New Ideas from Dead Economists
Karl Marx
Born in 1818, Karl Marx mixed with the upper and middle classes of Trier, Germany. After earning his diploma, Marx entered journalism, writing for and later editing the Rheinische Zeitung, a liberal middle-class newspaper. However, Marx was forced to resign because the repressive Prussian government did not like Marx's reckless writing. In 1843, Marx moved to Paris and began to edit a new political review and to become interested in communism. Marx believed that the foundations of capitalism were crumbling, and that the masses would soon erupt in revolution. According to Marx's Communist Manifesto, the "history of all hitherto existing societies is the history of class struggle." In addition, Marx believed that rebellion takes place when technology of the productive process changes and the old ruling class tries to hold onto the old ideas and block new economic developments (see the God/flood story). Because capitalism rested on a class system, revolution and victory for the workers was inevitable, according to Marx. Furthermore, he believed that capitalism was a necessary precondition for socialism. Another key idea of Marx was that bosses dominate the labor market by controlling the means of production. By controlling the means of production, bosses can exploit the workers in order to make a profit. The five steps that lead to an economic implosion are (1) falling profit rates and accumulation of capital; (2) increased concentration of economic power; (3) deepening crises and depressions; (4) presence of an industrial reserve army; and (5) increasing misery of the proletariat. However, one problem with Marxism is that Karl Marx did not give any instructions for how his plan would actually be implemented. Also, critics of Marx point out that he ignored the value to society of risk-taking, and that, by assuming the labor theory of value, he overlooked many dynamic factors. In short, Marx's predictions were not completely accurate.
David Ricardo
David Ricardo debuted as an economics writer in 1809 with newspaper articles and pamphlets on currency and inflation. Ricardo tried to argue one of the most complex and counterintuitive principles of economics: Ricardo's Law of Comparative Advantage. In short, Ricardo showed that people and countries should specialize in whatever leads them to give up the least. This is their "comparative advantage," and the sacrifice they make by not producing a good is their "opportunity cost" (see the Gilligan's Island example). So, specialization is determined by whoever has the lower opportunity cost. The point of Ricardo's analysis is that free trade makes it possible for households to consume more goods regardless of whether trading partners are more or less economically advanced. Therefore, Ricardo believed that protection is almost always bad for an economy as a while, although it is good for a particular group. Furthermore, by allowing trade, nations coerce their citizens to shift resources away from low productivity industries and toward high productivity industries. This allows households to enjoy more goods with less sacrifice. It also follows from Ricardo's analysis that tariffs tend to constrict economic growth; for this reason, the best uses of a protectionist policy would be for national defense purposes or to ensure political stability in uncertain times.
Alfred Marshall
His marginalism is evolution applied to economics: the businessman and the consumer don't make great leaps, but rather step by step try to improve their situation. Furthermore, people, companies, etc. adapt to changing prices. The fittest firms survive and low profits drive out the weakest. Also, Marshall tried to isolate particular tendencies and the time periods in which they operate. For example, in the first time frame, only demand fluctuates. The second time period, or the "short run," lasts long enough for producers to change the amount supplied. Lastly, in the third period, or the "long run," producers have enough time to build new plants, as well as vary labor and materials. Alfred Marshall also devised the ideas of "marginal utility" and the law of demand ("the greater the amount to be sold, the smaller must be the price...the amount demanded increases with a fall in price, and diminishes with a rise in price"). However, prices are determined by the intersection of supply and demand. Finally, elasticity is an idea that refers to how responsive people are to changes in prices. If the price of a product rises and people cut back their purchases, then demand is elastic. If they continue buying the same amount, then demand is inelastic (elasticity is the percentage change in demand divided by the percentage change in price).
Thorstein Veblen
Institutionalists look away from the usual economic categories (rents, profits, income, etc.) and instead focus on society's laws and institutions for insight. The new institutionalists differ from the old institutionalists in their use of mathematical curves and other such tools, which the old institutionalists disliked. One of the greatest old institutionalists was Thorstein Veblen. Veblen's approach attacks Marshall's law of demand (which says that people buy more of a good when the price falls) and the assumption that workers work only because they are paid. One of Veblen's key beliefs was that an individual's judgment of utility depends partly on what his or her neighbors will think of the purchase. In other words, people have an "emulatory instinct." Veblen asserted that for some goods, a consumer's demand is determined not only by the use of the good, but also by the price that the consumer thinks other people will think he paid (this price is the expected conspicuous price). Veblen also discussed the conflict between engineers and businessmen.
John Stuart Mill
Jeremy Bentham argued that since all human beings like pleasure and dislike pain, they will choose to do whatever gives them the most pleasure. In addition, he believed that when choices affect others, individuals should choose the option that maximizes the total pleasure of everyone involved. The specifics of this system are enumerated in the "felicific calculus." John Stuart Mill became a follower of Bentham's ideas and founded the Utilitarian Society. Later in his life, however, Mill attacked Benthamism for impoverishing the spirit. After struggling with rationalism and romanticism, Mill embraced an enlightened utilitarianism, insisting that the greatest happiness depends upon more than mere pleasure: honor, dignity, and self-development are also important, Mill argued. Mill's chief work on economics was Principles of Political Economy, published in 1848. Mill favored a proportional income tax, a high inheritance tax, a tax on "riotous parties and luxuries flaunted for status" (109), and aid to the handicapped. He also proposed that recipients exchange labor for welfare payments.
John Kenneth Galbraith
John Kenneth Gailbraith argued that advertisers create artificial desires in the hearts of consumers. He called this the dependence effect. However, Friedrich von Hayek suggested that environmental influences should not negate the importance of desires.
John Maynard Keynes
Maynard Keynes was born in 1883 into a Puritanical Victorian home. Keynes believed that patience alone was not good enough for economic recovery. Keynes also attacked Say's Law, which states that producing goods generates enough income to workers and suppliers for all the goods to be purchased. There are two classical economic ideas that Keynes disputed. First, he denied an automatic link between savings and investment. Furthermore, he did not believe in fluid, flexible wages and prices. In short, Keynes's view was that "depressions occur when total demand for goods and services is less than total income." If people do not purchase enough, merchants will fire workers and slash output. So, to have a healthy economy with full employment, households must consume enough and businesses must invest enough that sales of goods equal the amount produced. Keynes also developed the idea of a "multiplier." The Keynesian multiplier is the degree to which a change in spending becomes even greater than the initial change. Lastly, Keynes believed that mathematical precision in economics is a mistake.
Milton Friedman
Monetarist; the national economy is an automobile, and the accelerator should be marked "higher money supply" and the brake marked "lower money supply." An important term to understand is the "velocity" of money: the rate at which it turns over each year. Monetarists believe that velocity is stable, while Keynesians assert that it is unstable. In addition to constant velocity, the principle components of monetarism are that the amount of goods and services that can be produced is fixed in the short run, and, therefore, if the money supply is increased by some percentage, prices will rise by the same percent. Basically, monetarists believe i the importance of money, Keynesians do not, and monetarists do not see importance in government spending.
Adam Smith
The Wealth of Nations - Published in 1776. In this book, Smith argues that all humans want to live better than they do, and that society should exploit this natural drive in order to increase the wealth of nations. In other words, Smith believed that altruism alone is not enough to improve society and that self-interest is necessary. In addition, the "invisible hand" represents the free market, by which people take scarce resources and make them into something more valuable according to society's tastes. Adam Smith also argued that division of labor will greatly increase output. Lastly, Adam Smith supported free trade.
Thomas Malthus
Thomas Malthus was born in 1766 and can be considered the first professional economist. Malthus resisted the vision of Utopia and the ideas of people such as William Godwin, who argued that an increasing population was a good thing, as it meant more total happiness. In contrast to these ideas, Malthus controversially argued that the human population would increase at a very rapid pace, while food supplies would grow much more slowly, causing society to decay. Malthus also described "positive" and "preventative" checks. Positive checks are things such as war, famine, and plagues that raise the death rate. Preventative checks are conditions that lower the birthrate. Looking back on Malthus's predictions, it seems clear that they were not very accurate. One reason for this is that Malthus made some obvious mistakes in his research. For instance, when examining population data for the U.S., he didn't distinguish immigrants from natural-born Americans. Furthermore, Malthus didn't consider advances in medicine, an agricultural revolution, and the start of an industrial revolution, all of which would have influenced his predictions.
