History of Economic Thought

Economic Thought: Key Currents

• Early economic definitions involved managing agriculture (Xenophon) and household affairs (Aristotle's "Oikos" and "Nomos").
• Economy seeks to optimize social welfare by satisfying needs with limited resources, contributing to overall happiness.

Micro vs. Macroeconomics

• Microeconomics examines the economy at a microscopic level like domestic economy (Aristotle).
• Macroeconomics views the economy from a long-term, broader perspective like city management (Plato).
• Economy based on moral values includes fair pricing and condemnation of usury/greed.

Mercantilism (16th-17th Century)

• Based on political economy, where gold equals wealth.
• Interventionism: The State regulates, taxes, and controls industry and commerce.
• Protectionism: The State sets tariff barriers to limit imports and encourage exports for a positive trade balance and gold accumulation.
• State power relies on gold possession, funded by taxes on merchant classes.
• Colbert (France, 1619-1683): National mercantilism involves state intervention in foreign trade, developing manufactures (e.g., Manufacture des Gobelins).
• Current examples: Donald Trump seeks growth via exports and market share gains, favoring a weak dollar.
• Examples: Marine le Pen (France), Georgia Melloni (Italy), Viktor Orban (Hungary).

Physiocracy (1750-1770)

• Based on liberal thought, where nature equals power.
• Reaction to Colbertism, opposing its paralyzing effect on the French economy.
• Key figures: François Quesnay, Anne-Robert-Jacques Turgot, Pierre Samuel du Pont de Nemours, Marquis de Mirabeau.
• Nature is the source of wealth and power, emphasizing land's importance in economic production.
• Economy is governed by natural laws analogous to physical laws, with the "Supremacy of nature's powers."
• Advocates argue The State should not intervene in the economic sphere.
• François Quesnay (1694-1774) viewed the economy as a human body, with blood circulation representing commercial transactions and social classes as organs.
• In 1758, Quesnay created the first economic table, identifying farmers as the "productive class" responsible for fostering national wealth through land cultivation.
• Physiocrats: Forerunners of liberalism.

Classical Economics (1776-1871)

• Labor is the source of wealth.
• The goal is to multiply national wealth and improve general well-being.
• Value theory includes usage value (satisfaction, e.g., water in the desert) and exchange value (quantity of other goods obtainable, e.g., a diamond).
• Adam Smith (1723-1790): Supports the invisible hand, division of labor, specialization.
• Wealth production relies on available labor. To increase wealth, productivity gains must be increased through division of labor and specialization.
• "Invisible hand": Selfish, individualistic choices lead to collective wealth and common good via trickle-down effect.
• "The sum of private interests leads to the general interest".
• Wealth creation relies on the offer or in free markets.

Jean Batiste Say (1767 – 1832)

• Created the law of markets.
• Market self-regulation implies that supply creates its own demand, preventing overproduction crises.
• Adam Smith and Jean-Baptiste Say view nature as a resource for humans that holds no intrinsic value, gaining value only through human labor.
• Land-based resources are considered unlimited and free, focusing attention on capital and labor.

Thomas Robert Malthus (1766-1834)

• Natural resources are a limiting factor to economic and demographic expansion
• Demographic growth exceeds the means of subsistence and there is an increased risk of scarcity and impoverishment.
• Advocates to stop giving goods and services to families so they have less children.
• Advocated for sexual abstinence outside of marriage and ending assistance to the poor.
• Promoted demographic optimum and natural selection.

David Ricardo (1772-1823)

• Focuses on stationary State.
• Increased population will lead to less fertile and cultivated lands and decreasing yields.
• Increased prices leads to increased wages of workers, which leads to decreased profit for capitalists.
• Decreased profit for capitalists leads to decreased investment and investment incentive -> State remains stationary.
• International exchange and technological progress are solutions to diminishing returns.

Classical Economics: Wages and Inequality

• Iron law of wages: Workers' income is subject to the law of wages. Wages must be fixed near the minimum subsistence level
• Economy as a source of social inequalities -> Motivation factor

The State in Economics

• The state should be a gendarme.
• The state should limit itself to its sovereign functions (police, justice, defense).
• The state should enforce property rights and free competition.

Marxist Economics (Karl Marx, 1818-1883)

• Contests classical distribution theory, exposing working-class exploitation.
• Labor Exploitation: Workers generate surplus value, appropriated by capitalists; labor's value is underpaid.
• Capitalist Crises: Overproduction and capitalist collapse due to revolution.
• Communistic theory: private property ends, class struggle ends, and the capitalists will understand that the worker must take part in the wealth.

Neoclassical Economics (Marginalist Revolution)

• Breaks with philosophy, ethics, and justice and focuses on short-term efficiency, relegating ethics.
• Defined economics as the optimization of scarce resources for insatiable needs.
• Marginal Utility: Rejects labor value, adopts utility (usage value) by William Stanley Jevons, Léon Walras, and Carl Menger.
• The value of a good is relative to its user and not by the production. Consumers consume until the good doesn't feel beneficial or worth the money.
• The value of a good becomes subjective
• Homo Economicus: Maximize utility (individuals) and profit (firms) in a microeconomic environment.
• Individuality: Humans are selfish, rational, and maximizing.
• Cost-Benefit Analysis: Every human choice balances cost and benefit, influenced by market demands.
• Market Equilibrium: Supply (increasing price function) and demand (decreasing price function) meet at an equilibrium point.
• Equilibrium: The price where supply equals demand, optimizing resource use.
• Pareto Optimality: An efficient, perfectly competitive market without state intervention.
• It is impossible for a person to be better off without reducing well-being of another.

Markets: Pure vs. Imperfect Competition

• Pure and perfect competition implies the fulfilment of conditions of Perfect Competition on Perfect Markets (CPP).
• Market Atomicity: A large number of suppliers and buyers exist where no agent can influence price,
• Free market entry and exit for firms. -Product Homogeneity: Price-led purchases.
• Transparency: Access to free, instant, complete information.
• Production Factor Mobility
• CPP also relies on flexibility to change prices.
• CPP is Rare: -Atomicity is not always respected (Market Powers) -Entry/Exit is not always free -Information is often imperfect/Information Asymmetry -Limited agentrationality -Herding behaviors exist (Choices are influenced by others) -Uncertainty -Prices not always flexible
• Imbalance caused the Great Depression during the 1930s.

Keynesian Economics (1883-1946)

• Keynesian economics involves the rise of macroeconomics.
• Market Failures: Imbalances between supply and demand (unemployment, recession) can become long-lasting. State intervention is necessary where imbalances become too great.
• Macroeconomics and Aggregates: Shifts preference to short-term analysis, building the groundwork for macroeconomic analysis.
• What may be true at a microeconomic level may not be as true at a macroeconomic level as results can vary.
• Keynes advocates macroeconomic analysis on the basis of aggregates like production, spending, salaries etc.
• The results of those macroeconomic analyses have an affect on the interactions and the determinants of the society as a whole.
• A dynamic approach is adopted in terms of circuit like: Production -> Distribution -> Spending.
• Increased focus must remain with growing the GDP.
• Effective Demand: Demand is the starting point, creating supply.
• Effective demand determines production volume, investment level, employment.
• No demand = No Growth

Labor Employment

• Markets do not balance quickly under the law of supply and command.
• Wages and prices are not flexible, but viscous.
• Imperfect information causes slower responses.
• Mimetic anticipations cause financial and economic instability.
• Neoclassical economic equilibrium is not always optimal.
• Normal situations allow for underemployment and unused production capacities like used machinery.
• Nash Equilibrium: An impasse that stems from imperfect information.

State Intervention

• State Intervention: Necessary for full employment equilibrium. The State becomes a Welfare State that performs tailored economic policy actions. -Monetary Policy: Action on the interest rate to boost private spending. -Budget Policy: Action on public spending to stimulate a multiplier effect. -Redistribution of income policy: Transferring income to households (propensity to consume) to increase spending.
• Keynesian Policies: Focus on economic policies in post WW2 economic boom.
• Contestation: Focus on crises of the 70s.
• Renaissance: Focus on the liberation and the will to disengage the State after the 80's.
• Crises: The rehabilitation of Keynesian theory after the subprime mortgage crises in 2009.

Current Economic Issues

• Is the capitalist economy nearing exhaustion?
• Ecological crises mark a new form of capitalism crises.
• New emphasis on modes of production, new organizational forms, exchanges and consumption, development, upbringings, and innovation.

Well-Known Keynesian Theorists

• Joseph Stiglitz, George Akerlof, and Michael Spence (Nobel Prize 2001)
• Janet Yellen (FED Director, US Treasury Secretary)
• Olivier Blanchard (former IMF Chief Economist)
• Lawrence Summers (US Treasury Secretary)