Canada and the World
Current Events with a Canadian Perspective
Last update
19 November 2010
Basic Economics Part One
Early Economic Schools of Thought
The study of economic theory is relatively new
with only about a 300-
Modern economic thought emerged in the 17th and 18th centuries as the western world began its transformation from an agricultural to an industrial society.
Despite the enormous differences between then and now, the economic problems with which society struggles remain the same:
- How do we decide what to produce with our limited resources?
- How do we ensure stable prices and full employment of our resources?
- How do we provide a rising standard of living both for ourselves and for future generations?
Some of the brightest minds of the last three centuries have puzzled over these questions. Progress in finding answers has been uneven. Sometimes, theorists have gone down blind alleys, and often huge leaps forward are made as a new school of ideas suddenly emerges. Old ideas are modified by new insights as economists build on the work of those who have gone before.
This process continues today and its motivating force remains the same as that three centuries ago: to understand the economy so that we may use it wisely to achieve society's goals.
The Mercantilists
Mercantilism was the economic philosophy used by merchants and statesmen during the 16th and 17th centuries.
Mercantilists believed that a nation's wealth came primarily from the accumulation
of gold and silver.
Nations without mines could obtain gold and silver only by selling more goods than they bought from abroad.
Accordingly, the leaders of those nations intervened extensively in the market. They charged tariffs on foreign goods to restrict import trade, and granted subsidies to make it easier for domestic products to be exported.
The Physiocrats
Physiocrats were a group of 18th century French philosophers. They developed the idea of the economy as a circular flow of income and output.
They opposed the Mercantilist policy of promoting trade at the expense of agriculture
because they believed that agriculture was the sole source of wealth in an economy.
As a reaction against the Mercantilists' many trade regulations, the Physiocrats
called for a policy of laissez-
The Classical School
Classical economic theory began with the publication in 1776 of Adam Smith's The Wealth of Nations. The book identified land, labour, and capital as the three factors of production and the major contributors to a nation's wealth.
In Smith's view, the ideal economy is a self-
While Adam Smith emphasized the production of income, David Ricardo focused on the distribution of income among landowners, workers, and capitalists.
Ricardo saw a conflict between landowners on the one hand and labour and capital on the other. He thought that the growth of population and capital, pressing against a fixed supply of land, pushes up rents, and holds down wages and profits.
Thomas Robert Malthus (left) used the idea of diminishing returns to explain low
living standards. The force of a rapidly growing population against a limited amount
of land meant declining returns to labour.
The result, he claimed, was chronically low wages. This would prevent the standard of living for most of the population from rising above the bare minimum needed for survival.
Malthus also questioned the automatic tendency of a market economy to produce full employment. He blamed unemployment upon the economy's tendency to limit its spending by saving too much, a theme that lay forgotten until John Maynard Keynes revived it in the 1930s.
The Marginalists
Classical economists believed that prices are determined by the costs of production. Marginalist economists emphasized that prices also depend upon the level of demand, which in turn depends upon the amount of consumer satisfaction provided by individual goods and services.
Marginalists provided modern economics with the basic analytic tools of demand and supply, consumer utility, and a mathematical framework for using those tools.
Marginalists also showed that in a free market economy, the factors of production
-
The Marxist School
The Marxist School challenged the foundations of Classical 
theory. Writing during
the mid-
An advocate of a labour theory of value, Marx believed that all production belongs to labour because workers produce all value within society. He believed that the market system allows capitalists, the owners of machinery and factories, to exploit workers by denying them a fair share of what they produce.
Marx predicted that capitalism would produce growing misery for workers as competition
for profit led capitalists to adopt labour-
The Soviet Union was established on Marxist principles 1919. The fact that the Soviet Union collapsed 70 years later is taken by capitalists as a sign that Marxism was nothing more than a temporary detour.
The Institutionalist School
Institutionalist economists regarded individual economic behaviour as part of a larger social pattern influenced by current ways of living and modes of thought.
Their theories were debated in the 1920s and '30s. The American economist Thorstein Veblen tried to replace the concept of people as the makers of economic decisions with an image of people as influenced by continually changing customs and institutions.
The Institutionalists rejected the narrow Classical view that people are primarily
motivated by economic self-
Veblen saw the American economic system as one in which business was carried on for the amassing of money rather than the production of goods.
Institutionalism never caught on as a major school of economic thought, but its influence has continued, particularly in the works of economists seeking to explain economic problems at least partially in terms of broader social and cultural phenomena. This approach is useful in analyzing the problems of developing countries, where the modernization of social institutions is often a requirement for industrial progress.
The Keynesian School
Reacting to the severity of the worldwide Depression, John Maynard Keynes in 1936 broke from the Classical tradition with the publication of the General Theory of Employment, Interest, and Money. It is a very difficult read, some have said incomprehensible, but the book is still considered to be one of the most important in Western economic theory.
The Classical view assumed that in a recession, wages and prices would decline to restore full employment. Keynes held that the opposite was true. Falling prices and wages, by depressing people's incomes, would prevent a revival of spending.
He insisted that direct government intervention was necessary to increase total spending. Keynes' arguments proved the modern rationale for the use of government spending and taxing to stabilize the economy.
Government would spend and decrease taxes when private spending was insufficient and threatened a recession; it would reduce spending and increase taxes when private spending was too great and threatened inflation.
Image credit
Giorgio Monteforti
Sources
Hazlitt, Henry. Economics in One Lesson,Three Rivers Press, 1988.
Henderson, David R, et al, Concise Encyclopedia of Economics.
McConnell, Campbell R, Brue, Stanley L. Economics, McGraw Hill
Samuelson, Paul. Economics, McGraw Hill, 1948.
Sloman, John. Essential of Economics, Prentice Hall, 1998
© Canada and the World, October 2010
All rights reserved
The word "economics" comes from a Greek word -
LAISSEZ-
Economists use this French expression to describe unrestricted capitalism. “Laissez-
An economist is an expert who will know tomorrow why the things he predicted yesterday did not happen today.
Thorstein Veblen was born in Wisconsin in 1857. His parents were immigrants from Norway and Thorstein spoke only Norwegian at home and did not learn English until his teens.
The Communist Revolution of 1919, which overthrew Russia’s royal family, may have been based on Marxist theories about workers owning the means of production, but it soon became something else.
Under the control of heavy-
Russian Communism became a mirror of the Russian monarchy, giving rise to the saying that “Under capitalism one man oppresses another, whereas under Communism it’s the other way around.”
THE LAWS
OF ECONOMICS
The First Law of Economics:
For every economist, there exists an equal and opposite economist.
The Second Law of Economics:
They’re both wrong.