cooperation) could only be maintained by a central authority. In his book, The Road to Serfdom (1944) and in subsequent works, Hayek claimed that socialism required central economic planning and that such planning in turn would lead towards totalitarianism. Hayek attributed the birth of civilization to private property in his book The Fatal Conceit (1988). According to him, price signals are the only means of enabling each economic decision maker to communicate tacit knowledge or dispersed knowledge to each other, in order to solve the economic calculation problem. Along with his contemporary Gunnar Myrdal, Hayek was awarded the Nobel Prize in 1974.
John Maynard Keynes (1883-1946) was born in Cambridge, educated at Eton and supervised by both A. C. Pigou and Alfred Marshall at Cambridge University. He began his career as a lecturer, before working in the British government during the Great War, and rose to be the British government's financial representative at the Versailles conference. His observations were laid out in his book The Economic Consequences of the Peace.[63] In his Theory of Money, Keynes said that savings and investment were independently determined. The amount saved had little to do with variations in interest rates which in turn had little to do with how much was invested. Keynes thought that changes in saving depended on the changes in the predisposition to consume which resulted from marginal, incremental changes to income. Therefore, investment was determined by the relationship between expected rates of return on investment and the rate of interest.
During the Great Depression, Keynes had published his most important work, The General Theory of Employment, Interest, and Money (1936). He argued that there exists a continuum of equilibria, the full employment equilibrium position being just one of them. One innovation in his core argument is to stop taking prices and wages as perfectly flexible, arguing instead for a certain degree of stickiness. Thanks to stickiness, it is established that the interaction of "aggregate demand" and "aggregate supply" may lead to stable unemployment equilibria. To combat unemployment Keynes advocated low interest rates and easy credit. However, Keynes also argued that low interest rates were not the only necessary condition to restore economic activity. If investors' expectations are pessimistic (they forecast that effective demand will not grow) they will not invest. So lasting unemployment was entirely possible, and there would be no automatic self correction without external intervention by government. Keynes advocated that state spending be financed by a budgetary deficit.
The book was an enormous success, although it was opposed and criticized a number of people.[64] As a UK representative he helped formulate the plans for the International Monetary Fund, the World Bank and an International Trade Organisation[65] at the Bretton Woods conference, a package designed to stabilize world economy fluctuations and create a level trading field across the globe.
After World War II, the United States had become the pre-eminent global economic power. Europe and the Soviet Union lay in ruins and the British Empire was at its end. Until then, American economists had played a minor role. The institutional economists had been largely critical of the "American Way" of life, especially regarding conspicuous consumption of the Roaring Twenties before the Wall Street Crash of 1929. After the war, however, a more orthodox body of thought took root, reacting against the lucid debating style of Keynes, and re-mathematizing the profession. The orthodox centre was also challenged by a more radical group of scholars based at the University of Chicago. They advocated "liberty" and "freedom", looking back to 19th century-style non-interventionist governments.
Thorsten Veblen (1857-1929), who came from rural mid-western America and worked at the University of Chicago, is one of the best known early critics of the "American Way". In The Theory of the Leisure Class (1899) he scorned materialistic culture and wealthy people who conspicuously consumed their riches as a way of demonstrating success and in The Theory of Business Enterprise (1904) Veblen distinguished production for people to use things and production for pure profit, arguing that the former is often hindered because businesses pursue the latter. Output and technological advance are restricted by business practices and the creation of monopolies. Businesses protect their existing capital investments and employ excessive credit, leading to depressions and increasing military expenditure and war through business control of political power. These two books, focusing on criticism first of consumerism, and second of profiteering, did not advocate change. However, in 1911, Veblen joined the faculty of the University of Missouri, where he had support from Herbert Davenport, the head of the economics department. Veblen remained at Columbia, Missouri through 1918. In that year, he moved to New York to begin work as an editor of a magazine called The Dial, and then in 1919, along with Charles Beard, James Harvey Robinson and John Dewey, helped found the New School for Social Research (known today as The New School). He was also part of the Technical Alliance,[66] created in 1919 by Howard Scott. From 1919 through 1926 Veblen continued to write and to be involved in various activities at The New School. During this period he wrote The Engineers and the Price System (1921)[67].
John R. Commons (1862-1945) also came from mid-Western America. Underlying his ideas, consolidated in Institutional Economics (1934) was the concept that the economy is a web of relationships between people with diverging interests. There are monopolies, large corporations, labour disputes and fluctuating business cycles. They do however have an interest in resolving these disputes. Government, thought Commons, ought to be the mediator between the conflicting groups. Commons himself devoted much of his time to advisory and mediation work on government boards and industrial commissions.
The Great Depression was a time of significant upheaval in the States. One of the most original contributions to understanding what had gone wrong came from a Harvard University lawyer, named Adolf Berle (1895-1971), who like John Maynard Keynes had resigned from his diplomatic job at the Paris Peace Conference, 1919 and was deeply disillusioned by the Versailles Treaty. In his book with Gardiner C. Means, The Modern Corporation and Private Property (1932), he detailed the evolution in the contemporary economy of big business, and argued that those who controlled big firms should be better held to account. Directors of companies are held to account to the shareholders of companies, or not, by the rules found in company law statutes. This might include rights to elect and fire the management, require for regular general meetings, accounting standards, and so on. In 1930s America, the typical company laws (e.g. in Delaware) did not clearly mandate such rights. Berle argued that the unaccountable directors of companies were therefore apt to funnel the fruits of enterprise profits into their own pockets, as well as manage in their own interests. The ability to do this was supported by the fact that the majority of shareholders in big public companies were single individuals, with scant means of communication, in short, divided and conquered. Berle served in President Franklin Delano Roosevelt's administration through the depression, and was a key member of the so called "Brain trust" developing many of the New Deal policies. In 1967, Berle and Means issued a revised edition of their work, in which the preface added a new dimension. It was not only the separation of controllers of companies from the owners as shareholders at stake. They posed the question of what the corporate structure was really meant to achieve.
“Stockholders toil not, neither do they spin, to earn [dividends and share price increases]. They are beneficiaries by position only. Justification for their inheritance... can be founded only upon social grounds... that justification turns on the distribution as well as the existence of wealth. Its force exists only in direct ratio to the number of individuals who hold such wealth. Justification for the stockholder's existence thus depends on increasing distribution within the American population. Ideally the stockholder's position will be impregnable only when every American family has its fragment of that position and of the wealth by which the opportunity to develop individuality becomes fully actualized.”[68]
After the war, John Kenneth Galbraith (1908-2006) became one of the standard bearers for pro-active government and liberal-democrat politics. In The Affluent Society (1958), Galbraith argued voters reaching a certain material wealth begin to vote against the common good. He argued that the "conventional wisdom" of the conservative consensus was not enough to solve the problems of social inequality.[69] In an age of big business, he argued, it is unrealistic to think of markets of the classical kind. They set prices and use advertising to create artificial demand for their own products, distorting people's real preferences. Consumer preferences actually come to reflect those of corporations—a "dependence effect"—and the economy as a whole is geared to irrational goals.[70] In The New Industrial State Galbraith argued that economic decisions are planned by a private-bureaucracy, a technostructure of experts who manipulate marketing and public relations channels. This hierarchy is self serving, profits are no longer the prime motivator, and even managers are not in control. Because they are the new planners, corporations detest risk, require steady economic and stable markets. They recruit governments to serve their interests with fiscal and monetary policy, for instance adhering to monetarist policies which enrich money-lenders in the City through increases in interest rates. While the goals of an affluent society and complicit government serve the irrational technostructure, public space is simultaneously impoverished. Galbraith paints the picture of stepping from penthouse villas onto unpaved streets, from landscaped gardens to unkempt public parks. In Economics and the Public Purpose (1973) Galbraith advocates a "new socialism" as the solution, nationalising military production and public services such as health care, introducing disciplined salary and price controls to reduce inequality.
In contrast to Galbraith's linguistic style, the post-war economics profession began to synthesise much of Keynes' work with mathematical representations. Introductory university economics courses began to present economic theory as a unified whole in what is referred to as the neoclassical synthesis. "Positive economics" became the term created to describe certain trends and "laws" of economics that could be objectively observed and described in a value free way, separate from "normative economic" evaluations and judgments. The best selling textbook writer of this generation was Paul Samuelson (1915-2009). His Ph.D. was an attempt to show that mathematical methods could represent a core of testable economic theory. It was published as Foundations of Economic Analysis in 1947. Samuelson started with two assumptions. First, people and firms will act to maximise their self interested goals. Second, markets tend towards an equilibrium of prices, where demand matches supply. He extended the mathematics to describe equilibrating behaviour of economic systems, including that of the then new macroeconomic theory of John Maynard Keynes. Whilst Richard Cantillon had imitated Isaac Newton's mechanical physics of inertia and gravity in competition and the market,[10] the physiocrats had copied the body's blood system into circular flow of income models, William Jevons had found growth cycles to match the periodicity of sunspots, Samuelson adapted thermodynamics formulae to economic theory. Reasserting economics as a hard science was being done in the United Kingdom also, and one celebrated "discovery", of A. W. Phillips, was of a correlative relationship between inflation and unemployment. The workable policy conclusion was that securing full employment could be traded-off against higher inflation. Samuelson incorporated the idea of the Phillips curve into his work. His introductory textbook Economics was influential and widely adopted. It became the most successful economics text ever. Paul Samuelson was awarded the new Nobel Prize in Economics in 1970 for his merging of mathematics and political economy.
Kenneth Arrow (born 1921) is Paul Samuelson's brother-in-law. His first major work, forming his doctoral dissertation at Columbia University was Social Choice and Individual Values (1951), which brought economics into contact with political theory. This gave rise to social choice theory with the introduction of his "Possibility Theorem". In his words,
If we exclude the possibility of interpersonal comparisons of utility, then the only methods of passing from individual tastes to social preferences which will be satisfactory and which will be defined for a wide range of sets of individual orderings are either imposed or dictatorial.[71]
This sparked widespread discussion over how to interpret the different conditions of the theorem and what implications it had for democracy and voting. Most controversial of his four (1963) or five (1950/1951) conditions is the independence of irrelevant alternatives.
In the 1950s, Arrow and Gerard Debreu developed the Arrow-Debreu model of general equilibria. In 1971 Arrow with Frank Hahn co-authored General Competitive Analysis (1971), which reasserted a theory of general equilibrium of prices through the economy. In 1969 the Swedish Central Bank began awarding a prize in economics, as an analogy to the Nobel prizes awarded in Chemistry, Physics, Medicine as well as Literature and Peace (though Alfred Nobel never endorsed this in his will). With John Hicks, Arrow won the Bank of Sweden prize in 1972, the youngest recipient ever. The year before, US President Richard Nixon's had declared that "We are all Keynesians now".[72] The irony was that this was the beginning of a new revolution in economic thought.
The interventionist monetary and fiscal policies that the orthodox post-war economics recommended came under attack in particular by a group of theorists working at the University of Chicago, which came to be known as the Chicago School. This more conservative strand of thought reasserted a "libertarian" view of market activity, that people are best left to themselves, free to choose how to conduct their own affairs. More academics who have worked at the University of Chicago have been awarded the Nobel Prize in Economics than those from any other university.
Ronald Coase (born 1910) is the most prominent economic analyst of law and the 1991 Nobel Prize winner. His first major article, The Nature of the Firm (1937), argued that the reason for the existence of firms (companies, partnerships, etc.) is the existence of transaction costs. Rational individuals trade through bilateral contracts on open markets until the costs of transactions mean that using corporations to produce things is more cost-effective. His second major article, The Problem of Social Cost (1960), argued that if we lived in a world without transaction costs, people would bargain with one another to create the same allocation of resources, regardless of the way a court might rule in property disputes. Coase used the example of an old legal case about nuisance named Sturges v Bridgman, where a noisy sweetmaker and a quiet doctor were neighbours and went to court to see who should have to move.[73] Coase said that regardless of whether the judge ruled that the sweetmaker had to stop using his machinery, or that the doctor had to put up with it, they could strike a mutually beneficial bargain about who moves house that reaches the same outcome of resource distribution. Only the existence of transaction costs may prevent this.[74] So the law ought to pre-empt what would happen, and be guided by the most efficient solution. The idea is that law and regulation are not as important or effective at helping people as lawyers and government planners believe.[75] Coase and others like him wanted a change of approach, to put the burden of proof for positive effects on a government that was intervening in the market, by analysing the costs of action.[76]
Milton Friedman (1912-2006) stands as one of the most influential economists of the late twentieth century. He won the Nobel Prize in Economics in 1976, among other things, for A Monetary History of the United States (1963). Friedman argued that the Great Depression had been caused by the Federal Reserve's policies through the 1920s, and worsened in the 1930s. Friedman argues laissez-faire government policy is more desirable than government intervention in the economy. Governments should aim for a neutral monetary policy oriented toward long-run economic growth, by gradual expansion of the money supply. He advocates the quantity theory of money, that general prices are determined by money. Therefore active monetary (e.g. easy credit) or fiscal (e.g. tax and spend) policy can have unintended negative effects. In Capitalism and Freedom (1967) Friedman wrote:
"There is likely to be a lag between the need for action and government recognition of the need; a further lag between recognition of the need for action and the taking of action; and a still further lag between the action and its effects.[77]
Friedman was also known for his work on the consumption function, the permanent income hypothesis (1957), which Friedman himself referred to as his best scientific work.[78] This work contended that rational consumers would spend a proportional amount of what they perceived to be their permanent income. Windfall gains would mostly be saved. Tax reductions likewise, as rational consumers would predict that taxes would have to rise later to balance public finances. Other important contributions include his critique of the Phillips curve and the concept of the natural rate of unemployment (1968). This critique associated his name with the insight that a government that brings about higher inflation cannot permanently reduce unemployment by doing so. Unemployment may be temporarily lower, if the inflation is a surprise, but in the long run unemployment will be determined by the frictions and imperfections in the labour market.
Amartya Sen (born 1933) is a leading development and welfare economist and has expressed considerable skepticism on the validity of neo-classical assumptions. He was highly critical of rational expectations theory, and devoted his work to development and human rights. He won the Nobel Prize in Economics in 1998.
Joseph Stiglitz (born 1943) Received the Nobel Prize in 2001 for his work in information economics. He has served as chairman of President Clinton's Council of Economic Advisors and as chief economist for the World Bank. Stiglitz has taught at many universities, including Columbia, Stanford, Oxford, Yale, and MIT. In recent years he has become an outspoken critic of global economic institutions. He is a popular and academic author. In Making Globalization Work (2007), he offers an account of his perspectives on issues of international economics.
"The fundamental problem with the neoclassical model and the corresponding model under market socialism is that they fail to take into account a variety of problems that arise from the absence of perfect information and the costs of acquiring information, as well as the absence or imperfections in certain key risk and capital markets. The absence or imperfection can, in turn, to a large extent be explained by problems of information.[79]
Paul Krugman (born 1953) is a contemporary economist. His textbook International Economics (2007) appears on many undergraduate reading lists. Well known as a representative of progressivism, he writes a weekly column on economics, American economic policy, and American politics more generally in the New York Times. He was awarded the Nobel Prize in Economics in 2008 for his work on New Trade Theory and economic geography.
From the 1970s onwards Friedman's monetarist critique of Keynesian macroeconomics formed the starting point for a number of trends in macroeconomic theory opposed to the idea that government intervention can or should stabilise the economy.[80] Robert Lucas criticized Keynesian thought for its inconsistency with microeconomic theory. Lucas's critique set the stage for a neoclassical school of macroeconomics, New Classical economics based the foundation of classical economics. Lucas also popularized the idea of rational expectations,[81] which was used as the basis for several new classical theories including the Policy Ineffectiveness Proposition.[82]
The standard model for new classical economics is the real business cycle theory, which sought to explain observed fluctuations in output and employment in terms of real variables such as changes in technology and tastes. Assuming competitive markets, real business cycle theory implied that cyclical fluctuations are optimal responses to variability in technology and tastes, and that macroeconomic stabilisation policies must reduce welfare.[83]
Keynesian economic made a comeback among mainstream economists with the advent of New Keynesian macroeconomics. The central theme of new Keynesianism was the provision of a microeconomic foundation for Keynesian macroeconomics, obtained by identifying minimal deviations from the standard microeconomic assumptions which yield Keynesian macroeconomic conclusions, such as the possibility of significant welfare benefits from macroeconomic stabilization.[84] Akerlof’s ‘menu costs’ arguments, showing that, under imperfect competition, small deviations from rationality generate significant (in welfare terms) price stickiness, are good example of this kind of work.[85]
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Development economics is a branch of economics which deals with economic aspects of the development process in low-income countries. Its focus is not only on methods of promoting economic growth and structural change but also on improving the potential for the mass of the population, for example, through health and education and workplace conditions, whether through public or private channels.[1] Development economics involves the creation of theories and methods that aid in the determination of policies and practices and can be implemented at either the domestic or international level.[2] This may involve restructuring market incentives or using mathematical methods like inter-temporal optimization for project analysis, or it may involve a mixture of quantitative and qualitative methods.[3] Unlike in many other fields of economics, approaches in development economics may incorporate social and political factors to devise particular plans.[4] Also unlike many other fields of economics, there is "no consensus" on what students should know.[5] Different approaches may consider the factors that contribute to economic convergence or non-convergence across households, regions, and countries.[6]
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The earliest modern Western theory of development economics was mercantilism, which developed in the 17th century, paralleling the rise of the nation state. Earlier theories had given little attention to development. For example, Scholasticism the dominant school of thought during medieval feudalism, emphasized reconciliation with Christian theology and ethics, rather than development. The 16th and 17th century School of Salamanca, credited as the earliest modern school of economics, likewise did not address development specifically.
Major European nations in the 17th and 18th century all adopted mercantilist ideals to varying degrees, the influence only ebbing with the 18th century development of physiocrats in France and classical economics in Britain. Mercantilsm held that a nation's prosperity depended on its supply of capital, represented by bullion (gold, silver, and trade value) held by the state. It emphasised the maintenance of a high positive trade balance (maximising exports and minimising imports) as a means of accumulating this bullion. To achieve a positive trade balance, protectionist measures such as tarriffs and subsidies to home industies were advocated. Mercantilist development theory also advocated colonialism.
Theorists most associated with mercantilism include Philipp Wilhelm von Hornick, who in his Austria Over All, If She Only Will of 1684 gave the only comprehensive statement of mercantilist theory, emphasizing production and an export-led economy.[7] In France, mercantilist policy is most associated with 17th century finance minister Jean-Baptiste Colbert, whose policies proved influential in later American development.
Mercantilist ideas continue in the theories of economic nationalism and neomercantilism.
Following mercantilism was the related theory of economic nationalism, promulgated in the 19th century related to the development and industrialization of the United States and Germany, notably in the policies of the American System in America and the Zollverein (customs union) in Germany. A significant difference from mercantilism was the deemphasis on colonies, in favor of a focus on domestic production.
The names most associated with 19th century economic nationalism are the American Alexander Hamilton, the German-American Friedrich List, and the American Henry Clay. Hamilton's 1791 Report on Manufactures, his magnum opus, is the founding text of the American System, and drew from the mercantilist economies of Britain under Elizabeth I and France under Colbert. List's 1841 Das Nationale System der Politischen Ökonomie (translated into English as The National System of Political Economy), which emphasized stages of growth, proved influential in the US and Germany, and nationalist policies were pursued by politician Henry Clay, and later by Abraham Lincoln, under the influence of economist Henry Charles Carey.
Forms of economic nationalism and neomercantilism have also been key in Japan's development in the 19th and 20th centuries, and the more recent development of the Four Asian Tigers (Hong Kong, South Korea, Taiwan, and Singapore), and, most significantly, China.
The origins of modern development economics are often traced to the need for, and likely problems with the industrialization of eastern Europe in the aftermath of World War II.[8] The key authors are Paul Rosenstein-Rodan[9],Kurt Mandelbaum[10] ,Ragnar Nurkse[11], and Sir Hans Wolfgang Singer. Only after the war did economists turn their concerns towards Asia, Africa and Latin America. At the heart of these studies, by authors such as Simon Kuznets and W. Arthur Lewis[12] was an analysis of not only economic growth but also structural transformation.[13]
An early theory of development economics, the linear-stages-of-growth model was first formulated in the 1950s by W. W. Rostow in The Stages of Growth: A Non-Communist Manifesto, following work of Marx and List. This theory modifies Marx's stages theory of development and focuses on the accelerated accumulation of capital, through the utilization of both domestic and international savings as a means of spurring investment, as the primary means of promoting economic growth and, thus, development.[4] The linear-stages-of-growth model posits that there are a series of five consecutive stages of development which all countries must go through during the process of development. These stages are “the traditional society, the pre-conditions for take-off, the take-off, the drive to maturity, and the age of high mass-consumption”[14] Simple versions of the Harrod–Domar model provide a mathematical illustration of the argument that improved capital investment leads to greater economic growth.[4]
Such theories have been criticized for not recognizing that, while necessary, capital accumulation is not a sufficient condition for development. That is to say that this early and simplistic theory failed to account for political, social and institutional obstacles to development. Furthermore, this theory was developed in the early years of the Cold War and was largely derived from the successes of the Marshall Plan. This has led to the major criticism that the theory assumes that the conditions found in developing countries are the same as those found in post-WWII Europe.[4]
Structural-change theory deals with policies focused on changing the economic structures of developing countries from being composed primarily of subsistence agricultural practices to being a “more modern, more urbanized, and more industrially diverse manufacturing and service economy.” There are two major forms of structural-change theory; W. Lewis’ two-sector surplus model, which views agrarian societies as consisting of large amounts of surplus labor which can be utilized to spur the development of an urbanized industrial sector, and Hollis Chenery’s patterns of development approach, which is the empirical analysis of the “sequential process through which the economic, industrial and institutional structure of an underdeveloped economy is transformed over time to permit new industries to replace traditional agriculture as the engine of economic growth.” [4]
Structural-change approaches to development economics have faced criticism for their emphasis on urban development at the expense of rural development which can lead to a substantial rise in inequality between internal regions of a country. The two-sector surplus model, which was developed in the 1950s, has been further criticized for its underlying assumption that predominantly agrarian societies suffer from a surplus of labor. Actual empirical studies have shown that such labor surpluses are only seasonal and drawing such labor to urban areas can result in a collapse of the agricultural sector. The patterns of development approach has been criticized for lacking a theoretical framework.[4][citation needed]
International dependence theories gained prominence in the 1970s as a reaction to the failure of earlier theories to lead to widespread successes in international development. Unlike earlier theories, international dependence theories have their origins in developing countries and view obstacles to development as being primarily external in nature, rather than internal. These theories view developing countries as being economically and politically dependent on more powerful, developed countries which have an interest in maintaining their dominant position. There are three different, major formulations of international dependence theory; neocolonial dependence theory, the false-paradigm model and the dualistic-dependence model. The first formulation of international dependence theory, neocolonial dependence theory has its origins in Marxism and views the failure of many developing nations to undergo successful development as being the result of the historical development of the international capitalist system.[4]
First gaining prominence with the rise of several conservative governments in the developed world during the 1980s, neoclassical theories represent a radical shift away from International Dependence Theories. Neoclassical theories argue that governments should not intervene in the economy; in other words, these theories are claiming that an unobstructed free market is the best means of inducing rapid and successful development. Competitive free markets unrestrained by excessive government regulation are seen as being able to naturally ensure that the allocation of resources occurs with the greatest efficiency possible and the economic growth is raised and stabilized.[4][citation needed]
It is important to note that there are several different approaches within the realm of neoclassical theory, each with subtle, but important, differences in their views regarding the extent to which the market should be left unregulated. These different takes on neoclassical theory are the free market approach, public-choice theory, and the market-friendly approach. Of the three, both the free-market approach and public-choice theory contend that the market should be totally free, meaning that any intervention by the government is necessarily bad. Public-choice theory is arguably the more radical of the two with its view, closely associated with libertarianism, that governments themselves are rarely good and therefore should be as minimal as possible.[4]
The market-friendly approach, unlike the other two, is a more recent development and is often associated with the World Bank. This approach still advocates free markets but recognizes that there are many imperfections in the markets of many developing nations and thus argues that some government intervention is an effective means of fixing such imperfections[4]
Development economics also includes topics such as Third World debt, and the functions of such organisations as the International Monetary Fund and World Bank. In fact, the majority of development economists are employed by, do consulting with, or receive funding from institutions like the IMF and the World Bank.[15] Many such economists are interested in ways of promoting stable and sustainable growth in poor countries and areas, by promoting domestic self reliance and education in some of the lowest income countries in the world. Where economic issues merge with social and political ones, it is referred to as development studies.
Per capita Gross Domestic Product (GDP per head) is used by many developmental economists as an approximation of general national well-being. However, these measures are criticized as not measuring economic growth well enough, especially in countries where there is much economic activity that is not part of measured financial transactions (such as housekeeping and self-homebuilding), or where funding is not available for accurate measurements to be made publicly available for other economists to use in their studies (including private and institutional fraud, in some countries). Even though per-capita GDP as measured can make economic well-being appear smaller than it really is in some developing countries, the discrepancy could be still bigger in a developed country where people may perform outside of financial transactions an even higher-value service than housekeeping or homebuilding as gifts or in their own households, such as counseling, lifestyle coaching, a more valuable home décor service, and time management. Even free choice can be considered to add value to lifestyles without necessarily increasing the financial transaction amounts. More recent theories of Human Development have begun to see beyond purely financial measures of development, for example with measures such as medical care available, education, equality, and political freedom. One measure used is the Genuine Progress Indicator, which relates strongly to theories of distributive justice. Actual knowledge about what creates growth is largely unproven; however recent advances in econometrics and more accurate measurements in many countries is creating new knowledge by compensating for the effects of variables to determine probable causes out of merely correlational statistics.
(Warning: this section appears to be based on only one particular point of view.)
The most prominent contemporary development economist is perhaps the Nobel laureate Amartya Sen. Recent theories revolve around questions about what variables or inputs correlate or affect economic growth the most: elementary, secondary, or higher education, government policy stability, tariffs and subsidies, fair court systems, available infrastructure, availability of medical care, prenatal care and clean water, ease of entry and exit into trade, and equality of income distribution (for example, as indicated by the Gini coefficient), and how to advise governments about macroeconomic policies, which include all policies that affect the economy. Education enables countries to adapt the latest technology and creates an environment for new innovations. The cause of limited growth and divergence in economic growth lies in the high rate of acceleration of technological change by a small number of developed countries. These countries’ acceleration of technology was due to increased incentive structures for mass education which in turn created a framework for the population to create and adapt new innovations and methods. Furthermore, the content of their education was composed of secular schooling that resulted in higher productivity levels and modern economic growth.
| Welfare economics | |
|---|---|
 |
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| Birth | November 3, 1933 Santiniketan, West Bengal, India |
| Nationality | Indian |
| Institution | Harvard University Cornell University Princeton University Cambridge University Oxford University Delhi School of Economics London School of Economics |
| Field | Welfare economics |
| Alma mater | University of Cambridge Presidency College, Kolkata Visva-Bharati University |
| Influences | John Rawls |
| Contributions | Human development theory |
| Awards | Nobel Memorial Prize
in Economic Sciences (1998) Bharat Ratna (1999) |
Amartya Kumar Sen CH (Hon) (Bengali : অমর্ত্য কুমার সেন, Ômorto Kumar Shen) (born 3 November 1933) is the sole recipient of the 1998 Nobel Memorial Prize in Economic Sciences for his work on welfare economics. He is currently the Thomas W. Lamont University Professor and Professor of Economics and Philosophy at Harvard University. He is also a fellow of Trinity College at the University of Cambridge[1].
He is known as "the Mother Teresa of Economics"[2] for his work on famine, human development theory, welfare economics, the underlying mechanisms of poverty, gender inequality, and political liberalism.
From 1998 to 2004 he was Master of Trinity College[3]. He became the first Indian academic to head an Oxbridge college. He is also a former honorary president of Oxfam. Amartya Sen's books have been translated into more than thirty languages. He is a trustee of Economists for Peace and Security. As of today he has received over 80 honorary doctorates.
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Sen hails from a distinguished landed family fromEast Bengal (present-day Bangladesh). His maternal grandfather Kshitimohan Sen was a renowned scholar of medieval Indian literature, an authority on the philosophy of Hinduism. He was a close associate of Rabindranath Tagore in Santiniketan. He became the second Vice Chancellor of Visva-Bharati University, Santiniketan. His maternal grandfather was an uncle of the first Chief Election Commissioner of India, Sukumar Sen and the Law Minister of India, Ashoke Kumar Sen. Sen's father was Ashutosh Sen and his mother was Amita Sen, who were born at Manikganj, Dhaka. His father taught chemistry at Dhaka University (now in Bangladesh) and later became Chairman of the West Bengal Public Services Commission. Sen's first wife was Nabaneeta Dev Sen, a well known Indian writer and scholar, with whom he had two children: Antara and Nandana. Their marriage broke up shortly after they moved to London in 1971. In 1973, he married his second wife, Eva Colorni, who died from stomach cancer quite suddenly in 1985. They had two children, Indrani and Kabir. His present wife Emma Georgina Rothschild, is an economic historian, an expert on Adam Smith and Fellow of King's College, Cambridge.
Sen brought up his youngest children on his own. Indrani is a journalist in New York, and Kabir teaches music at Shady Hill School in Cambridge, Massachusetts and has produced 3 of his own hip-hop Albums. His eldest daughter Antara Dev Sen is an Indian journalist who, along with her husband Pratik Kanjilal, publishes The Little Magazine. Nandana Sen is a Bollywood actor.
Sen usually spends winter holidays at his home in Shantiniketan in West Bengal, India, where he likes to go on long bike rides, and maintains a house in Cambridge, Massachusetts, where he and Emma spend the spring and long vacations. Asked how he relaxes, he replies: "I read a lot and like arguing with people."
Sen was born in Santiniketan, West Bengal, the University town established by the poet Rabindranath Tagore, another Indian Nobel Prize winner. His ancestral home was in Wari, Dhaka in modern-day Bangladesh. Rabindranath Tagore is said to have given Amartya Sen his name ("Amartya" meaning "immortal").
Sen began his high-school education at St Gregory's School in Dhaka in 1941, in modern-day Bangladesh. His family migrated to India following partition in 1947. Sen studied in India at the Visva-Bharati University school and Presidency College, Kolkata before moving to Trinity College, Cambridge, where he earned a First Class (Congratulatory First) BA (Honours) in 1956 and then a Ph.D. in 1959. To Sen, then Cambridge was like a battlefield. There were major debates between supporters of Keynesian economics and the diverse contributions of Keynes’ followers, on the one hand, and the “neo-classical” economists skeptical of Keynes, on the other. Sen was lucky to have close relations with economists on both sides of the divide. Meanwhile, thanks to its good “practice” of democratic and tolerant social choice, Sen’s own college, Trinity College, was an oasis very much removed from the discord. However, because of a lack of enthusiasm for social choice theory whether in Trinity or Cambridge, Sen had to choose a quite different subject for his Ph.D. thesis, after completing his B.A. He submitted his thesis on “the choice of techniques” in 1959 under the supervision of the brilliant but vigorously intolerant Joan Robinson.[4][5] During his time at Cambridge, and according to Quentin Skinner, Sen was a member of the secret society "The Apostles".[6]
While an undergraduate student of Trinity College he met Prasanta Chandra Mahalanobis in Cambridge. Mahalanobis, after returning to Calcutta, recommended Sen to Triguna Sen, then the Education Minister of West Bengal. When Sen arrived in India on a two year leave from Cambridge during his second year of doctoral research,Triguna Sen appointed him as Professor and Head of Department of Economics at Jadavpur University, Calcutta, his very first appointment, at the age of 23. Between 1960–1961, he taught at Massachusetts Institute of Technology as a visiting professor.[7]. He has also been a visiting professor at Stanford, Berkeley, and Cornell.
During his tenure at Jadavpur University, he had the good fortune of having economic methodologist, A. K. Dasgupta, who was then teaching in Benares, as his supervisor. Subsequently, Sen won a Prize Fellowship at Trinity College, which gave him four years of freedom to do anything he liked, during which he took the radical decision of studying philosophy. That proved to be of immense help to his later research. Sen related the importance of studying philosophy thus: “The broadening of my studies into philosophy was important for me not just because some of my main areas of interest in economics relate quite closely to philosophical disciplines (for example, social choice theory makes intense use of mathematical logic and also draws on moral philosophy, and so does the study of inequality and deprivation), but also because I found philosophical studies very rewarding on their own.”[8]
He has taught economics at Calcutta, Jadavpur University, Delhi School of Economics (where he completed his magnum opus Collective Choice and Social Welfare in 1970)[9], Oxford (where he was first a Professor of Economics at Nuffield College and then the Drummond Professor of Political Economy and a Fellow of All Souls College), London School of Economics, Harvard and was Master of Trinity College, Cambridge, between 1998 and 2004.[10] In January 2004 Sen returned to Harvard. He is also a contributor to the Eva Colorni Trust at the former London Guildhall University.
In May 2007, he was appointed as chairman of Nalanda Mentor Group to steer the execution of Nalanda University Project, which seeks to revive the ancient seat of learning at Nalanda, Bihar, India into an international university.
Sen's papers in the late 1960s and early 1970s helped develop the theory of social choice, which first came to prominence in the work by the American economist Kenneth Arrow, who, while working at the RAND Corporation, famously proved that all voting rules, be they majority rule or two thirds-majority or status quo, must inevitably conflict with some basic democratic norm. Sen's contribution to the literature was to show under what conditions Arrow's impossibility theorem would indeed come to pass as well as to extend and enrich the theory of social choice, informed by his interests in history of economic thought and philosophy.
In 1981, Sen published Poverty and Famines: An Essay on Entitlement and Deprivation (1981), a book in which he demonstrated that famine occurs not only from a lack of food, but from inequalities built into mechanisms for distributing food. Sen's interest in famine stemmed from personal experience. As a nine-year-old boy, he witnessed the Bengal famine of 1943, in which three million people perished. This staggering loss of life was unnecessary, Sen later concluded. He presents data that there was an adequate food supply in Bengal at the time, but particular groups of people including rural landless labourers and urban service providers like haircutters did not have the monetary means to acquire food as its price rose rapidly due to factors that include British military acquisition, panic buying, hoarding, and price gouging, all connected to the war in the region. In Poverty and Famines, Sen revealed that in many cases of famine, food supplies were not significantly reduced. In Bengal, for example, food production, while down on the previous year, was higher than in previous non-famine years. Thus, Sen points to a number of social and economic factors, such as declining wages, unemployment, rising food prices, and poor food-distribution systems. These issues led to starvation among certain groups in society. His capabilities approach focuses on positive freedom, a person's actual ability to be or do something, rather than on negative freedom approaches, which are common in economics and simply focuses on non-interference. In the Bengal famine, rural laborers' negative freedom to buy food was not affected. However, they still starved because they were not positively free to do anything, they did not have the functioning of nourishment, nor the capability to escape morbidity.
In addition to his important work on the causes of famines, Sen's work in the field of development economics has had considerable influence in the formulation of the Human Development Report, published by the United Nations Development Programme. This annual publication that ranks countries on a variety of economic and social indicators owes much to the contributions by Sen among other social choice theorists in the area of economic measurement of poverty and inequality.
Sen's revolutionary contribution to development economics and social indicators is the concept of 'capability' developed in his article "Equality of What." He argues that governments should be measured against the concrete capabilities of their citizens. This is because top-down development will always trump human rights as long as the definition of terms remains in doubt (is a 'right' something that must be provided or something that simply cannot be taken away?). For instance, in the United States citizens have a hypothetical "right" to vote. To Sen, this concept is fairly empty. In order for citizens to have a capacity to vote, they first must have "functionings." These "functionings" can range from the very broad, such as the availability of education, to the very specific, such as transportation to the polls. Only when such barriers are removed can the citizen truly be said to act out of personal choice. It is up to the individual society to make the list of minimum capabilities guaranteed by that society. For an example of the "capabilities approach" in practice, see Martha Nussbaum's Women and Human Development.
He wrote a controversial article in The New York Review of Books entitled "More Than 100 Million Women Are Missing" (see Missing women of Asia), analyzing the mortality impact of unequal rights between the genders in the developing world, particularly Asia. Other studies, such as one by Emily Oster, have argued that this is an overestimation, though Oster has recanted some of her conclusions.[11]
Sen was seen as a ground-breaker among late twentieth-century economists for his insistence on discussing issues seen as marginal by most economists. He mounted one of the few major challenges to the economic model that posited self-interest as the prime motivating factor of human activity. While his line of thinking remains peripheral, there is no question that his work helped to re-prioritize a significant sector of economists and development workers, even the policies of the United Nations.
Welfare economics seeks to evaluate economic policies in terms of their effects on the well-being of the community. Sen, who devoted his career to such issues, was called the "conscience of his profession." His influential monograph Collective Choice and Social Welfare (1970), which addressed problems related to individual rights (including formulation of the liberal paradox), justice and equity, majority rule, and the availability of information about individual conditions, inspired researchers to turn their attention to issues of basic welfare. Sen devised methods of measuring poverty that yielded useful information for improving economic conditions for the poor. For instance, his theoretical work on inequality provided an explanation for why there are fewer women than men in India and China despite the fact that in the West and in poor but medically unbiased countries, women have lower mortality rates at all ages, live longer, and make a slight majority of the population. Sen claimed that this skewed ratio results from the better health treatment and childhood opportunities afforded boys in those countries, as well as sex-specific abortion.
Governments and international organizations handling food crises were influenced by Sen's work. His views encouraged policy makers to pay attention not only to alleviating immediate suffering but also to finding ways to replace the lost income of the poor, as, for example, through public-works projects, and to maintain stable prices for food. A vigorous defender of political freedom, Sen believed that famines do not occur in functioning democracies because their leaders must be more responsive to the demands of the citizens. In order for economic growth to be achieved, he argued, social reforms, such as improvements in education and public health, must precede economic reform.
Although Sen is a self-proclaimed atheist, he claims that this can be associated with Hinduism as a political entity.[12][13][14][15]
Sen cites Peter Bauer as a major influence on his thinking.
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Binary economics is a heterodox theory of economics that endorses both private property and a free market but proposes significant reforms to the banking system. The aim of binary economics is to ensure that all individuals receive income from their own independent capital estate,[1] using interest-free loans issued by a central bank to promote the spread of employee-owned firms.[2] These loans are intended to: halve infrastructure improvement costs, reduce business startup costs, and widen stock ownership.
Binary economics is a minority discipline, hard to place on the left-right spectrum.[3] It has variously been characterized as an extreme right-wing ideology and as extremely left-wing by its critics.[4][5] The ‘binary’ (in ‘binary economics’) means ‘composed of two’ because it suffices to view the physical factors of production as being but two (labour and capital which includes land) and only two ways of genuinely earning a living − by labour and by productive capital ownership. Humans are usually considered as owning their labour, but not necessarily the other productive factor – capital.[6]
Binary economics is partly based on belief that society has an absolute duty to ensure that all humans have good health, housing, education and an independent income, as well as a responsibility to protect the environment for its own sake. The interest-free loans proposed by binary economics are compatible with the traditional opposition of the Abrahamic religions to usury.[7]
Proponents[8] of binary economics claim that their system contains no expropriation of wealth, and much less redistribution will be necessary. They argue that it cannot cause inflation and is of particular importance as more of the physical contribution to production is automated.[9] and that the Binary economics paradigm[10] is particularly helpful in addressing the issue of why developing countries languish.[11] Advocates[12] contend that implementing their system will lessen national debt and encourage national unity. They believe binary economics could create a stable economy.
In its intent to involve people in ownership and participation binary economics has affinity with distributism and with the worker cooperatives of the Emilia-Romagna region of Italy and the Mondragón Cooperative Corporation of Spain.
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Although elements of binary economics can be found elsewhere (for example, in Pope Leo XIII Rerum Novarum 1891; Harold Moulton (1935) The Formation of Capital; the distributism of G. K. Chesterton and Hilaire Belloc; and Ibn Ashur (1946) Maqasid al Shari’ah al Islamiya) the first clear formulation of the subject was by American lawyer Louis Kelso and Mortimer Adler (the Aristotelian philosopher and educator) in their book The Capitalist Manifesto (1958). The title of the book is best viewed as a thing of its time, being a Cold War reference in opposition to communism.
Kelso and Adler continued to write together - The New Capitalists (1961) contributes greatly to the understanding of collateral and capital credit insurance - and then Kelso teamed up with political scientist Patricia Hetter Kelso to explain how capital instruments provide an increasing percentage of the wealth and why capital is narrowly owned in the modern industrial economy.[13] Their analysis predicts that widely distributed capital ownership will create a more balanced economy. This is at the heart of the binary claim to create an efficiency which creates justice and vice versa.
Kelso and Hetter then proposed new binary share holdings which (with exception for research, maintenance and depreciation) would pay out their full capital earnings, be capable of being insured and, if loss occurred, would occasion no recourse to the new binary owners. Because of the full payout provision they argued that binary holdings would yield more than five times what is typically paid out today. In the binary economics plan, this improved payout would allow a new widespread capital ownership, and achieve individual incomes which could be possessed by anybody.
Very often the first acquaintance people have with binary economics comes through today’s Employee Share Ownership Plans (ESOPs).[14] These stem originally from Louis Kelso & Patricia Hetter Kelso (1967)Two-Factor Theory: The Economics of Reality; the founding of Kelso & Company in 1970; and then from conversations in the early 1970s between Louis Kelso, Norman Kurland (Center for Economic and Social Justice), Senator Russell Long of Louisiana (Chairman, USA Senate Finance Committee, 1966 - 1981) and Senator Mike Gravel of Alaska. There are about 11,500 ESOPs in the USA today covering 11 million employees in closely held companies. As Binary Economics predicts, some studies have shown productivity improvements as an effect of employee ownership[15] and involvement - binary techniques for this are called Justice Based Management.
A good understanding of binary economics can be obtained by contrasting various aspects with comparable aspects in conventional economics (especially mainstream Neoclassical economics). The first contrast is that mainstream academic economics is primarily 'positive economics' (the analysis of 'what is') where binary economics proposes an economic system that ‘ought to be’ ('normative economics'). However, binary productiveness analysis is claimed to be a superior account of reality (‘what is’) than classical positive economics.
Conventional economics upholds productivity[16] which is not a direct analysis of physical reality: rather it is the calculation of a ratio or rate of total output divided by unit of input (though usually having separate labour and capital goods input-components, e.g. Cobb-Douglas). In contrast, the binary analysis of productiveness (see section below) attempts to give accurate credit to the physical contributions of both labour and capital goods to production, attempting to answer a fundamental economic question - Who or what physically creates the wealth?
The third contrast is that conventional economics believes that interest (as distinct from administration cost) is always necessary; in Binary Economics theory it isn't (certainly where the development and spreading of productive capacity is concerned).[17]
For newly created money, conventional economics upholds the doctrine of the time value of money whereas binary economics doesn't apply the principle to fiat money.
An assumption of general scarcity is at the heart of conventional economics. Binary economics, however, denies the assumption. Amartya Sen argued that starvation is primarily due to lack of money in the hands of the starving and not the absence of food: thus it is human attitudes, practice, and institutions which are at fault.
Binary economics also rejects conventional financial savings doctrine (that there must be financial savings prior to investment) - no financial saving is necessary if money can be created out of nothing.[18] The theory asserts that what matters is whether the newly created money is interest-free, whether it can be repaid, whether there is effective collateral and whether it goes towards the development and spreading of various forms of productive (and the associated consuming) capacity.
The contrast continues: Unlike Binary economics, conventional economics is largely unconcerned that the present money supply is generally not directed at the spreading of productive capacity -- broadly, productive capital is narrowly owned[19].
Very fundamentally, binary economics rejects the claim of conventional economics that it promotes a ‘free market’ which is free, fair, and efficient. (e.g., as an interpretation of the classical First Fundamental Theorem of Welfare Economics).
The two economics differ on the subject of democracy. Conventional economics upholds the periodic political vote.[20] Binary economics does the same but then deepens democracy[21] by insisting that productive capital and the practical everyday power its ownership gives to individuals be widely distributed as well. In binary economics freedom is only truly achieved if all individuals are able to acquire an independent economic base.
On environmental issues, binary economics claims to have a big advantage over conventional economics because of the interest-free loans which would be available. (See Environment section below.) The appropriate (non-zero) interest rate dominates conventional economic analysis of environment policy (e.g. in tackling climate change).
Binary economics proposes that central bank-issued interest-free loans should be administered by the banking system for the development and spreading of productive (and the associated consuming) capacity, particularly new capacity, as well as for environmental and public capital. While no interest would be charged, there would be an administrative cost as well as collateralization or capital credit insurance.[22]
Binary economics is concerned that the present banking system 'creates new money out of nothing' by issuing more credit than it has reserves.[23] Therefore the binary supply of interest-free loans takes place in circumstances of a move (over time) towards commercial banks maintaining reserves equal to 100% of their deposits. Thus commercial banks would be confined to lending their own capital and, with permission, customers' deposits while also administering the binary interest-free loans. Some binary economists propose that under binary principles, the International Monetary Fund and its Special Drawing Rights could allow everyone in the world capital ownership.
Not all investments would qualify for the interest-free loans; the development and spreading of new productive capacity would be targeted. However, since the banking system is restrained (by a move to 100% banking reserves) from endlessly creating new money and all interest-free loans are returned to the central bank and cancelled, interest-free loans would be available for homes and Louis & Patricia Kelso are the authorities on this matter (a full chapter in Democracy and Economic Power, 1986 & 1991.)
Interest-free loans would allow hospitals, sewage works, social housing, roads, bridges, etc. to be built at half or less of the present cost. (This use is also advocated by the USA Sovereignty movement - Dennis Kucinich, Ken Bohnsack et al.). However, the capital projects can still, if wished, be built, managed, even owned, by the private sector and use made of Community Investment Corporations and the like. In these Corporations local citizens own the local land and get the rents from it.[24]
Interest-free loans for public capital have been successfully used in Canada, New Zealand, and Guernsey. Malaysia is today believed to be experimenting with them.[25]
After 1949 central bank loans were a major factor in the Taiwanese Land to the Tiller program which spread land ownership from the few to the many. This was done without causing inflation and was an overall binary solution because, in various ways the money went into the spreading of both productive and consuming capacity.[26] (One way was by financing the buyout with industrial bonds, thus giving capital to small industries to provide things for the newly empowered farmers to purchase.)
Ownership of productive (and the associated consuming) capacity, particularly new capacity, can be spread by the use of central bank-issued interest-free loans.[27] Interest-free loans should be allowed for private capital investment IF such investment creates new owners of capital and is part of national policy to enable all individuals, over time, on market principles, to become owners of substantial amounts of productive, income-producing capital.[28] By using central bank-issued interest-free loans, a large corporation would get cheap money as long as new binary shareholders are created.
It is proposed that all large corporations should have to pay out all their earnings all the time (with exception of reserves for maintenance, depreciation, repair, and research). Large corporations will then have the option of obtaining interest-free loans on condition that they help to spread ownership. Medium-sized corporations (which would not be subject to the full pay out provision) will be able to have interest-free loans if they spread ownership.
Interest-free loans should be used, in particular, for clean, renewable energy. At present, a lot of green power-generating projects are not financially viable, but they would be with interest-free loans. Much more clean electricity could then be provided (e.g. by tidal barrages, wave machines, wind turbines, solar electricity, and geothermal power stations).
Interest-free loans should be used for micro-finance, small business, and farms, thereby freeing them from the huge pressure of compounding interest-bearing debt. Farm capital can be one half or less of the usual cost. The world’s poor people (e.g., Bangladesh women[29] - 55% of the world's population live on under $3 per day) could be enabled to reduce by one half or more the cost of building small businesses by the use of interest-free micro-finance being funnelled through the Grameen Bank and similar institutions such as the Institute for Integrated Rural Development.
It is binary policy that, since further and higher education should be encouraged, student loans should not bear interest.[30]
Binary productiveness and conventional productivity are distinct concepts.[31]
Conventional productivity, generally labour productivity, is the ratio of labour as input to the overall output.[32]
In contrast, binary productiveness is the percentage of total physical input that labour and capital each contributes to the output.[33] Capital contributes an increasing physical percentage as even Marx understood.[34] Consider the example of a man digging a hole. Using his hands this takes him four hours. But, by using a form of capital − a shovel − he can dig the hole in one hour or dig four holes in the same amount of time it took him to dig one hole with his hands. The physical productiveness of the human labor is 25% while the physical productiveness of the capital shovel is 75%.
A criticism of the hole and shovel example has been made by Timothy D. Terrell[35] summarizing a critique given by Timothy Roth.[36] The criticism states that: a) somebody invented the shovel; b) the shovel cannot be independent. Roth argues that someone with human capital had to invent the shovel before it could be used, so the presence of the shovel is not independent of human capital. Also, Roth notes the presumption that the human hole digger has no role in the productiveness of the shovel.
However, binary economics states that the fact that somebody invented the shovel has nothing to do with its present use for digging a hole and the shovel is viewed as an independent contributor which co-operates with the man just as the man co-operates with the shovel. Moreover, just as two humans can co-operate, so the man and the shovel co-operate to dig the hole and produce far more holes than either the man or shovel could do by themselves.
A more basic criticism of productiveness is that allocating output back to contributing factors may not be analytically coherent if the relationship between inputs and output is non-linear. The hole-shovel example above is tractable due to the one man, one tool nature of the productive process modeled; for a production process where output is proportional to the product of capital and labor, i.e. Q = aKL, the question "what percent of Q is due to K" has no answer.
As part of binary policy to develop capital ownership for each member of the population, there is no estate duty (or Inheritance tax) on death if the estate devolves in such a way as to spread capital estates to more individuals. If it does not do so, binary economics proposes a graduated tax.
Netocracy was a term invented by the editorial board of the American technology magazine Wired in the early 1990s. A portmanteau of internet and aristocracy, netocracy refers to a perceived global upper-class that bases its power on a technological advantage and networking skills, in comparison to what is portrayed as a bourgeoisie of a gradually diminishing importance.
The concept was later picked up by the Swedish philosophers Alexander Bard and Jan Söderqvist for their book Netocracy — The New Power Elite and Life After Capitalism (originally published in Swedish in 2000, published in English by Reuters/Pearsall UK in 2002).
The netocracy concept has been compared with Richard Florida's concept of the creative class. Bard and Söderqvist have also defined an under-class in opposition to the netocracy, which they refer to as the consumtariat.
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The word is also used as a portmanteau of Internet and democracy, not of Internet and aristocracy:
ISBN 978-0415969215ISBN 978-1412939799ISBN 978-0674015432SECTION II: DIFFERENCES BETWEEN SEVERAL "POSTs"
Various management theorists dispute the existence of postmodern organization (section I). They prefer to see what is in the right column of Table One (section I) as just a manifestation of "late modern" or "post-industrial" or "post-Fordism" or even "post-capitalism." Here is a brief definition of each "Post" term. While management writers disagree about each of these, they all think there is a post-something going on and that it is different from so-called "modern" organization.
What is Post-Industrial? The post-industrialists argue that in the most recent industrial revolution smoke the traditional stake, brick and mortar organization is being replaced by a more virtual and service-business form. It is a form with fewer managers, workers are gaining more autonomy to self-organize, but the controlling and monitoring, once done by cadres of managers (and supervisors) is now being done electronically. On the down side this has been called an age of "surveillance" (Foucault, 1977: 207, 221) because of the "need to maintain control of such aspects as promotion practices, wage scales and job categorizations has required the collection of "objective" data on employees, rather than relying on personal relationships" (Fairweather, 1999: 40-41). This new form of surveillance control is said to lead to an even more compliant work force.
What is Post-Fordist? If Henry Ford symbolizes the "Fordist" factory model of mass assembly line production and mass consumption, then what is "Post-Fordism"? Post-Fordist is a more flexible and leaner (fewer workers) production system. Instead of mass production, small lots are produced with greater product variety to meet the tastes of different consumer groups. These consumer groups want products and services tailored to their unique needs (see Piore and Sabel 1984). The result was not only fewer mass production factories, but the ones that remained doing more flexible production wanted more casual labor. The new Post-Fordist firms exhibit a penchant for "flexibility" to meet demands of changing consumer demands and changing labor costs (i.e. cheaper labor in other parts of the world). Post-Fordist production also means continuous improvement processes, such as TQM (Total Quality Management), shorter cycle times (time it takes to change production line, invent a new product, change to meet new demands) and JIT (Just in Time Inventory) systems. The result is a flexible production system to meet the contingencies of fragmented markets. This has resulted in changes in supply chain management and in choices of labor pools overseas (See Doner & Hershberg, 1999).
What is Post-Capitalism? There are three versions.
First, Karl Marx (a definite modernists) envisioned a post-capitalist form of organizations that would be run by workers' councils. This cause was taken up in the trade union movement of the 1920s and 1930s and later continued by socialists antagonist to the capitalist model. The great worker revolt did not happen and state socialism collapsed with the former Soviet Union. There are two other approaches to consider.
Second, for Peter Drucker (1991, 1993) competing in a global marketplace requires a new form of capitalism, what he terms "post-capitalism." In Drucker's version, "knowledge" is the key asset that managers and firms must manage and we are becoming a "knowledge society." We are going beyond brick and mortar and beginning to become virtual knowledge organizations, working in virtual teams, disseminating knowledge through web-based enterprises. In the new knowledge organizations, electronic technology with high speed computer systems and automation are becoming common place. This is thought to be changing the very nature of capitalism. An entire consulting industry has sprouted over night to install systematic practices for managing a knowledge in the now post-capitalist enterprises. Of course, not everyone is convinced that there is a fundamental change, just the old wolf in new clothing.
Third, a more recent approach to post-capitalism can be seen in the work of David Korten (1996a,b; 1999). He is calling for citizen participation in corporate governance. In this approach local communities could petition to have corporate charters revoked, particularly corporations that continue to do ecological and social damage. Numerous citizen, activist groups are beginning to take on corporate power. The recent demonstrations against WTO in Seattle and more recently against the World Bank are examples. But, there is also a growing "corporate charter" movement which asserts that the founding fathers of the U.S. constitution had local control over corporate greed and mayhem. They argue that unbridled global capitalism is not always healthy for the local economy. In sum, Korten contends that multinational corporations use public relations spin control to mask themselves as responsible corporate citizens. But behind the PR mask are practices that pollute the natural environment, destroy labor markets, and exploit indigenous workers.
What is Late Modern? Organizations are in constant state of reform but they are still highly modern and even bureaucratic. There are fewer layers, fewer managers, and more talk of teams, but just late modern, not really postmodern. What it means to be a manager changes in the "late modern world." Anthony Giddens (1991), for example, says that under conditions of 'late modernity', the construction and maintenance of managerial-identity is very problematic (see Casey, 1995). As institutional structures become destabilized and open to constant restructuring and revision, so 'self-identity becomes a reflexively organized project' (1991: 5).
If a person's identity resides 'in the capacity to keep a particular narrative going' (Giddens, 1991: 54), when the institutional conditions in which viable narratives are constructed change, individuals may find their identities open to reformulation. As the possibilities for alternative identities and narratives emerge, the self enters a period of dislocation which offers the potential both for reaffirmation and transformation, and, since selves and institutions are dialectically related, the outcomes of personal struggles with identity manifest themselves in the identity of the occupation itself. So, for example, the reluctance of many managers to re-identify themselves as 'professionals' has inhibited the recasting of the occupation of management itself as a 'profession' (Reed and Anthony, 1992). [As cited in Danieli &Thomas, 1999: 449-450.]
What is Postmodern Fragmentation? There is no whole story, it is all parts. Instead of one form of capitalism there appear to be many. There are many voices and many story fragments that make up any complex organization. A postmodern organization would be a combination or collage of many types and forms (premodern, modern as well as postmodern), partly bureaucratic, partly chaotic, partly a quest to reform it all, and partly postmodern unknowability. The postmodern organization acts out fragmented and contrary scripts (script here is the story acted out in action). Postmodernists are quick to attack dualities (male/female identity; boss/worker hierarchy; traditional/progress; science/fiction; science/ethics, etc. Best and Kellner accused postmodernists of being one-sided, as pointing out "fragmentation (Lyotard) or implosion (Baudrillard) while neglecting, with some exceptions, to properly conceptualize either totalizing forms of domination or resistance to them" (1991: 223). in the end there are just hybrids, combinations of forms that make up complex organizations in the postmodern world.
The next sections III,
focus on postmodern science (Part
A) and postmodern aesthetics (Part B). We see postmodern sciences as
more than
Newtonian, mechanistic science, and postmodern aesthetics as different
from
modernist aesthetics.
Economic history as it relates to economic growth in the modern sense first occurred during the industrial revolution in the West, due to high amounts of energy conversion taking place. Economic growth spread to all regions of the world during the 20th century, when world GDP per capita quintupled. The highest growth occurred in the 1960s during post-war reconstruction and in the early 2000s, driven by new technology and globalization. The history of economics goes much further back in time though, to trading in commodities and the development of market economies. The use of barter like methods may date back to at least 100,000 years ago.
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The city states of Sumer developed a trade and market economy based originally on the commodity money of the Shekel which was a certain weight measure of barley, while the Babylonians and their city state neighbors later developed the earliest system of economics using a metric of various commodities, that was fixed in a legal code.[2] The early law codes from Sumer could be considered the first (written) economic formula, and had many attributes still in use in the current price system today... such as codified amounts of money for business deals (interest rates), fines in money for 'wrong doing', inheritance rules, laws concerning how private property is to be taxed or divided, etc.[3] For a summary of the laws, see Babylonian law.
Temples are history's first documented creditors at interest, beginning in Sumer in the third millennium. By charging interest and ground rent on their own assets and property, temples helped legitimize the idea of interest‑bearing debt and profit seeking in general. Later, while the temples no longer included the handicraft workshops which characterized third‑millennium Mesopotamia, in their embassy functions they legitimized profit‑seeking trade, as well as by being a major beneficiary.[4]
Ancient Greek and Roman thinkers made various economic observations, especially Aristotle and Xenophon. Many other Greek writings show understanding of sophisticated economic concepts. For instance, a form of Gresham’s Law is presented in Aristophanes’ Frogs. Bryson of Heraclea was a neo-platonic who is cited as having heavily influenced early Muslim economic scholarship.[5]
Barter like methods may date back to at least 100,000 years ago. Trading in red ochre is attested in Swaziland, shell jewellery in the form of strung beads also dates back to this period, and had the basic attributes needed of commodity money.[6] To organize production and to distribute goods and services among their populations, before market economies existed, people relied on tradition, top-down command, or community cooperation.
According to Herodotus, and most modern scholars, the Lydians were the first people to introduce the use of gold and silver coin.[7] It is thought that these first stamped coins were minted around 650-600 BC.[8] A stater coin was made in the stater (trite) denomination. To complement the stater, fractions were made: the trite (third), the hekte (sixth), and so forth in lower denominations.
The first banknotes were used in Tang Dynasty China in the 9th century (with expanded use during the Song Dynasty), and the first in Europe issued by Stockholms Banco in 1661.
In the Western world, a prevalent term for coin-money has been specie, stemming from Latin in specie "in kind".[9]
By the 20th century, the industrial revolution had led to an exponential increase in the human consumption of resources. The increase in health, wealth and population was perceived as a simple path of progress. However, in the 1930s economists began developing models of non-renewable resource management (see Hotelling's Rule) and the sustainability of welfare in an economy that uses non-renewable resources (Hartwick's Rule).
Concerns about the environmental and social impacts of industry were expressed by some Enlightenment political economists and in the Romantic movement of the 1800s. Overpopulation was discussed in an essay by Thomas Malthus (see Malthusian catastrophe), while John Stuart Mill foresaw the desirability of a "stationary state" economy, thus anticipating concerns of the modern discipline of ecological economics.[10][11][12][13][14]
Ecological economics was founded in the works of Kenneth E. Boulding, Nicholas Georgescu-Roegen, Herman Daly and others. The disciplinary field of ecological economics also bears some similarity to the topic of green economics.[15]
According to ecological economist Malte Faber, ecological economics is defined by its focus on nature, justice, and time. Issues of intergenerational equity, irreversibility of environmental change, uncertainty of long-term outcomes, and sustainable development guide ecological economic analysis and valuation.[16]
The world economy is set to shrink by between 0.5% and 1.0% in 2009, the first global contraction in 60 years. In its forecast the International Monetary Fund (IMF) says that developed countries will suffer "deep recession".[17]
Energy accounting is proposed in the early 1930s as a scientific alternative to a price system, or money method of regulating society.[18][19] Joseph Tainter [20] suggests that diminishing returns of the EROEI is a chief cause of the collapse of complex societies. Falling EROEI due to depletion of non-renewable resources also poses a difficult challenge for industrial economies. Sustainability becomes an issue as survival is threatened due to climate change.
Thermoeconomists claim that human economic systems can be modeled as thermodynamic systems. Then, based on this premise, they attempt to develop theoretical economic analogs of the first and second laws of thermodynamics.[21] In addition, the thermodynamic quantity exergy, i.e. measure of the useful work energy of a system, is the most important measure of value. In thermodynamics, thermal systems exchange heat, work, and or mass with their surroundings; in this direction, relations between the energy associated with the production, distribution, and consumption of goods and services can be determined.[22]
An important task for resource theory in regard to economics (energy economics) is to develop methods to optimize resource conversion processes.[23] These systems are described and analyzed by means of the methods of mathematics and the natural sciences.[24] Human factors, however, have dominated the development of our perspective of the relationship between nature and society since at least the industrial Revolution, and in particular have influenced how we describe and measure the economic impacts of changes in resource quality. A balanced view of these issues requires an understanding of the physical framework in which all human ideas, institutions, and aspirations must operate. [25]
