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Economics is a social science seeking to analyze and describe the production, distribution, and consumption of goods and services.[1]. Economics studies how individuals and societies seek to satisfy needs and wants. Alfred Marshall in the late 19th century informally described economics as "the study of man in the ordinary business of life"; the vast number of topics to which the methods of economic theory have been applied suggests to some that economics is simply "that which economists do."
The word "economics" is from the Greek words ????? [oikos], meaning "family, household, estate," and ????? [nomos], or "custom, law," and hence means "household management" or "management of the state." An economist is a person using economic concepts and data in the course of employment, or someone who has earned a university degree in the subject.
Economics has two broad branches: microeconomics, where the unit of analysis is the individual agent, such as a household or firm, and macroeconomics, where the focus is on aggregates, the sum of the supply and demand in an economy, or the total net result of buying and selling. Another division of the subject distinguishes positive economics, which seeks to predict and explain economic phenomena, from normative economics, which orders choices and actions by some criterion; such orderings necessarily involve subjective value judgments.
Economic reasoning has in recent decades been increasingly applied to social situations where there is no monetary consideration, such as politics, law, psychology, history, crime, war, religion, marriage and family life, and other social interactions. For a more general definition, economics is the study of humanity in systems of incentives and scarce resources.
The approach to economics that is dominant today is usually referred to as mainstream economics, and has developed primarily from neoclassical economics. The more specific definition this approach implies was captured by Lionel Robbins in 1932: "the science which studies human behaviour as a relation between scarce means having alternative uses." Scarcity means that available resources are insufficient to satisfy all wants and needs; absent scarcity and alternative uses of available resources, there is no economic problem. Heterodox economics, including institutional economics, Marxist economics, socialism, and green economics, sometimes make other grounding assumptions, such as that economics primarily deals with the exchange of value, and that labour (human effort) is the source of all value.
Adam Smith, FRSE, (baptised June 5, 1723 O.S. (June 16 N.S.) ? July 17, 1790) was a Scottish political economist and moral philosopher. His Inquiry into the Nature and Causes of the Wealth of Nations was one of the earliest attempts to study the historical development of industry and commerce in Europe. That work helped to create the modern academic discipline of economics and provided one of the best-known intellectual rationales for free trade, capitalism and libertarianism.
Biography
Smith was a son of the controller of the customs at Kirkcaldy, Fife, Scotland. The exact date of his birth is unknown, but he was baptised at Kirkcaldy on June 5, 1723, his father having died some six months previously. At around the age of 4, he was kidnapped by a band of Gypsies, but he was quickly rescued by his uncle and returned to his mother. Smith's biographer, John Rae, commented wryly that he feared Smith would have made "a poor Gypsy."
At the age of fourteen, Smith proceeded to the University of Glasgow, studying moral philosophy under "the never-to-be-forgotten" (as Smith called him) Francis Hutcheson. Here Smith developed his strong passion for liberty, reason, and free speech. In 1740 he entered Balliol College, Oxford, but as William Robert Scott has said, "the Oxford of his time gave little if any help towards what was to be his lifework," and he left the university in 1746. In 1748 he began delivering public lectures in Edinburgh under the patronage of Lord Kames. Some of these dealt with rhetoric and belles-lettres, but later he took up the subject of "the progress of opulence," and it was then, in his middle or late 20s, that he first expounded the economic philosophy of "the obvious and simple system of natural liberty" which he was later to proclaim to the world in his Inquiry into the Nature and Causes of the Wealth of Nations. In about 1750 he met David Hume, who became one of the closest of his many friends. With others who played an important role in the emergence of the Scottish Enlightenment, he frequented The Poker Club of Edinburgh.
Smith's father had a strong interest in Christianity[1] and belonged to the moderate wing of the Church of Scotland (the national church of Scotland since 1690). Smith may have gone to England with the intention of a career in the Church of England[citation needed]: this is controversial and depends on the status of the Snell Scholarship. How he lost belief and why remains uncertain. But it is definite that he returned to Scotland as a Deist. [2]
Adam SmithIn 1751 Smith was appointed professor of logic at the University of Glasgow, transferring in 1752 to the chair of moral philosophy. His lectures covered the fields of ethics, rhetoric, jurisprudence, political economy, and "police and revenue". In 1759 he published his The Theory of Moral Sentiments, embodying some of his Glasgow lectures. This work, which established Smith's reputation in his day, was concerned with how human communication depends on sympathy between agent and spectator (that is, the individual and other members of society). His analysis of language evolution was somewhat superficial, as shown only 14 years later by a more rigorous examination of primitive language evolution by Lord Monboddo in his Of the Origin and Progress of Language[3]. Smith's capacity for fluent, persuasive, if rather rhetorical argument, is much in evidence. He bases his explanation, not as the third Lord Shaftesbury and Hutcheson had done, on a special "moral sense", nor (as Hume did) on utility, but on sympathy.
Smith now began to give more attention to jurisprudence and economics in his lecture and less to his theories of morals. An impression can be obtained as to the development of his ideas on political economy from the notes of his lectures taken down by a student in about 1763 which were later edited by Edwin Cannan[4], and from what Scott, its discoverer and publisher, describes as "An Early Draft of Part of The Wealth of Nations", which he dates about 1763. Cannan's work appeared as Lectures on Justice, Police, Revenue and Arms. A fuller version was published as Lectures on Jurisprudence in the Glasgow Edition of 1976.
At the end of 1763 Smith obtained a lucrative offer from Charles Townshend (who had been introduced to Smith by David Hume), to tutor his stepson, the young Duke of Buccleuch. Smith subsequently resigned from his professorship and from 1764-66 traveled with his pupil, mostly in France, where he came to know intellectual leaders such as Turgot, Jean D'Alembert, André Morellet, Helvétius and, in particular, Francois Quesnay, the head of the Physiocratic school whose work he respected greatly. On returning home to Kirkcaldy he devoted much of the next ten years to his magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations, which appeared in 1776. It was very well-received and popular, and Smith became famous. In 1778 he was appointed to a comfortable post as commissioner of customs in Scotland and went to live with his mother in Edinburgh. He died there on July 17, 1790, after a painful illness and was buried in the Canongate Kirkyard, Royal Mile, Edinburgh. He had apparently devoted a considerable part of his income to numerous secret acts of charity.
Wikisource has the following related text:
The Times obituary of Adam SmithSmith's literary executors were two old friends from the Scottish academic world; physicist/chemist Joseph Black and pioneering geologist James Hutton. Smith left behind many notes and some unpublished material, but gave instructions to destroy anything that was not fit for publication. He mentioned an early unpublished History of Astronomy as probably suitable, and it duly appeared in 1795, along with other material, as Essays on Philosophical Subjects.
Works
Shortly before his death Smith had nearly all his manuscripts destroyed. In his last years he seemed to have been planning two major treatises, one on the theory and history of law and one on the sciences and arts. The posthumously published Essays on Philosophical Subjects (1795) probably contain parts of what would have been the latter treatise.
The Wealth of Nations was influential since it did so much to create the field of economics and develop it into an autonomous systematic discipline. In the Western world, it is arguably the most influential book on the subject ever published. When the book, which has become a classic manifesto against mercantilism (the theory that large reserves of bullion are essential for economic success), appeared in 1776, there was a strong sentiment for free trade in both Britain and America. This new feeling had been born out of the economic hardships and poverty caused by the American War of Independence. However, at the time of publication, not everybody was immediately convinced of the advantages of free trade: the British public and Parliament still clung to mercantilism for many years to come.
The Wealth of Nations also rejects the Physiocratic school's emphasis on the importance of land; instead, Smith believed labour was paramount, and that a division of labour would affect a great increase in production. Nations was so successful, in fact, that it led to the abandonment of earlier economic schools, and later economists, such as Thomas Malthus and David Ricardo, focused on refining Smith's theory into what is now known as classical economics (Modern economics evolved from this). Malthus expanded Smith's ruminations on overpopulation, while Ricardo believed in the "iron law of wages" ? that overpopulation would prevent wages from topping the subsistence level. Smith postulated an increase of wages with an increase in production, a view considered more accurate today.
One of the main points of The Wealth of Nations is that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called "invisible hand" (originally written in Moral Sentiments). If a product shortage occurs, for instance, its price rises, creating a profit margin that creates an incentive for others to enter production, eventually curing the shortage. If too many producers enter the market, the increased competition among manufacturers and increased supply would lower the price of the product to its production cost, the "natural price". Even as profits are zeroed out at the "natural price," there would be incentives to produce goods and services, as all costs of production, including compensation for the owner's labour, are also built into the price of the goods. If prices dip below a zero profit, producers would drop out of the market; if they were above a zero profit, producers would enter the market. Smith believed that while human motives are often selfish and greedy, the competition in the free market would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. Nevertheless, he was wary of businessmen and argued against the formation of monopolies.
Smith vigorously attacked the antiquated government restrictions which he thought were hindering industrial expansion. In fact, he attacked most forms of government interference in the economic process, including tariffs, arguing that this creates inefficiency and high prices in the long run. This theory, now referred to as "laissez-faire", which means "let them do", influenced government legislation in later years, especially during the 19th century. (However, it must be remembered that Smith advocated for a Government that was active in sectors other than the economy: he advocated for public education of poor adults; for institutional systems that were not profitable for private industries; for a judiciary; and for a standing army.)
Two of the most famous and oft-quoted passages in The Wealth of Nations are:
It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.
As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual value of society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.
The "Adam Smith-Problem"
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There has been considerable controversy as to whether there is a contradiction between Smith's emphasis on sympathy in his Theory of Moral Sentiments and the key role of self-interest in The Wealth of Nations. Economist Joseph Schumpeter referred to this in German as das 'Adam Smith-Problem'. In his Moral Sentiments Smith seems to emphasize the broad synchronization of human intention and behaviour under a beneficent Providence, while in The Wealth of Nations, in spite of the general theme of "the invisible hand", Adam Smith makes the claim that, within the system of capitalism, individuals acting for their own good tend also to promote the good of their community. Creating harmony out of conflicting self-interests, he finds many more occasions for pointing out cases of conflict and of the narrow selfishness of human motives. Yet it would be inaccurate to describe the Adam Smith of the Moral Sentiments as rejecting selfishness as an important factor in many human motives, for he writes that:
Thus self-preservation, and the propagation of the species, are the great ends which Nature seems to have proposed in the formation of all animals. Mankind are endowed with a desire of those ends, and an aversion to the contrary; with a love of life, and a dread of dissolution; with a desire of the continuance and perpetuity of the species, and with an aversion to the thoughts of its entire extinction. But though we are in this manner endowed with a very strong desire of those ends, it has not been entrusted to the slow and uncertain determinations of our reason, to find out the proper means of bringing them about. Nature has directed us to the greater part of these by original and immediate instincts. Hunger, thirst, the passion which unites the two sexes, the love of pleasure, and the dread of pain, prompt us to apply those means for their own sakes, and without any consideration of their tendency to those beneficent ends which the great Director of nature intended to produce by them.
Adam Smith himself cannot have seen any contradiction, since he produced a slightly revised edition of Moral Sentiments after the publication of The Wealth of Nations. Both sets of ideas are to be found in his Lectures on Jurisprudence. He may have believed that moral sentiments and self-interest would always add up to the same thing.
Some scholars have given another explanation: Adam Smith was trying to illustrate the complicated economy with two simple dimensions. It was the people who, due to historical limitations, emphasized the "wealth" part. In the future, due to the change of world economy, the emphasis may well change.
Influence
The Wealth of Nations, one of the earliest attempts to study the rise of industry and commercial development in Europe, was a precursor to the modern academic discipline of economics. It provided one of the best-known intellectual rationales for free trade and capitalism, greatly influencing the writings of Marx and later economists.
There has been some controversy over the extent of Smith's originality in The Wealth of Nations. Some argue that the work added only modestly to the already established ideas of thinkers such as Anders Chydenius (The National Gain (1765), David Hume and the Baron de Montesquieu. Indeed, many of the theories Smith set out simply described historical trends away from mercantilism and towards free trade that had been developing for many decades and had already had significant influence on governmental policy. Nevertheless, Smith's work organized their ideas comprehensively, and so remains one of the most influential and important books in the field today.
Smith was ranked #30 in Michael H. Hart's list of the most influential figures in history.
Joseph Alois Schumpeter (February 8, 1883 ? January 8, 1950) was an economist from Austria and a giant in the history of economic thought.
Contents [hide]
1 Summary
2 Most important work
2.1 The history of economic analysis
2.2 Business cycles
2.3 Schumpeter and Keynesianism
2.4 Schumpeter and capitalism's demise
2.5 Schumpeter and democratic theory
2.6 Schumpeter and entrepreneurship
3 His legacy
4 Notes
5 References
6 See also
7 External links
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Summary
Born in T?e?? (then part of Austria-Hungary, now in the Czech Republic). He was always a brilliant student and praised by his teachers. He began his career studying Law at the University of Vienna under the great Austrian capital theorist Eugen von Böhm-Bawerk, taking his PhD in 1906. In 1909, after some study trips, he became a professor of economics and government at the University of Czernowitz (a German-language university in Austria, now in Ukraine), in 1911, at the University of Graz, where he remained until World War I. In 1919-1920, he served as the Austrian Minister of Finance, with some success, and in 1920-1924, as President of the private Biederman Bank. That bank collapsed in 1924 and left Schumpeter in bankruptcy. From 1925-1932, he held a chair at the University of Bonn, Germany. Having to leave central Europe because of the rise of the Nazis, he moved to Harvard (where he had already lectured in 1927-1928 and 1930), where he taught from 1932 to 1950. During his Harvard times, he wasn't generally considered to be a very good classroom teacher, but he acquired a school of loyal followers. His prestige among colleagues was likewise not very high, because his views seemed outdated and not in touch with then-fashionable Keynesianism. This period as a Harvard professor was characterised by extreme hard work but also by little real recognition of his core ideas.
Although Schumpeter encouraged some young mathematical economists and was even the founding president of the Econometric Society (1933), Schumpeter was not a mathematician but rather an economist and tried instead to integrate sociological understanding into his economic theories. From current thought it has been argued that Schumpeter's ideas on business cycles and economic development could not be captured in the mathematics of his day - they need the language of non-linear dynamical systems to be partially formalized.
He was probably the second most influential economist of the 20th century, after Keynes.
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Most important work
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The history of economic analysis
Schumpeter's vast erudition is apparent in his posthumous History of Economic Analysis, although some of his judgments seem quite idiosyncratic and sometimes cavalier. For instance, Schumpeter thought that the greatest 18th century economist was Turgot, not Adam Smith, as many consider. Some of these judgments are partly explained by his opinion that there is one general system of economic analysis, and Léon Walras found it. Other economists are rated by how much of Walras' theory could be read into them. Schumpeter criticized John Maynard Keynes and David Ricardo for the "Ricardian vice". According to Schumpeter, Ricardo and Keynes reasoned in terms of abstract models, where they would freeze all but a few variables. 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.
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Business cycles
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 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, though, is, in fine Austrian fashion, the entrepreneur.
The entrepreneur disturbs this equilibrium and is the 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 communist Nikolai Kondratiev's ideas on 50-year cycles, Kondratiev waves.
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Schumpeter and Keynesianism
So 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 purchase the resources needed to realize his or her 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. Nevertheless, Schumpeter, who was a liberal, at least in the classical European sense, rejected Keynesianism.
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Schumpeter and capitalism's demise
Schumpeter's most popular book in English is probably Capitalism, Socialism, and Democracy. This book opens with a treatment of Karl Marx. On the surface level, this piece seems to support socialism. Schumpeter's reasoning was that an overt defense of capitalism would prompt the book to only be read by those who already supported capitalism. Therefore, he believed that he must masquerade as a seeming supporter of socialism to entice the young socialist to read his work. In the end, he hoped to awaken self-recognition in the reader to the flaws of socialism. [1] Schumpeter is sympathetic to Marx's conclusion that capitalism will collapse, although Schumpeter concludes capitalism will be replaced by socialism for non-Marxist reasons. It is in this book that Schumpeter characterizes capitalism with the famous phrase "creative destruction" in which old ways of doing things are endogenously destroyed and replaced by the new.
Schumpeter thinks that the success of capitalism will lead to a form of corporation and a fostering of values, especially among intellectuals, of hostility to capitalism. The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism and it will be succeeded by socialism of some form or another. There will not be a revolution, but merely a trend in parliaments to elect social democratic parties of one stripe or another. He argued that capitalism will collapse from within as democratic majorities will vote themselves the creation of a welfare state and place restrictions upon entrepreneurship that will burden and destroy the capitalist structure. Schumpeter emphasizes that he is analyzing trends, not engaging in political advocacy. Some have thought John Kenneth Galbraith was influenced in his The New Industrial State by Schumpeter's views on corporations. This view however did not negate the fact that Schumpeter still believed that free market capitalism was the best economic system.
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Schumpeter and democratic theory
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. This made a 'rule by the people' concept both unlikely and undesirable. 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 periodical votes from the general public legitimise governments and keep them accountable, the policy programme is very much seen as their own and not that of the people, and the participatory role for individuals is severely limited.
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Schumpeter and entrepreneurship
The concept of entrepreneurship can not be fully understood without his contributions, being probably the first scholar to develop its theories. He gave two theories, sometimes called Mark I and Mark II. In the first one, the early one, Schumpeter argued that the innovation and technological change of a nation comes from the entrepreneurs, or wild spirits. He came up with the German word Unternehmergeist, meaning entrepreneur-spirit. He believed that these individuals are the ones who make things work in the economy of the country. In Mark II, later in the United States, he pointed out that the ones who really move the innovation and economy are the big companies which have the resources and capital to invest in research and development. Both arguments might be complementary today.
The English literature preferred to use the French word entrepreneurship, but perhaps the German one would be more correct to understand the entrepreneur studies.
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His legacy
For some time after his death, Schumpeter's views were most influential among 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 of Schumpeter and were often also 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". Another outstanding student of Schumpeter's was the economist Nicholas Georgescu-Roegen. Today, Schumpeter is a protagonist of the mainstream, not in academic economics ("standard textbook economics"), but in economic policy, management studies, industrial policy, and the entire area of innovation. The concept of entrepreneurship can not be fully undestood without his contributions, being probably the first scholar to develop its theories. The European Union's innovation program, and its main development plan, the Lisbon Strategy, are based on Schumpeter.
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