Liyan Dimaandal
Due: August 22, 2023
2E4 - ECO5102
History of Economic Thought
Quick thought #1
Pre-Classical
This era of economic thought could be considered as the development of
precursor ideas of fundamental principles later on. The period spans across
centuries dating as far back as the ancient Greeks and as recent as partway
through the industrial revolution. With that in mind, it is important to note that
agriculture was still the primary goal of many civilizations. During this time period,
a lot of ideas commonly associated with economics were just beginning to be
explored. Majority of the discourse orbited around the idea of how wealth should
be defined and subsequently how it should be managed as well as how growth is
achieved. Naturally, when trading was the norm, the idea that growth of wealth
can be attributed to trade and exchange.
It is worth noting that nations during this era already had distinctions between
members of society as well as simple or rudimentary systems to conduct
commerce both within itself and with other nation states. One example could be
the silk route which connected the eastern parts of China to the western parts of
Europe.
Classical
This era of economic studies was predominantly defined by the work of Adam
Smith with his look into the idea of a free market as a reaction to the idea of
mercantilism in the era prior. Smith’s ideas were very capitalist oriented as well as
believing that a market undisturbed will ,by an “Invisible hand”, be able to correct
itself and maintain a balance. During this era, the industrial revolution had began
and automation paved the way for a more growth oriented vision. Naturally, at the
cusp of the dawn of a new system, classical economist began looking at the
potential of automation and how much more it can produce at a lower cost and
ideas such as how should the profit of this new operation be distributed among
the owners and laborers.
The notion of a free market came about as a reaction to the autocratic
systems in the era prior. During that era, many European nations such as France
and Britain had a system that funnels most of the reward for labor will go to the
monarchy. It was these central governing entities that decided how its workers
were to be paid and what labor they can do. Consequently, with the rise of
western capitalism, and the start of the industrial revolution, ideas emerged as to
how economic systems should be run.
The Marxist conception of Socialism as a precursor to communism
Just as the previous era centered around criticizing the era before it, this era
of economic history is a response to the western capitalism dominated school of
thought. During this era, social classes were very distinct between workers and
and the aristocracy or as the famous Marx wrote, the bourgeoisie and the
proletariat. The bourgeoise had benefited greatly from the onslaught of the
industrial revolution. This focus on producing more and more led to businesses to
pursue growth at the expense of its workers. What this means is that although
companies were making profit, the working conditions of their workers were
described as abysmal. One such example of this is the evidence of Edwin
Chadwick’s report which pointed out the average life expectancy for a laborer in
the City of Manchester, England was a young 17 years whereas rural places such
as Ruthlandshire had 38. It is worth noting that the industrial revolution had
brought with it more technological advancements which in turn had the ability to
destroy certain industries. One need not look any further than the example of
weaving, specifically handloom weaving. With the introduction of automation
technology, demand for these products increased however, the wages of workers
decrease by nearly 60% Which then led to intense levels of poverty in the region.
Marginal revolution
Up until this point, the concept of economics has largely centered around the
mechanisms of growth. This means that prior to this era, Economists were
focused on analyzing systems with the notion that resources are unlimited. This of
course had to be revised after the industrial revolution had brought with it extreme
levels of poverty that showcased to the people at that time the impact of scarce
resources. This in turn led to a paradigm shift where economics would then be
viewed as a science of allocative efficiency. This was followed by the progression
of descriptive analysis to a more mathematical approach with prices now
determined by both supply and demand as an example.
It is worth noting here that most of the western world had witnessed numerous
political revolutions with the rise of Marxist socialist philosophies. Along with the
implications from industrial capitalism, economist began shifting towards a more
individualistic approach as opposed to the previous collective approach. Despite
these massive changes in perspective, it still shares a key element with that of
classical economics. The concept of laissez faire or the market being able to
function on it’s own without the intervention of a government.
Neoclassical Economics
With the world adopting a more comprehensive view of economics, many
economists in this era began using classical economics as well as concepts of
utility from the marginal revolution as the foundation to develop neoclassical
economics. During this specific era, certain economic models have been refined
such as the supply and demand equilibrium and the indifference curves. This was
due to economists relying more on mathematical models and scientific
approaches to study economics. At the time, several economies had depressions
and recessions due to the very small return on investment in automation. One
such example is the US economy when manufacturing plants moved towards
reducing their costs on labor only to yield a very minimal increase in revenue.
Economic depressions led to the notion that consumers should be the primary
focus of economic study. This is evident in the belief that value of a product to a
consumer is more of a driving factor to the value than the cost of production. One
could make the observation that consumers and for the most part, people act in
their best interest which means that they are rational in thinking. This then led to
the idea that competition in the market would naturally lead to a balanced
equilibrium. Mathematically, this was a sound conclusion which will be proven to
be insufficient later on.
Keynesian Revolution
The main inspiration behind this school of thought was the impact and
personal observations of John Maynard Keynes with the great depression. One of
the most notable characteristics of the economy at that time was massive levels of
unemployment along with poor purchasing power of the people. Prior to the
development of Keynesian economics, the general consensus among economists
was that people who are rational would naturally lean towards a market
equilibrium. This wasn’t the case when the great depression hit in the 1930’s.
Despite the claims, the market wasn’t able to fully return to equilibrium because
the element of fear had influenced the behavior of both consumers and firms.
The great depression had demonstrated the need for government intervention
on economic policies. Up to this point, people would let the market resolve its
issues by itself. It doesn’t help that society then had recovered from the first world
war and prepared for the second world war. Economically speaking, stability was
something that was lacking in that period which is why Keynes believed that in
times of crisis, the government must do something to stimulate the growth of the
economy. This was how low employment and low demand would be resolved
which often contradicted the idea of a free market.
Formalist Economics
The study of economics had undergone an intellectual revolution in the sense
that how one studies economics has changed. This era of economic thought was
brought about some time after the second world war. During this time, several
nations had experienced massive economic growth which others dub as the
“Golden age of Capitalism”. Many industries moved from producing products built
for destruction to producing products for the sake of creating and exploring
something new. This was integral to proving the idea of a central equilibrium.
During a post-war economy, social classes were not as defined as they were
100 years prior. Because social classes were not as defined, business could
produce many products that could cater to many people. This is where the idea
that competitive markets are able to achieve some form of equilibrium between
demand and supply became the new norm. It is also worth noting that the values
of a post-war economy changed and consequently changed the direction of
modern economics.
References
Blaug, M. (2003). The formalist revolution of the 1950s. Journal of the History of Economic
Thought, 25(2), 145–156. https://doi.org/10.1080/1042771032000083309
Boyer, G. R. (1998). The historical background of the Communist Manifesto. Journal of
Economic Perspectives, 12(4), 151–174. https://doi.org/10.1257/jep.12.4.151
Chambre, H., & McLellan, D. T. (2023, June 27). Marxism | Definition, History, Ideology,
Examples, & Facts. Encyclopedia Britannica. https://www.britannica.com/topic/Marxism
Classical Economics - explanation. (n.d.). The Business Professor, LLC.
https://thebusinessprofessor.com/en_US/economic-analysis-monetary-policy/classical-ec
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Depression of the 1890s. (n.d.). StudySmarter UK.
https://www.studysmarter.co.uk/explanations/history/us-history/depression-of-the-1890s/
Harris, D. J. (2007). THE CLASSICAL THEORY OF ECONOMIC GROWTH. Stanford
University.
Kenton, W. (2023). Neoclassical Economics: What It Is and Why It's Important. Investopedia.
https://www.investopedia.com/terms/n/neoclassical.asp#:~:text=Neoclassical%20econom
ics%20is%20a%20broad,earlier%20theories%20of%20classical%20economics.
Team, I. (2022). Keynesian Economics Theory: Definition and How It's Used. Investopedia.
https://www.investopedia.com/terms/k/keynesianeconomics.asp#toc-keynesian-economic
s-and-monetary-policy
THE MARGINALIST REVOLUTION. (n.d.).
http://www.compilerpress.ca/ElementalEconomics/380%20Thought/Lecture%20Notes/T
he%20Marginalist%20Revolution%201.htm