Joseph A. Schumpeter: Historian of Economics: Perspectives on the History of Economic Thought - Kindle edition by Laurence S. Moss. Download it once and.
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However, the Schumpeters persevered, and in published what became the most popular of all his works, Capitalism, Socialism and Democracy , reprinted many times and in many languages in the following decades, as well as cited thousands of times. The source of Joseph Schumpeter's dynamic, change-oriented, and innovation-based economics was the Historical School of economics. Although his writings could be critical of the School, Schumpeter's work on the role of innovation and entrepreneurship can be seen as a continuation of ideas originated by the Historical School, especially the work of Gustav von Schmoller and Werner Sombart.
According to Christopher Freeman , a scholar who devoted much time researching Schumpeter's work: Schumpeter's scholarship is apparent in his posthumous History of Economic Analysis , [23] although some of his judgments seem idiosyncratic and sometimes cavalier. Then they could argue that one caused the other in a simple monotonic fashion. This led to the belief that one could easily deduce policy conclusions directly from a highly abstract theoretical model.
In this book, Joseph Schumpeter recognized the implication of a gold monetary standard compared to a fiat monetary standard. In History of Economic Analysis , Schumpeter stated the following: It links every nation's money rates and price levels with the money-rates and price levels of all the other nations that are 'on gold. This is the reason why gold is so unpopular now and also why it was so popular in a bourgeois era. Schumpeter's relationships with the ideas of other economists were quite complex in his most important contributions to economic analysis — the theory of business cycles and development.
Following neither Walras nor Keynes, Schumpeter starts in The Theory of Economic Development [26] with a treatise of circular flow which, excluding any innovations and innovative activities, leads to a stationary state. The stationary state is, according to Schumpeter, described by Walrasian equilibrium. The hero of his story is the entrepreneur. The entrepreneur disturbs this equilibrium and is the prime cause of economic development, which proceeds in cyclic fashion along several time scales.
In fashioning this theory connecting innovations, cycles, and development, Schumpeter kept alive the Russian Nikolai Kondratiev 's ideas on year cycles, Kondratiev waves. Schumpeter suggested a model in which the four main cycles, Kondratiev 54 years , Kuznets 18 years , Juglar 9 years and Kitchin about 4 years can be added together to form a composite waveform. Actually there was considerable professional rivalry between Schumpeter and Kuznets. The wave form suggested here did not include the Kuznets Cycle simply because Schumpeter did not recognize it as a valid cycle.
A Kondratiev wave could consist of three lower degree Kuznets waves. Similarly two or three Kitchin waves could form a higher degree Juglar wave. If each of these were in phase, more importantly if the downward arc of each was simultaneous so that the nadir of each was coincident, it would explain disastrous slumps and consequent depressions.
As far as the segmentation of the Kondratiev Wave, Schumpeter never proposed such a fixed model. He saw these cycles varying in time — although in a tight time frame by coincidence — and for each to serve a specific purpose. In Schumpeter's theory, Walrasian equilibrium is not adequate to capture the key mechanisms of economic development. Schumpeter also thought that the institution enabling the entrepreneur to buy the resources needed to realize his vision was a well-developed capitalist financial system, including a whole range of institutions for granting credit.
One could divide economists among 1 those who emphasized "real" analysis and regarded money as merely a "veil" and 2 those who thought monetary institutions are important and money could be a separate driving force. Both Schumpeter and Keynes were among the latter. Schumpeter's most popular book in English is probably Capitalism, Socialism and Democracy.
While he agrees with Karl Marx that capitalism will collapse and be replaced by socialism , Schumpeter predicts a different way this will come about. While Marx predicted that capitalism would be overthrown by a violent proletarian revolution, which actually occurred in the least capitalist countries, Schumpeter believed that capitalism would gradually weaken by itself and eventually collapse. Specifically, the success of capitalism would lead to corporatism and to values hostile to capitalism, especially among intellectuals.
Intellectuals tend to have a negative outlook of capitalism, even while relying on it for prestige, because their professions rely on antagonism toward it. The growing number of people with higher education is a great advantage of capitalism, according to Schumpeter. Yet, unemployment and a lack of fulfilling work will cause intellectual critique, discontent and protests. Parliaments will increasingly elect social democratic parties, and democratic majorities will vote for restrictions on entrepreneurship.
Increasing workers' self-management , industrial democracy and regulatory institutions would evolve non-politically into "liberal capitalism". Thus, the intellectual and social climate needed for thriving entrepreneurship will be replaced by some form of "laborism". This will exacerbate " creative destruction " a borrowed phrase to denote an endogenous replacement of old ways of doing things by new ways , which will ultimately undermine and destroy the capitalist structure.
Schumpeter emphasizes throughout this book that he is analyzing trends, not engaging in political advocacy. In the same book, Schumpeter expounded a theory of democracy which sought to challenge what he called the "classical doctrine". He disputed the idea that democracy was a process by which the electorate identified the common good, and politicians carried this out for them.
He argued this was unrealistic, and that people's ignorance and superficiality meant that in fact they were largely manipulated by politicians, who set the agenda. Furthermore, he claimed that even if the common good was possible to find, it would still not make clear the means needed to reach its end, since citizens do not have the requisite knowledge to design government policy.
Instead he advocated a minimalist model, much influenced by Max Weber , whereby democracy is the mechanism for competition between leaders, much like a market structure. Although periodic votes by the general public legitimize governments and keep them accountable, the policy program is very much seen as their own and not that of the people, and the participatory role for individuals is usually severely limited. Schumpeter was probably the first scholar to theorize about entrepreneurship , and the field owed much to his contributions.
In Mark I, Schumpeter argued that the innovation and technological change of a nation come from the entrepreneurs, or wild spirits. He coined the word Unternehmergeist , German for "entrepreneur-spirit", and asserted that " Schumpeter developed Mark II while a professor at Harvard. Many social economists and popular authors of the day argued that large businesses had a negative effect on the standard of living of ordinary people. Contrary to this prevailing opinion, Schumpeter argued that the agents that drive innovation and the economy are large companies which have the capital to invest in research and development of new products and services and to deliver them to customers more cheaply, thus raising their standard of living.
In one of his seminal works, Capitalism, Socialism and Democracy , Schumpeter wrote:. As soon as we go into details and inquire into the individual items in which progress was most conspicuous, the trail leads not to the doors of those firms that work under conditions of comparatively free competition but precisely to the door of the large concerns — which, as in the case of agricultural machinery, also account for much of the progress in the competitive sector — and a shocking suspicion dawns upon us that big business may have had more to do with creating that standard of life than with keeping it down.
Schumpeter was the most influential thinker to argue that long cycles are caused by innovation, and are an incident of it. His treatise on business cycles developed were based on Kondratiev's ideas which attributed the causes very differently. Schumpeter's treatise brought Kondratiev's ideas to the attention of English-speaking economists.
Kondratiev fused important elements that Schumpeter missed. Yet, the Schumpeterian variant of long-cycles hypothesis, stressing the initiating role of innovations, commands the widest attention today. Fluctuations in innovation cause fluctuation in investment and those cause cycles in economic growth. Schumpeter sees innovations as clustering around certain points in time periods that he refers to as "neighborhoods of equilibrium", when entrepreneurs perceive that risk and returns warrant innovative commitments.
These clusters lead to long cycles by generating periods of acceleration in aggregate growth. The technological view of change needs to demonstrate that changes in the rate of innovation governs changes in the rate of new investments, and that the combined impact of innovation clusters takes the form of fluctuation in aggregate output or employment. The process of technological innovation involves extremely complex relations among a set of key variables: The impact of technological innovation on aggregate output is mediated through a succession of relationships that have yet to be explored systematically in the context of long wave.
New inventions are typically primitive, their performance is usually poorer than existing technologies and the cost of their production is high. A production technology may not yet exist, as is often the case in major chemical inventions, pharmaceutical inventions. The speed with which inventions are transformed into innovations and diffused depends on actual and expected trajectory of performance improvement and cost reduction.
Schumpeter identified innovation as the critical dimension of economic change. He sought to prove that innovation-originated market power can provide better results than the invisible hand and price competition. He argued that technological innovation often creates temporary monopolies, allowing abnormal profits that would soon be competed away by rivals and imitators.
These temporary monopolies were necessary to provide the incentive for firms to develop new products and processes. He was married three times. His best man at his wedding was his friend and Austrian jurist Hans Kelsen. His second was Anna Reisinger, 20 years his junior and daughter of the concierge of the apartment where he grew up. As a divorced man, he and his bride converted to Lutheranism in order to marry. The loss of his wife and newborn son came only weeks after Schumpeter's mother had died. In , Schumpeter married the American economic historian Elizabeth Boody, who helped him popularize his work and edited what became their magnum opus, the posthumously published History of Economic Analysis.
Schumpeter died in his home in Taconic , Connecticut, at the age of 66, on the night of 7 January For some time after his death, Schumpeter's views were most influential among various heterodox economists , especially European, who were interested in industrial organization, evolutionary theory , and economic development, and who tended to be on the other end of the political spectrum from Schumpeter and were also often influenced by Keynes, Karl Marx, and Thorstein Veblen.
Robert Heilbroner was one of Schumpeter's most renowned pupils, who wrote extensively about him in The Worldly Philosophers. In the natural world there are trees, diamonds , iron ore and people. In the economic world they become chairs, rings , factories and workers. However, says Marx, commodities have a dual nature, a dual value. He distinguishes the use value of a thing from its exchange value , which can be entirely different.
If commodities are considered absolutely isolated from their useful qualities the common property is human labor in the abstract. In this sense, value is human labor and is the most abstract and common property embodied in commodities. This follows the classical economists in the labor theory of value. He believed value can derive too from natural goods and refined his definition of value to " socially necessary labor time ", by which he meant the time people need to produce things when they are not lazy or inefficient.
These two factors mean exchange values differ greatly. The difference makes up the capitalist's profit , or in Marx's terminology, " surplus value ". Marx's work turned the labor theory of value , as the classicists called it, on its head. His dark irony goes deeper by asking what is the socially necessary labor time for the production of labor i.
Marx answers that this is the bare minimum for people to subsist and to reproduce with skills necessary in the economy. People are therefore alienated from both the fruits of production and the means to realize their potential, psychologically, by their oppressed position in the labor market. But the tale told alongside exploitation and alienation is one of capital accumulation and economic growth.
Employers are constantly under pressure from market competition to drive their workers harder, and at the limits invest in labor-displacing technology, by replacing an assembly line packer, for example. This increases profits and expands growth, but for the sole benefit of those who have private property in these means of production.
The working classes meanwhile face progressive immiseration, having had the product of their labor exploited from them, having been alienated from the tools of production. And having been fired from their jobs and replaced by machines, they end up unemployed. Marx believed that a reserve army of the unemployed would grow and grow, fueling a downward pressure on wages as desperate people accepted work for less.
But this would produce a deficit of demand as the people's power to purchase products lagged. A glut of unsold products would result, production would be cut back, and profits decline until capital accumulation halted in an economic depression. When the glut cleared, the economy would again start to boom before the next cyclical bust begins.
With every boom and bust , with every capitalist crisis, thought Marx, tension and conflict between the increasingly polarized classes of capitalists and workers would heighten. Moreover, smaller firms are being gobbled by larger ones in every business cycle, as power is concentrated in the hands of the few and away from the many. Ultimately, led by the Communist party , Marx envisaged a revolution and the creation of a classless society. How this society might work, Marx never suggested. His primary contribution was not a blueprint for what a new society would be, but a criticism of the one he saw.
The first volume of Das Kapital was the only one Marx alone published. The second and third volumes were produced with the help of Friedrich Engels ; Karl Kautsky , who had become a friend of Engels, saw through the publication of volume four. Published as the three volume 'Theories of Surplus Value'. Marx began a tradition of economists who became political activists, including Rosa Luxemburg — , a member of the Social Democratic Party of Germany who later turned towards the Communist Party of Germany because of their stance against the First World War, and Beatrice Webb — of England, a socialist who helped found both the London School of Economics LSE and the Fabian Society and the principal re-articulator of his Crisis theory Henryk Grossman — Allen — popularized the use of mathematics in economics.
History of economic thought - Wikipedia
Neoclassical economics developed in the s. There were three main independent schools. The Cambridge School was founded with the publication of Jevons' Theory of Political Economy , developing theories of partial equilibrium and focusing on market failures. It was founded with the publication of Menger's Principles of Economics. It was founded with the publication of Walras' Elements of Pure Economics. American economist John Bates Clark — promoted the marginalist revolution , publishing The Distribution of Wealth , which proposed Clark's Law of Capitalism: In Menger's English counterpart Stanley Jevons — independently published Theory of Political Economy , stating that at the margin the satisfaction of goods and services decreases.
An example of the Theory of Diminishing Marginal Utility is that for every orange one eats, one gets less pleasure until one stops eating oranges completely. Alfred Marshall — is also credited with an attempt to put economics on a more mathematical footing. The first professor of economics at the University of Cambridge , his work Principles of Economics [58] abandoned the term " political economy " for his favorite " economics ".
He viewed math as a way to simplify economic reasoning, although he had reservations as revealed in a letter to his student Arthur Cecil Pigou: This I do often. Small changes in people's preferences, for instance shifting from beef to mushrooms, would lead to a mushroom price rise, and beef price fall; this stimulates producers to shift production, increasing mushrooming investment, which would increase market supply and a new price equilibrium between the products, e.
For many products across the economy the same would happen if one assumes markets are competitive, people choose on the basis of self-interest, and there's no cost for shifting production. This group became known as the Austrian School of Economics , reflecting the Austrian origin of many of the early adherents.
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Thorstein Veblen in The Preconceptions of Economic Science contrasted neoclassical marginalists in the tradition of Alfred Marshall with the philosophies of the Austrian School. Consumers act rationally by seeking to maximize satisfaction of all their preferences; people allocate their spending so that the last unit of a commodity bought creates no more satisfaction than a last unit bought of something else. An Essay on the Application of Mathematics to the Moral Sciences , which introduced indifference curves and the generalized utility function, along with Edgeworth's Limit Theorem , extending the Bertrand Model to handle capacity constraints, and proposing Edgeworth's Paradox for when there is no limit to what the firms can sell.
Ludwig von Mises 's outspoken criticisms of socialism had a large influence on the economic thinking of Austrian School economist Friedrich Hayek — , who, while initially sympathetic, became one of the leading academic critics of collectivism in the 20th century. But he argued that centralizing economic decision-making would lead not only to infringements of liberty but also to depressed standards of living because centralized experts could not gather and assess the knowledge required to allocate scarce resources efficiently or productively.
In his book, The Road to Serfdom and in subsequent works, Hayek claimed that socialism required central economic planning and that such planning in turn would lead towards totalitarianism. Hayek attributed the birth of civilization to private property in his book The Fatal Conceit According to him, price signals are the only means of enabling each economic decision maker to communicate tacit knowledge or dispersed knowledge to each other, to solve the economic calculation problem.
In the early 19th century German-born English astronomer Sir William Herschel — noted a connection between year sunspot cycles and wheat prices. In the Soviet economist Nikolai Kondratiev — proposed the existence of Kondratiev waves in Western capitalist economies fifty to sixty years long. In the mids German economist Wilhelm Roscher — founded the German historical school of economics , which promoted the cyclical theory of nations—economies passing through youth, manhood, and senility—and spread through academia in Britain and the U.
Thorstein Veblen — , who came from rural midwestern America and worked at the University of Chicago is one of the best-known early critics of the "American Way". In The Theory of the Leisure Class he scorned materialistic culture and wealthy people who conspicuously consumed their riches as a way of demonstrating success. In The Theory of Business Enterprise Veblen distinguished production for people to use things and production for pure profit, arguing that the former is often hindered because businesses pursue the latter. Output and technological advance are restricted by business practices and the creation of monopolies.
Businesses protect their existing capital investments and employ excessive credit, leading to depressions and increasing military expenditure and war through business control of political power. These two books, focusing on criticism of consumerism and profiteering did not advocate change. However, in he moved to New York to begin work as an editor of a magazine called The Dial , and then in , along with Charles A.
From through Veblen continued to write and to be involved in various activities at The New School. During this period he wrote The Engineers and the Price System The 20th century's initial climate of optimism was soon violently dismembered in the trenches of the Western Front. During the war, production in Britain, Germany, and France was switched to the military. In Russia crumbled into revolution led by Vladimir Lenin and who promoted Marxist theory and collectivized the means of production. Also in the United States of America entered the war Allies France and Britain , with President Woodrow Wilson claiming to be "making the world safe for democracy", devising a peace plan of Fourteen Points.
In Germany launched a spring offensive which failed, and as the allies counterattacked and more millions were slaughtered, Germany slid into the German Revolution , its interim government suing for peace on the basis of Wilson's Fourteen Points. After the war, Europe lay in ruins, financially, physically, psychologically, and its future was dependent on the dictates of the Versailles Conference in During this time institutional economists had been largely critical of the "American Way" of life, especially the conspicuous consumption of the Roaring Twenties before the Wall Street Crash of The most important development in economic thought during the Great Depression was the Keynesian revolution , including the publication in of The General Theory of Employment, Interest, and Money by John Maynard Keynes.
See the discussion of Keynesianism below. Subsequently, a more orthodox body of thought took root, reacting against the lucid debating style of Keynes, and remathematizing the profession. The orthodox center was also challenged by a more radical group of scholars based at the University of Chicago, who advocated "liberty" and "freedom", looking back to 19th century-style non-interventionist governments.
In Russian-American economist Wassily Leontief — proposed the Input-Output Model of economics, which uses linear algebra and is ideally suited to computers, receiving the Nobel Economics Prize. In — as John Tukey of Princeton University was developing the revolutionary Fast Fourier Transform , which greatly speeded up the calculation of Fourier Transforms, his British assistant Sir Clive Granger — pioneered the use of Fourier Transforms in economics, receiving the Nobel Economics Prize. Ragnar Frisch's assistant Trygve Haavelmo — received the Nobel Economics Prize for clarifying the probability foundations of econometrics and for analysis of simultaneous economic structures.
The Great Depression was a time of significant upheaval in the world economy. One of the most original contributions to understanding what went wrong came from Harvard University lawyer Adolf Berle — , who like John Maynard Keynes had resigned from his diplomatic job at the Paris Peace Conference, and was deeply disillusioned by the Versailles Treaty. In his book with American economist Gardiner C. Means — The Modern Corporation and Private Property he detailed the evolution in the contemporary economy of big business, and argued that those who controlled big firms should be better held to account.
Directors of companies are held to account to the shareholders of companies, or not, by the rules found in company law statutes.
This might include rights to elect and fire the management, require for regular general meetings, accounting standards, and so on. In s America the typical company laws e. Berle argued that the unaccountable directors of companies were therefore apt to funnel the fruits of enterprise profits into their own pockets, as well as manage in their own interests. The ability to do this was supported by the fact that the majority of shareholders in big public companies were single individuals, with scant means of communication, in short, divided and conquered.
In Berle and Means issued a revised edition of their work, in which the preface added a new dimension. It was not only the separation of controllers of companies from the owners as shareholders at stake. They posed the question of what the corporate structure was really meant to achieve:. They are beneficiaries by position only. Justification for their inheritance Its force exists only in direct ratio to the number of individuals who hold such wealth.
Justification for the stockholder's existence thus depends on increasing distribution within the American population. Ideally the stockholder's position will be impregnable only when every American family has its fragment of that position and of the wealth by which the opportunity to develop individuality becomes fully actualized.
Together they founded Industrial Organization Economics. Chamberlin also founded Experimental Economics. In Russian economist Leonid Kantorovich — developed Linear Programming for the optimal allocation of resources, receiving the Nobel Economics Prize. By the twentieth century, the industrial revolution had led to an exponential increase in the human consumption of resources.
The increase in health, wealth and population was perceived as a simple path of progress. However, in the s economists began developing models of non-renewable resource management see Hotelling's rule and the sustainability of welfare in an economy that uses non-renewable resources. Concerns about the environmental and social impacts of industry had been expressed by some Enlightenment political economists and in the Romantic movement of the s. Overpopulation had been discussed in an essay by Thomas Malthus see Malthusian catastrophe , while John Stuart Mill foresaw the desirability of a stationary state economy , thus anticipating concerns of the modern discipline of ecological economics.
Ecological economics was founded in the works of Kenneth E. The disciplinary field of ecological economics also bears some similarity to the topic of green economics. According to ecological economist Malte Faber, ecological economics is defined by its focus on nature, justice, and time. Issues of intergenerational equity , irreversibility of environmental change , uncertainty of long-term outcomes, thermodynamics limits to growth, and sustainable development guide ecological economic analysis and valuation. Energy accounting was proposed in the early s as a scientific alternative to a price system , or money method of regulating society.
Falling EROEI due to depletion of non-renewable resources also poses a difficult challenge for industrial economies. Sustainability becomes an issue as survival is threatened due to climate change. In Yale economist Walton H. Hamilton coined the term " Institutional economics ". In John R. Commons — , another economist from midwestern America published Institutional Economics , based on the concept that the economy is a web of relationships between people with diverging interests, including monopolies, large corporations, labor disputes, and fluctuating business cycles. They do however have an interest in resolving these disputes.
Government, thought Commons, ought to be the mediator between the conflicting groups. Commons himself devoted much of his time to advisory and mediation work on government boards and industrial commissions. In Alfred Marshall's student Arthur Cecil Pigou — published Wealth and Welfare , which insisted on the possibility of market failures , claiming that markets are inefficient in the case of economic externalities , and the state must interfere to prevent them.
However, Pigou retained free market beliefs, and in , in the face of the economic crisis, he explained in The Theory of Unemployment that the excessive intervention of the state in the labor market was the real cause of massive unemployment because the governments had established a minimal wage, which prevented wages from adjusting automatically. This was to be the focus of attack from Keynes. In Pigou published the paper The Classical Stationary State , which popularized the Pigou Real Balance Effect , the stimulation of output and employment during deflation by increasing consumption due to a rise in wealth.
In response to the Economic Calculation Problem proposed by the Austrian School of Economics that disputes the efficiency of a state-run economy, the theory of Market Socialism was developed in the late s and s by economists Fred M. Taylor — , Oskar R. Lange — , Abba Lerner — et al.
In Ohlin and Heckscher proposed the Heckscher-Ohlin Model of International Trade , which claims that countries will export products that use their abundant and cheap factors of production and import products that use their scarce factors of production. In Ohlin was awarded a share of the Nobel Economics Prize.
In Myrdal published his theory of Circular Cumulative Causation , in which a change in one institution ripples through others. In he received a share of the Nobel Economics Prize. Ely — et al. Pigou and Alfred Marshall at Cambridge University. He began his career as a lecturer before working for the British government during the Great War, rising to be the British government's financial representative at the Versailles Conference , where he profoundly disagreed with the decisions made.
His observations were laid out in his book The Economic Consequences of the Peace [79] , where he documented his outrage at the collapse of American adherence to the Fourteen Points [80] and the mood of vindictiveness that prevailed towards Germany. The book was an enormous success, and though it was criticized for false predictions by a number of people, [87] without the changes he advocated, Keynes's dark forecasts matched the world's experience through the Great Depression which began in , and the descent into World War II in World War I had been touted as the "war to end all wars", and the absolute failure of the peace settlement generated an even greater determination to not repeat the same mistakes.
With the defeat of Fascism , the Bretton Woods Conference was held in July to establish a new economic order, in which Keynes was again to play a leading role. The Great Depression had been sparked by the Wall Street Crash of , leading to massive rises in unemployment in the United States, leading to debts being recalled from European borrowers, and an economic domino effect across the world.
Orthodox economics called for a tightening of spending, until business confidence and profit levels could be restored. Keynes by contrast, had argued in A Tract on Monetary Reform which argues for a stable currency that a variety of factors determined economic activity, and that it was not enough to wait for the long run market equilibrium to restore itself.
As Keynes famously remarked:.
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In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again. On top of the supply of money , Keynes identified the propensity to consume , inducement to invest, marginal efficiency of capital, liquidity preference, and multiplier effect as variables which determine the level of the economy's output, employment, and price levels. Much of this esoteric terminology was invented by Keynes especially for his General Theory.
Keynes argued that if savings were being withheld from investment in financial markets , total spending falls, leading to reduced incomes and unemployment, which reduces savings again. This continues until the desire to save becomes equal to the desire to invest, which means a new "equilibrium" is reached and the spending decline halts. This new "equilibrium" is a depression, where people are investing less, have less to save and less to spend. Keynes argued that employment depends on total spending, which is composed of consumer spending and business investment in the private sector.
Consumers only spend "passively", or according to their income fluctuations. Businesses, on the other hand, are induced to invest by the expected rate of return on new investments the benefit and the rate of interest paid the cost. So, said Keynes, if business expectations remained the same, and government reduces interest rates the costs of borrowing , investment would increase, and would have a multiplied effect on total spending. Interest rates , in turn, depend on the quantity of money and the desire to hold money in bank accounts as opposed to investing.
If not enough money is available to match how much people want to hold, interest rates rise until enough people are put off. So if the quantity of money were increased, while the desire to hold money remained stable, interest rates would fall, leading to increased investment, output and employment. For both these reasons, Keynes therefore advocated low interest rates and easy credit, to combat unemployment. But Keynes believed in the s, conditions necessitated public sector action. Deficit spending , said Keynes, would kick-start economic activity. This he had advocated in an open letter to U.
Roosevelt in the New York Times The New Deal programme in the U. It provided conceptual reinforcement for policies already pursued. Keynes also believed in a more egalitarian distribution of income, and taxation on unearned income arguing that high rates of savings to which richer folk are prone are not desirable in a developed economy. Keynes therefore advocated both monetary management and an active fiscal policy.
Keynes died little more than a year later, but his ideas had already shaped a new global economic order, and all Western governments followed the Keynesian economics program of deficit spending to avert crises and maintain full employment. One of Keynes's pupils at Cambridge was Joan Robinson — , a member of Keynes's Cambridge Circus , who contributed to the notion that competition is seldom perfect in a market, an indictment of the theory of markets setting prices. In The Production Function and the Theory of Capital Robinson tackled what she saw to be some of the circularity in orthodox economics.
Neoclassicists assert that a competitive market forces producers to minimize the costs of production. Robinson said that costs of production are merely the prices of inputs, like capital. Capital goods get their value from the final products. And if the price of the final products determines the price of capital, then it is, argued Robinson, utterly circular to say that the price of capital determines the price of the final products.
Goods cannot be priced until the costs of inputs are determined. This would not matter if everything in the economy happened instantaneously, but in the real world, price setting takes time — goods are priced before they are sold. Since capital cannot be adequately valued in independently measurable units, how can one show that capital earns a return equal to the contribution to production?
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Alfred Eichner — was an American post-Keynesian economist who challenged the neoclassical price mechanism and asserted that prices are not set through supply and demand but rather through mark-up pricing. Eichner is one of the founders of the post-Keynesian school of economics and was a professor at Rutgers University at the time of his death. Eichner's writings and advocacy of thought, differed with the theories of John Maynard Keynes, who was an advocate of government intervention in the free market and proponent of public spending to increase employment.
Eichner argued that investment was the key to economic expansion. He was considered an advocate of the concept that government incomes policy should prevent inflationary wage and price settlements in connection to the customary fiscal and monetary means of regulating the economy. Richard Kahn — was a member of the Cambridge Circus who in proposed the Multiplier. In he published a small book called Production of Commodities by Means of Commodities , which explained how technological relationships are the basis for production of goods and services.
Prices result from wage-profit tradeoffs, collective bargaining, labour and management conflict and the intervention of government planning. Like Robinson, Sraffa was showing how the major force for price setting in the economy was not necessarily market adjustments. Its central theme is the provision of a microeconomic foundation for Keynesian macroeconomics, obtained by identifying minimal deviations from the standard microeconomic assumptions which yield Keynesian macroeconomic conclusions, such as the possibility of significant welfare benefits from macroeconomic stabilization.
In George Akerlof — and Janet Yellen — published menu costs arguments showing that, under imperfect competition, small deviations from rationality generate significant in welfare terms price stickiness. In British economist Huw Dixon — published A simple model of imperfect competition with Walrasian features , [93] the first work to demonstrate in a simple general equilibrium model that the fiscal multiplier could be increasing with the degree of imperfect competition in the output market, helping develop New Keynesian economics. The reason for this is that imperfect competition in the output market tends to reduce the real wage , leading to the household substituting away from consumption towards leisure.
When government spending is increased, the corresponding increase in lump-sum taxation causes both leisure and consumption to decrease assuming that they are both a normal good. The greater the degree of imperfect competition in the output market, the lower the real wage and hence the more the reduction falls on leisure i.
Hence the fiscal multiplier is less than one, but increasing in the degree of imperfect competition in the output market. This opened the door to many younger economists such as E. Always Post Keynesian in his style and approach, Canterbery went on to make contributions outside traditional Post Keynesianism. His friend, John Kenneth Galbraith, was a long-time influence.
Randall Wray called "The best pair of articles on the nature of money written in the twentieth century. The government-interventionist monetary and fiscal policies that the postwar Keynesian economists recommended came under attack by a group of theorists working at the University of Chicago , which came in the s to be known as the Chicago School of Economics.
The second generation was known for a more conservative line of thought, reasserting a libertarian view of market activity that people are best left to themselves to be free to choose how to conduct their own affairs. Ronald Coase — of the Chicago School of Economics was the most prominent economic analyst of law, and the Nobel Prize in Economics winner. His first major article The Nature of the Firm argued that the reason for the existence of firms companies , partnerships, etc. Homo economicus trades through bilateral contracts on open markets until the costs of transactions make the use of corporations to produce things more cost-effective.
His second major article The Problem of Social Cost argued that if we lived in a world without transaction costs, people would bargain with one another to create the same allocation of resources, regardless of the way a court might rule in property disputes. Coase used the example of an old legal case about nuisance named Sturges v Bridgman , where a noisy sweets maker and a quiet doctor were neighbors and went to court to see who should have to move. Only the existence of transaction costs may prevent this. The idea is that law and regulation are not as important or effective at helping people as lawyers and government planners believe.
In Coase disciple Richard Posner — published Economic Analysis of Law , which became a standard textbook, causing him to become the most cited legal scholar of the 20th century. In he published The Economics of Justice , which claimed that judges have been interpreting common law as it they were trying to maximize economic welfare.
Milton Friedman — of the Chicago School of Economics is one of the most influential economists of the late 20th, century, receiving the Nobel Prize in Economics in Friedman argues that laissez-faire government policy is more desirable than government intervention in the economy. Governments should aim for a neutral monetary policy oriented toward long-run economic growth , by gradual expansion of the money supply.
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He advocates the quantity theory of money , that general prices are determined by money. Therefore, active monetary e. In Capitalism and Freedom , Friedman wrote:. Friedman was also known for his work on the consumption function, the Permanent Income Hypothesis , which Friedman referred to as his best scientific work. Windfall gains would mostly be saved. Tax reductions likewise, as rational consumers would predict that taxes would have to rise later to balance public finances. Other important contributions include his critique of the Phillips Curve , and the concept of the natural rate of unemployment Muth , opposing the idea that government intervention can or should stabilize the economy.
Sargent — and Neil Wallace — , which seemed to refute a basic assumption of Keynesian economics was also adopted. The Lucas aggregate supply function states that economic output is a function of money or price "surprise. Prescott — , which seeks to explain observed fluctuations in output and employment in terms of real variables such as changes in technology and tastes. Assuming competitive markets, real business cycle theory implies that cyclical fluctuations are optimal responses to variability in technology and tastes, and that macroeconomic stabilization policies must reduce welfare.
In Kydland and Prescott also founded the theory of Dynamic Stochastic General Equilibrium DSGE , large systems of microeconomic equations combined into models of the general economy, which became central to the New Neoclassical Synthesis , incorporating theoretical elements such as sticky prices from New Keynesian Macroeconomics. They shared the Nobel Economics Prize. In Chicago School economist Eugene Fama — published The Behavior of Stock Market Prices , which found that stock market prices follow a random walk, proposing the Efficient Market Hypothesis , that randomness is characteristic of a perfectly functioning financial market.
The same year Paul Samuelson published a paper concluding the same thing with a mathematical proof, sharing the credit. Earlier in Holbrook Working — published a paper saying the same thing, but not in a mathematical form. In Fama published Efficient Capital Markets: A Review of Theory and Empirical Work , proposing that efficient markets can be strong, semi-strong, or weak, and also proposing the Joint Hypothesis Problem , that the idea of market efficiency can't be rejected without also rejecting the market mechanism.
Joseph Alois Schumpeter — was an Austrian School economist and political scientist best known for his works on business cycles and innovation.
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He insisted on the role of the entrepreneurs in an economy. HisHistory of Economic Analysisis perhaps the greatest contribution to the history of economics, providing a magisterial account of the development of the subject from Ancient Greece to the mid- twentieth century. This book analyses his contribution to the history of economics, considers its lasting significance and assesses the current state of the field.
Boettke and David L. Arizona Politics and Government analyzes the development and operation of one of the country's fastest-growing states. How has the Jewish family changed over the course of the twentieth century? How has it remained the same?