1.6 - Economic Thought
Origins and early development of economics
The term "economy" comes from the Greek word "oikonomia", which combines "oikos" meaning household and "nemein" meaning management or dispensation. Economics emerged as an independent field of study in the late 17th and early 18th centuries.
Key economic ideas in the 18th century
During the 18th century, economic thought began to emphasise individual behaviour and the role of markets. This period laid the groundwork for understanding how self-interest drives economic activity and how markets can organise society.
Adam Smith (1723-1790)
Adam Smith is often seen as a foundational figure in economics. In his 1776 book "The Wealth of Nations", he described individual economic behaviour as motivated by self-interest and the pursuit of personal gain.
Key contributions:
- Invisible hand - Smith introduced the idea of the "invisible hand", where individual decisions in a market lead to organised and beneficial outcomes for society as a whole, without central planning.
- Laissez-faire approach - He argued that markets should function with minimal interference, allowing free operation to achieve the best results.
- Role of government - While supporting free markets, Smith recognised that governments must provide essential conditions, such as legal frameworks and infrastructure, for markets to work effectively.
Developments and thinkers in the 19th century
The 19th century was dominated by classical economists who explored production, consumption, and the dynamics between different economic factors. The focus shifted from early emphasis on supply and wages to include consumer behaviour and utility.
Key classical economists and their ideas
| Economist | Key contribution | The idea |
|---|---|---|
| Alfred Marshall (1842-1924) | The demand and supply framework | Price-quantity diagrams show equilibrium, where demand and supply intersect and the market clears; the two are often compared to the blades of a pair of scissors, both of which are essential |
| William Stanley Jevons (1835-1882) | The "marginal revolution" | Total utility is the overall satisfaction from a good, while marginal utility is the additional satisfaction from one more unit; marginal utility was thought to diminish as the quantity consumed rises |
| Jean-Baptiste Say (1767-1832) | Say's Law | Supply creates its own demand: production generates the income needed to buy goods, so wealth comes from producing rather than just consuming |
| Karl Marx (1818-1883) | The conflict between labour and capital | "Das Kapital" (1867) argued that tensions between labour and capital would bring about the collapse of capitalist systems; the work also inspired movements for radical economic and political change |
Shifts in focus during the century
Early in the 19th century, economists concentrated on production processes, supply-side factors, and the links between wages and profits. By the later part, attention turned more to consumption, with the introduction of utility as a way to measure value based on satisfaction.
Economic theories in the 20th century
The 20th century saw major shifts in economic thinking, influenced by global events like depressions and crises. Ideas moved between government intervention and free-market approaches, with key debates on how economies achieve stability.
John Maynard Keynes (1883-1946)
John Maynard Keynes published "The General Theory" in 1936, challenging classical views by arguing that effective demand (total spending in the economy) determines output levels.
Milton Friedman and monetarism (1912-2006)
Milton Friedman was the best-known advocate of monetarism, the counter-revolution that emerged at the University of Chicago in the 1970s in opposition to the Keynesian policy proposals.
Keynesian and monetarist views compared
| Feature | Keynesian economics | Monetarism |
|---|---|---|
| View of the market | Market economies do not automatically return to full employment, so they need government action | Free markets should be left to work, because government creates more problems than it solves; hence the case for deregulation |
| Main policy tool | Fiscal policy - adjusting taxes and government spending to stimulate demand | Control of the money supply, to manage inflation and keep the economy stable |
| When it was influential | Prominent until the mid-1970s, then regained attention during the 2008-09 financial crisis and the 2020 Covid-19 pandemic | Spread widely in the early 1980s and had a strong influence on policy-making in that decade |
A compromise position emerged from the debate: the Keynesian framework is taken to apply in the short run, where policy can give demand a quick adjustment, while the monetarist framework applies in the long run.
Modern approaches in the 21st century
Economic thought in the 21st century has expanded to include human behaviour and environmental concerns, moving beyond traditional models to address real-world complexities and sustainability.
Behavioural economics
This approach examines how psychological, cognitive, emotional, cultural, and social factors affect economic decisions. It builds on standard economics by incorporating elements like happiness, satisfaction, and cooperative behaviours for a more realistic view of how people make choices.
Sustainability and the circular economy
Sustainability highlights the connections between the economy, society, and the environment, promoting practices that support long-term viability.
Circular economy principles:
- This model designs products for reuse in biological (natural decomposition) or technical (recycling) cycles, with goods made for easy disassembly.
- Aim to eliminate waste, minimise purchases of new raw materials, and rely on renewable energy for production and transport.