History of Economy
History of Economics as a science
The first philosophical reflections on economy date back to ancient times. Aristotle addressed some problems of economics mainly as problems of a household management. Scholastic philosophers addressed ethnical questions concerning economy behavior and then condemned usury – taking of interest on money. Then, with the increasing importance trade and of nation-states in the early modern period, mercantilist philosophers addressed questions concerning the balance of the trade and regulations of the currency. Only in the work of physiocrats and especially of Adam Smith` do scholars begin to think of economy as an object of study, with its own participles and laws.
The economy as a distinct subject dates back only to the 18th century. The 18th century philosophers wrote in the shadow of Newton’s accomplishments. David Home hoped to develop a science of mind and society in the image of Newton’s science of the solar system. To the end, he seeks out general laws of individual thought and action and hope to find some large-scale orderly relations. Traces the rise in prices and the temporary increase in economic activity that follow an increase in currency to the perceptions and actions of individuals who first spend the additional currency.
The first systematic work of economics was Adam Smith’s “ An Inquiry into the Nature and Causes of the Wealth of Nations “. He also made an implication probably the foundation of all social sciences. That implication is that the social, aggregative implications of individual choices are often unintended. When people spend their additional gold imported from abroad, they don’t intend to raise the price-level, but that’s what they do anyway. This can be an object of scientific investigation.
The most important economists of the past
Adam Smith (1723-1790)
Adam Smith was Scottish political economist and philosopher. He was the most significant protagonist of Early Classical school which was called also Smithians. He was working at Glasgow University where his lectures contained ethics, rethoric and political economy. In 1759 he published The Theory of Moral Sentiments where many of his lectures were covered. In this book he expressed concern with the explanation of moral approval and disapproval. In 1763 he resigned his professorship and became a tutor to a young duke. Together with his pupil he was travelling in France where he met many intellectual leaders.
He was influenced particulary by a head of Physiokratic school whose work he much respected. He became famous for his influential book An Inquiry into the Nature and Causes of the Wealth of Nations which was written in 1776. In this book he proclaimed the obvious and simple system of natural liberty. The emphasis on sympathy as a fundamental human motive presented in The Theory of Moral Sentiments turned into the key-role of self interest in his second work. Shortly before his death he had destroyed almost all of his manuscripts. After his death in 1795 was published his work Essays on Philosophical Subjects taht contain what would probably have been his latter treatise.
By publishing his work An Inquiry into the Nature and Causes of the Wealth of Nations he founded the science of political economy. It was so significant for the modern world that it has been considered as one of the most important book ever written. It consists of five books:
Book 1 Improvement in Productive Powers of Labout
Book 2 Nature, Accumulation and Employment of Stock
Book 3 Progress of Opulance of Different Nations
Book 4 Sytems of Political Economy
Book 5 Revenue of the Sovereign or Commonwealth
Its basic doctrine was that the only source of nation´s wealth is labour. He declared that there can be no production without labour. He held that the true wealth of nation did not lie in the gold but in the achievement of an abundance of the necessities of life. He also warned that intervention by state is in this process unnecessary and needless. Although he had some objections to capitalism he considered it to be the best possible system. Some of classicals believed that the population was growing so fastly that there would not be enough resources available. They argued that government should have not intervene to try to correct this because it would just make the things worse. This approach is called ´laissez-faire´ what describes an economic system where the government intervenes as little as possible and leaves the private sector to organise most economic activity through market. Classicals believed that free markets were the best organizers of economic activity.
John Maynard Keynes (1883-1946)
He was not only Britain´s most significant twentieth-century economist and statesman, but also a journalist, art collector and bibliophile. The group of Keynesian economists was named after him and he is considered to be one of the greatest economists ever.
He became famous by critism of the peace treaty of Versailles with Germany in the Economic Consequences of the Peace. During the crises of 1920s he stated the Britain´s conservative policies as its cause. Later the unemployment crises inspirated his great works General Theory of Employment and Interest and Money. He declared that full employment was not automatic condition and expounded a new theory of the rate of the interest. The cause of unemployment was, according to him, due to a deficiency in the demand for goods and services. He also modified his classical belief in internantional free trade because of the full employment. He belonged among intereventionists and said that government could overcome this deficiency by adjusting own spendings and by control of money. He seemed to provide a human way for capitalism to survive. In his work General Theory of Employment he argued that the central government needed to intervention especially during the time of chronic unemployment. He was also one of the key-figures involved in Bretton Woods Conference in 1944 when influential political and intellectual persons from Europe and USA came together to rethink international economic policies. Keynesian macroeconomic theory:
This theory grew out in the 1930s when there was so-called Great Depression and Neoclassical economy was able neither explain its causes nor give a solution. Keynes thought that a "do nothing" approach to economy could make the situation only worse.
General Theory of Employment is now considered one of the most significant text of economic thoughts. It consists of Keynes´ lectures on topic full empoyment. He explained here why he thought that price adjustment would not have been successful but even it would have worsen the crisis. He also offered here other aspects of the mainstream approach and theoretical framework.
"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez faire to dig the notes up again. . . there need be no more unemployment. . . . It would indeed be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing."
John Maynard Keynes, The General Theory, p. 129.
Milton Friedman (1912-)
He is the best known member of Monetarists. Monetarists are a group of American economists who are called after their preoccupation with money and its effects.
Monetarism is very related to the classical school. Actually it expended classical theory to explain new phenomenom-stagflation which is connection of stagnation and inflation. This term appeared first time in 1970s and Keynesians had no solution for it at the time. Monetarists argued that increases in money supply would cause inflation therefore they believed that the money supply should be controlled.
One of the best known Friedman´s quaotes:
"Inflation is always and everywhere monetary phenomenom."
The two key areas of Monetarists´work are:
Quantity Theory of Money
Fischer Equation of Exchange:
M.....amount of money in circulation
V.... velocity of circulation of money
P.....average price level
T.... number of transactions taking place
Increases in money supply would lead to inflation-control the money supply to control the inflation.
Expectations-augmented Phillips Curve
Phillips Curve was created by Keynesians and it showed a trade off between
unemployment and inflation. But the problem was that in 1970s it could not explain the
stagflation-unemployment and inflation going up together. According to the curve it was
not possible but it happened. Friedman came up with theory about expectations. He
argued that there were more curves for different each level of expected inflation
Major economic approaches of today
Today, there are two different ways of organizing economy. At one extreme, most economic decisions are made by governor. At the other extreme, decisions are made in markets by individuals through payments of money.
In the USA and most democratic cultures. Most economic problems are solved by the market – it’s called MARKET ECONOMY (capitalism). The major decisions of production and consumption are made by individuals and private firms. Firms produce the commodities which yield the highest profits by the cheapest technology. Consumption depends on the individuals’ decisions how to spend their wages. The role of government is just to guard against shady and dishonest dealings. The characteristic of capitalism can be divided into two major categories:
1. Private ownership of capital – under capitalism somebody owns each piece of capital and perceives the income from it
Freedom of choice and enterprise – the consumers can buy what they please, the laborers can work where, when and if they please and the investors can invest whatever property they please (-freedom of choice) - the firms are free to enter whatever markets, obtain resources in any way they can, and organize their affairs as best as they can (-freedom of enterprise). However, the government must set “rules of the game” to prevent firms from engaging in unfair practices
3. Competition – firms compete with one another for sales (in a perfect capitalism no firm controls the price of products Þ firms must jump to the tune of consumers)
4. Reliance upon market – free market plays a central role
The second way of solving economy problems is COMMAND ECONOMY. In this way, the influence of government is very big. Lands and capital are owned by the government, which makes the decisions about production and distribution. The government is also the employer of most workers and tells them how to do their jobs. And the government decides how the output of the society will be divided between goods and services = in a command economy the government makes all decisions and answers all economic questions through its ownership of resources. This system was used in the USSR and some other countries, but as time goes on number of countries with this economic system decreases.
No contemporary society falls completely into either of these categories Þ all societies are MIXED ECONOMIES, with elements of market and command. The American economy is an economy where both government and private decisions are important. Most decisions are made in the market place, but the government modifies the functioning of market – it sets laws and rules that regulate economic life, produces educational and police service, and regulates pollution and business.
Russian and other former socialist economic in Eastern Europe are searching for their own particular brands of the mixed economy.