Date: Aug 6, 2019
Category: Economics Essay
History of Economic Thought

The economy is the base of any society. Economy occurs with a man; exists with a man, and in the name of a man. Moreover, there are also men of the economy, whose thoughts are the stronghold of the entire history of this science. According to Robert L. Heilbroner (1999), the world-known philosophers and prominent economic thinkers, Adam Smith, David Ricardo, Thomas Malthus, John Stuart Mills, Karl Marx, Thorstein Veblen, John Maynard Keynes, and Joseph Schumpeter, had influenced the course of history by their theories greatly. Their theories and thoughts differed in many respects; nevertheless, they were led by the mutual passion for research and knowledge of human nature to create wealth and then rush for it. Their economic theories, in fact, put the chaotic world into the meaningful structure of regularity and harmony. Thus, gradually, an economist by economists, idea by idea, the science of economics with all its contradictions and commonness was developed.

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Adam Smith was the founder of the entire economic science. Along with his successors, David Ricardo and John Stuart Mill, he developed the classical political economy. Together with Thomas Malthus, he represented the first modern school of economic thought, classical economics. It was developed in the period when capitalism was developing from feudalism and the great changes in society were to come. In the revolutionary book An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Smith allocates the central problematic issue of the economic development of society and its well-being. The economist primarily investigates the reasons for the growth of the nation's wealth, the role of labor in the process, and the factors of the productivity increase. According to Smith’s ideas, a wealth of the nation consists of the productive capacity and depends on such factors as the division of labor and accumulation of capital that it makes possible. His work is considered the cornerstone of capitalism, namely the idea that the country’s future income depends on this capital accumulation. The more people invest in better production processes, the more wealth will be created in the future. According to Smith, the principle of complete laissez-faire country is a condition of wealth. Moreover, Smith is famous for the well-known "invisible hand of the market." Under the "invisible hand, » Smith explained a strange paradox: when acting in their own interests, each person not only gets richer by him/herself but also multiplies the wealth of society. Thus, he proposed the concept of an "economic man,” driven by selfishness and greed. One more popular Smith’s novelty is Smith's dogma. In the very heart of this dogma, there is a value determined by the income sources: wages, profit, or rent. In general, Smith’s ideas were the symbol of free-market economics and that was one of his main destinations.

David Ricardo became interested in the economy after reading Smith’s works. He studied the economy as a complex system, in which the economic laws work as a mechanism to ensure these laws exist. Ricardo outlined his views on the Principles of Political Economy and Taxation (1817), in the preface to which he wrote that the main task of political economy was to determine the laws that governed the distribution of the created product. The economist fully shared the stand of Adam Smith against the national economies. Nevertheless, Ricardo developed the labor theory of value more consistently than Smith did. On its basis, he also created the theory of rent. He considered labor a source of rent while Smith believed that the rent was a special gift of nature. Ricardo also thought that the wages are withheld in the stringent subsistence limits by the natural law of population. This law is called the "iron law" of wages. Being the architects of the classic economic thought, Smith and Ricardo still disagreed on some issues. Smith, as a natural harmony believer, is a representative of the optimal position while Ricardo is a representative of the pessimistic one. The most vivid differences in the economists’ thoughts consider their views on the prospect of economic growth and capital accumulation.

Smith’s disciple in a number of questions about the classical school, and the author of An Essay on the Principle of Population in Connection with the Future Improvement of Society (1815), Thomas Malthus was an ardent opponent of Ricardo. Both Ricardo and Malthus being good friends in life were rather opponents in the understanding of economics. Malthus stated that Ricardo was wrong, and Smith was right speaking about the law of increasing cost production. In general, Malthus’ ideas were contrary to the rent concept of Ricardo. Malthus suggested that the rent was a kind of economic surplus. He particularly struck Ricardo for his thesis about the opposition of wages and profits. If to speak about his main work about population, Malthus concluded that all the calamities of the people were associated with the laws of nature, in particular, with the economic concept of a general glut. By virtue of this concept, according to Malthus, the population is too large as compared to the necessary means of its subsistence. In the end, the Malthusian catastrophe is inevitable, because the unabated population is exponential while the growth of the food supply is expected to be arithmetical.

John Stuart Mill helped develop the ideas of economies of scale, opportunity cost, and comparative advantage in trade. In theoretical and methodological terms, he is largely close to his idol David Ricardo. His best work Principles of Political Economy and Some Aspects of Their Applications to Social Philosophy (1909) were presented by Mill as logical conclusions from the teaching of Ricardo. Nevertheless, his work demonstrated the creative achievements of the economist and became a textbook for several generations of economists in Europe. Mill’s approach to economics is based on his belief in the superiority of socialism. Therefore, his main task was to find the practical resolution of these contradictions, to show that a capitalist society can be not so cruel to the working class Mill presented his ideal of the capitalist society, which, according to his calculations, could provide a universal human good. His work, focusing on the justification of this unattainable ideal, marked the beginning of the bourgeois liberalism.

The ideas of Adam Smith recognized as great but not corresponding to the realities of today's world. Meanwhile, the theories of another outstanding economist, Karl Marx, are still the subject of heated debate, although his main economic writings were created over 100 years ago. The principal difference between Marx's economic theory and the preceding ones are primarily in the fact that the capitalist system is considered from the class position of the proletariat. Marx came to the conclusion that this system was neither "eternal,” nor "natural," and "responding to human nature." On the contrary, he believed that capitalism would be eventually replaced by another revolutionary social system with no private property, human exploitation, inequality, and poverty of the masses. Marx deduced his negation of capitalism, not from the moral indignation, outrage, and protest, which undoubtedly were evoked by the capitalist society. He argued that capitalism would die due to the internal objective contradictions that cannot be solved without changing the economic and social system as a whole. Marx devoted all his popular works to the justification of these fundamental positions. The famous economic work Capital (1867) reflects his view of the economic order at the best. Marx believed that the value of any commodity was determined by the labor expensed on it. The capitalist can make a profit only if the price of the goods exceeds the cost of production, which is achieved only by the exploitation of workers. This, eventually, leads to a full impoverishment of the proletariat. Marx's thesis is the exact opposite of the theory of Adam Smith, who believed that if society enriched, the proletariat also enriched.

Thorstein Veblen is an American economist and founder of institutional trends in political economy. Veblen opposed the Adam Smith concept of "economic man," which was widely accepted in the economic circles. The economist stated that a person should not be treated like a mechanical bull, a kind of "calculator of pleasures and hardships." Veblen believed that, in a market economy, consumers were exposed to all types of social and psychological pressure, forcing them to make unwise decisions. Thanks to the economic theory of Veblen, the economic theory was enriched with the concept of "conspicuous consumption," called the "effect (paradox) of Veblen." In his Theory of the Leisure Class (1899), Veblen shows that "conspicuous leisure" and "ostentatious extravagance" are not only leisure class attitudes. The middle strata, different groups of people are seeking to emulate the apical segments, legislators’ of money living standards "of society. Veblen concludes that the capitalist society is not a unique balance but a tough competition. Life in this society is a true struggle for existence.

John Maynard Keynes was the founder of the Keynesian economic theory. Developed under the influence of the ideas of John Maynard Keynes, it later became known as Keynesianism. Keynes is the central figure among the economists of the XX century since he has created the foundations of modern macroeconomic theory that can serve as a basis for fiscal and monetary policies. Before Keynes, there was only one economy - a classic one described by Adam Smith. Keynes came up with a new one - the economy of Keynes. The Great Depression showed that Smith’s "invisible hand" did not always cope with the management of the economy and it needed the heavy hand of the state. In difficult times of crisis, the government should spend more to maintain the level of employment. Moreover, Keynes helped create the postwar monetary regime, which was first tied to the gold standard. Now, it is entirely based on the U.S. dollar. Thus, Adam Smith capitalism was transformed into a "mixed economy" of Keynes.

Joseph Schumpeter made history with his theory of "creative destruction," according to which, capitalism was the translational motion, in which everything old was constantly destroyed and substituted with a new one. The epochal work of Schumpeter's Theory of Economic Development was released in 1911. He was arguing with ideas of Keynes. Most of all, he was concerned with the role of the entrepreneur in the process of economic development. Consequently, in the mid-1930s, he became one of the main exponents of neoclassical economic thought. However, he agreed with Keynes that there was a need to take some measures to cope with unprecedented levels of unemployment, which characterized the Depression. He also admitted that political and social instability was caused by this unemployment. However, he rejected the central element of Keynes's theory that, without the intervention of government in a capitalist economy, there would be prolonged periods of mass unemployment and a decline in economic activity. Schumpeter feared that the Keynesianism would replace the normal and healthy functioning of the market state control forever. Ideas, proposed by Schumpeter, have already reached the boundaries of economics.

Thus, since the first economic theory birth until the time of the new economic, the world has faced a lot of changes. Adam Smith brought the classical theory of economics, the idea of capitalism, which passed through the stages of acceptance, critics, and revising. Nevertheless, it still stays the stronghold of the history of economic studies. The great economist one by one being the heroes of their times tried to understand the truth of the world order, economic system, and society. The most crucial economic theories were born under their diligence and knowledge. Marx stirred up the world with his Capital and idea of socialism, and Keynes has literally changed the classic economic theories in practice. There are new challenges for the globalizing world today. The economics still waits for the new philosophers and economists to come.