Economics has always been a subject open to continuous development of new ideas and theories that explains the functioning of economic system in every period of time. In simple terms, economics is a subject that studies about the behavior of humans (economic agents) in the market (economy) to meet their various needs with scarce resources. In other words, it is the branch of social science that studies how various economic agents interact with each other in an economy and allocate the scarce resources to meet their unlimited wants. The basic tool of the subject, the theory of demand and supply deals with how households (Consumers) and firms (Producers) function in the market to maximize their respective needs efficiently. This forms the core of economics, which over the period gave rise to different thoughts, as in reality every economy in the world undergoes continuous changes on the path to development and economic prosperity. This fact has led to different schools of thought that describes the various approaches in the history of economic theory.This development of economic theories highlights the fact that economists are free to express their own ideas and act independently and thus some of the ideas proposed by few of these schools are highly debated. In this article, I would like to take all those of you who are surprisingly interested to know the evolution of economic theories to a short trip to the most famous schools of economic thought, major economists of each school and their works.
The Classical School of Economic Thought:
This is one of the of the oldest school of economic thought and marks the beginning of modern economics. Classical economics also called as political economy was the original form of mainstream economics that developed in the 18th century and predominated till the mid 19th century. The basic idea of the the classical economics is that, it claimed that the markets will regulate themselves and move to equilibrium attaining efficiency without any intervention. Some of the majors of this school of thought whose contributions are still noteworthy in the history of economics are Adam Smith, Jean Baptiste Say, David Ricardo and Thomas Malthus. Now, a brief look into their work.
Adam Smith (1723-1790)
Adam smith is one of the foremost philosopher turned political economist whose work gave rise to the development of modern economics.Adam smith was born in Kirkaldy, Scotland in 1723. Smith entered University of Glasgow at the age of 14. Then later when he was 17 years old he joined Oxford and in 1951 he became a professor of logic at Glasgow. The next year he took the chair of philosophy where he started developing keen interest in writing and thus came two of his classic works, The theory of moral sentiments (1759) and An Inquiry Into The Nature And Causes of The Wealth of Nations (1776). The Wealth of Nations is considered as the first modern works of economics.The theory of moral sentiments is his first work, though, The Wealth of Nations is taken to be his most influential work. But according to smith, he considered his first book as his superior work. In his first work, Smith critically examines the modern thinking of his time, and suggests that conscience arises from social relationships. His goal in writing the book was to explain the ability of mankind to make moral judgments, inspite of man's natural inclination towards self interest. Smith proposes the theory of sympathy, in which the act of observing others makes people aware of themselves and the morality of their own behavior. The second book came when the world was actually witnessing the start of the industrial revolution. In his second book, The wealth of Nations he expresses the role of self interest of mankind. In this book, he attempted to state the nature and causes of a nation's prosperity by introducing important concepts such as 'invisibile hand' and 'division of labour.' The invisible hand explains the self regulating nature of the market to achieve equilibrium. Many economists consider this as the first welfare theorem. The wealth of nations is seen as the most seminal text of free market capitalism. More than two centuries after his death Smith is considered as the " father of modern economics" and still among the most influential thinkers in the field of economics today.
Jean Baptiste Say (1767-1832)
JB Say was a french economist and a businessman. He is best known for his Say's law of market though its origin traces to his predecessor. Though being a greatest economist of his times very little facts are known about his personal and education life. He went to London to pursue his formal education along with his brother who was also an economist. He spent most of his initial years in Geneva and London. After some personal grievances, he returned back to France and was employed in a life assurance company and soon became a pro of free market intellectuals. While talking about the development of the mainstream economics and the history of economic thought, much less importance is given to his varied works. He was hardly recognized for his works in taxes, money & banking, value & utility, entrepreneurs & capitalism. He had liberal views and was in favor of competition and free trade. The Say's law states that supply (aggregate) creates its own demand (aggregate). Say view that a economic glut occurs when there are too many factors of production (Land, labour, capital & entrepreneur) to produce one kind of product and not enough to produce others. Say also viewed that a rational consumer would not hoard money and will be willing to spend all of his money as the value of money varies over a period. The say's approach to economics was more of philosophical and realistic. Say works has got much to say even to a non economist. Say once called economics to be beautiful and above all useful science. But what we got to know, atleast the economists group is that, he left the economics field both more beautifully and more useful than he had found it.
David Ricardo (1772-1823)
David Ricardo was a British political economist and his mostly credited to systematizing economics. He is one of the lead economists of classical economics. He was not just an economist but was also a financier and speculator ( a person who engages in the practice of risky financial transactions in an attempt to profit from short-medium term market fluctuations) who holds a lot of fortune. He is one of the most important economist from the classical school who contributed hugely to the subject and his ideas stand out to be still relevant in the modern day.He was a contributor of wide range of economic theories that is of significant importance in the history of economic thought. Perhaps, his most important contribution was the 'theory of comparative advantage' in which he advocates that a nation should abandon industries in which it is internationally competitive in order to concentrate solely on the industries in which it is most competitive. He referred comparative advantage to the ability of a firm or an individual to produces goods & services at a lower marginal and opportunity cost than others. This theory contrasts with 'the theory absolute advantage' introduced by Adam Smith, where he referred absolute advantage as the ability of a firm, individual or a country to produce more of a particular goods using the same amount of resources. His most famous work was 'The principals of political economy and taxation' (1817) where he introduced the concept of 'labour theory of value' according to which the relative price of two goods is determined by the ratio of the quantities of labour required in their production. Another famous theory of his is the 'Ricardian Equivalence' which is an economic hypothesis stating that the timing of any tax change of the government does not affect the level of consumers spending. It does not matter whether the government finances its expenditures with debt or tax increase, because the level of total demand in the economy is the just the same. Ricardo's attempts to address important economic issues took economics to higher level. He is the one who presented the classical system more clearly than anyone had done before.
Thomas Robert Malthus (1766-1834)
Thomas Malthus was a British political economist who is widely known for his theories about population change. Malthus received his early education at home at Bramcote, Nottinghamshire and then at Warrington Academy from 1782. He then joined Jesus College, Cambridge in 1784. He came into the spotlight with his classic work 'An Essay on The Principal of Population' (1798). The essay gave rise to Malthusian controversy. In his book Malthus proposes that the human population grows exponentially while food production grew simultaneously at a arithmetic rate. He supported this point with relevant empirical data. This deadly scenario of arithmetic food growth along with simultaneous geometric human population growth predicted a future when humans would have no resources for survival. This phenomenal prediction is sometimes called as the 'Malthusian Controversy' which highlights the fact that population growth outpaced agricultural growth. This seems to be so impressive because Malthus proposed this almost two centuries back when the population growth was not as rapid as it is today. If alone Malthus was alive today, he would have been richly awarded for his theory as it is so apt and significant in present day. I think the present day economists and political leaders should rewind and understand the true importance of Malthus theory and try to bring efficient solutions for the growing mismatch between population growth and agricultural growth. Another important term of his is 'Malthusian Trap' which suggests that for most of human history, income was largely stagnant because technological advances and innovations resulted only in more people, rather than improvements in the standard of living. Malthus also hypothesized unchecked population growth would also lead to social problems. Malthus established the relation between population and economics that when population grows faster than production of food, real wages fall because the growing population causes the cost of living to increase. Though Malthus has not given various theories and holds limited work he is known best for his strong contribution to the field. He is one of the economist belonging to the classical school who got to be remembered by the present and future economists no matter to which school of thought they belong to, after all economics is one single family comprising members of different views and opinions about the happenings of the world.
When you hear the word neo, dont think about the matrix character played by keanu Reeves as it is very common, atleast among movie lovers to think about the character in the famous science fiction matrix franchise.As the powerful character in the series, the word neo in this context is also quite apt to some extent, for as this is the only school of economics that is widely debated and influential school of economic thought next to the Keynesian. The neoclassical school of economics is one of the most widely dominated modern school of economic thought and constitute the highest number of followers till date mainly due to its modern insight about the subject. The term was first introduced by an american economist, Thorstein Veblen who was also the leader of the institutional economics movement. The neoclassical economics primarily studies about the individual, be it either consumer or producer rational decision making process through the basic supply and demand analysis. It was developed in the late nineteenth century and is also stated as orthodox economics by its critiques as most of the ideas presented by this school is not applicable and deviates from real life situation. Now a peep into the work of some of the notable economists of this school.
Alfred Marshal is one of the great economists of his time and is one of the founders of economics. He contributed a lot to the field and his theories even today hold a significant importance in the history of economic thought. His most famous work was the 'Principals of economics' published in 1980 which was the dominant textbook in the England for several years. Marshall was born in clapham, England. He graduated from St. John's college, Cambridge and showed a keen interest in mathematics. Most of his work were quantitative in nature and introduced a lot of mathematical insight to economic theories. He rejected economics as the science of wealth and linked it to social welfare. In 1970s when Marshall was residing in USA to study about the economic conditions to gain a clear picture about the functioning of the economy he wrote essays on international trade and theoretical aspects of the economy. His first book was 'The Economics of Industry' which made the him noticed among the economics fraternity. His classic work the principals of economics gave a all together fresh insight to economics particularly, microeconomics (studies about the behavior of consumers, producers, individual firms at the micro level). The book recognized him as the forefront of new economic thinkers. Infact, he was the founder of standard microeconomics and bought neoclassical economics to mainstream economics. He emphasized that both demand and supply as the primary determinant of goods and services. He was the one who initially conceptualized consumer surplus (the difference between what a consumer is willing to pay and what he actually pays) and producer surplus (the difference between the amount the producer receives and the amount which he/she is willing to accept). He also came to the conclusion that the marginal utility (satisfaction) after a point decreases by consuming additional unit of a good (the law of diminishing marginal utility). He also introduced a concept of three periods of business progression. The first stage being where supplies are all fixed, the second stage where capital is fixed and labour is adjusted to change supply, the third stage where all labour becomes variable. He is known for explaining how the economy works towards efficiency and achieves market equilibrium by equating market demand and market supply. Marshall's model allowed a visual representation of complex economic fundamentals where before all the ideas and theories were only being capable of explaining through words. (So students who find economics hard and as a Hercules task because of its rigorous math application and quantitative nature got to blame Marshal for all the difficulties you guys are facing burning the midnight oil...LOL).
Source: Wikipedia
