- II. Main schools of economic thought through time
- A. Mercantilism
- B. Physiocracy
- C. Classical School
- D. Marxism (some authors put it within the Classical School)
- E. Neoclassical School
- F. Keynesian Economics
- G. Analytical Economics
- H. The current macroeconomic debate: New Classics versus New Keynesians
The economy is the social science that studies how societies allocate their scarce resources to the production of goods and services that will satisfy their needs (always growing).
The study of economics can be divided into two large fields.
The theory of prices, or microeconomics, explains how the interaction of supply and demand in markets with different levels of competition determines the prices of each good, the level of wages, the profit margin, and the variations in income.
Microeconomics is based on the assumption of rational behavior.
Citizens will spend their income trying to obtain the maximum possible satisfaction or, as economic analysts say, they will try to maximize their utility.
For their part, entrepreneurs will try to obtain the maximum possible benefit over their production costs.
The second field, that of macroeconomics, includes problems related to the level of employment and the rate of income or income in a country.
The study of macroeconomics arose with the publication of The General Theory of Employment, Interest, and Money (1936), by British economist John Maynard Keynes.
His conclusions on economic booms and slumps focus on the total, or aggregate, demand for goods and services by consumers, investors, and governments.
According to Keynes, insufficient aggregate demand will generate unemployment; The solution would be to increase investment by companies or public spending, even if it is necessary to have a budget deficit.
II. Main schools of economic thought through time
Economic questions have preoccupied many intellectuals throughout the centuries. In ancient Greece, Aristotle and Plato discussed the problems of wealth, property, and trade.
During the Middle Ages, the ideas of the Church predominated, Canon Law was imposed, which condemned usury (the charging of abusive interest in exchange for cash) and considered that commerce was an inferior activity to agriculture.
The economy, as a modern science independent of philosophy and politics, dates from the publication of the work Inquiry into the Nature and Causes of the Wealth of Nations (better known by the abbreviated title of The Wealth of Nations, 1776). , by Scottish philosopher and economist Adam Smith.
Mercantilism and the speculations of the Physiocrats preceded the classical economics of Smith and his 19th-century followers.
The development of modern nationalism throughout the 16th century diverted the attention of the thinkers of the time toward how to increase the wealth and power of national states.
The economic policy that prevailed at that time, mercantilism, encouraged the self-sufficiency of nations. This economic doctrine prevailed in England and the rest of Western Europe from the 16th to the 18th century.
The mercantilists considered that the wealth of a nation depended on the amount of gold and silver that it had.
Apart from the gold and silver mines discovered by Spain on the American continent, a nation could only increase its reserves of these precious metals by selling more products to other countries than it bought.
Achieving a balance of payments with a positive balance implied that other countries had to pay the difference between gold and silver.
The mercantilists took it for granted that their country would always be at war with others, or preparing for the next war.
If they had gold and silver, the rulers could pay mercenaries to fight, as King George III of England did during the American War of Independence.
In a pinch, the monarch could also buy weapons, uniforms, and food for the soldiers. Jean. B. Colbert (1619-1683), Louis XIV’s minister, institutionalized the export of French products to create gold and for which he developed the French industry in a very important way.
This mercantilist preoccupation with accumulating precious metals also affected internal politics.
It was imperative that wages be low and the population grow. A large and low-paid population would produce many goods at a price low enough to be able to sell them abroad.
People were forced to work long hours, and the consumption of tea, gin, and silk fabrics, among others, was considered wasteful.
From this philosophy, it was also deduced that child labor was positive for the economy of a country. A mercantilist author had a plan for the children of the poor: “When these children are four years old, they are to be taken to the poorhouse in the region, where they will be taught to read for two hours a day, and kept working the day.” remainder of the day on tasks best suited to their age, strength, and ability.
This economic doctrine was in vogue in France during the second half of the 18th century and arose as a reaction to the restrictive policies of mercantilism.
The founder of the school, François Quesnay, was a family doctor at the court of King Louis XV. His best-known book, Tableau Économique (1758), attempted to establish the flows of income in an economy, anticipating the national accounting, created in the 20th century. According to the Physiocrats, all wealth was generated by agriculture; Thanks to trade, this wealth passed from farmers to the rest of society. The physiocrats were supporters of free trade and laissez-faire (the doctrine that governments should not intervene in the economy).
They also argued that state revenue had to come from a single tax that should be levied on primary activity, the only source of wealth for them. Adam Smith knew the leading Physiocrats and wrote about their doctrines, mostly positively.
C. Classical School
As a coherent body of theory, the classical school of economic thought starts with the writings of Smith, continues with the work of the British economists Thomas Robert Malthus and David Ricardo, and culminates with the synthesis of John Stuart Mill, Ricardo’s disciple.
Although divergences among economists were frequent from the publication of Smith’s The Wealth of Nations (1776) to Mill’s Principles of Political Economy (1848), economists belonging to this school agreed on the main concepts. They all defended private property, and markets, and believed, as Mill put it, that “only through the principle of competition does political economy have a claim to science.”
They shared Smith’s mistrust of governments, his blind belief in the power of selfishness, and his famous “invisible hand” which made it possible for social welfare to be achieved through the individual pursuit of self-interest.
The classics borrowed from Ricardo the concept of diminishing returns, which states that as the labor force and capital used to till the land increase, returns decrease or, as Ricardo said, “after a certain stage, not very advanced, the progress of agriculture slows down gradually.
The scope of economic science was expanded considerably when Smith stressed the role of consumption over that of production. Smith was confident that it was possible to increase the general standard of living for the community as a whole.
He argued that it was essential to allow individuals to pursue their well-being as a means of increasing the prosperity of the whole society.
On the opposite side, Malthus, in his well-known and influential Essay on the Principle of Population (1798), raised the pessimistic note of the Classical School,
by asserting that hopes of further prosperity would be smashed against the rock of excessive population growth. According to Malthus, food only increased according to an arithmetic progression (2-4-6-8-10, etc.), while the population doubled each generation (2-4-8-16-32, etc.) unless this tendency is controlled, either by nature or by prudence of the species itself. Malthus held that natural control was “positive”: “The power of population is so superior to the power of the earth to permit man’s subsistence, that premature death must check the growth of the human being to some extent.” This procedure to stop growth was wars, epidemics, plagues, plagues, human vices, and famines,
The only way to escape this imperative of humanity and the horrors of positive control of nature, was the voluntary limitation of population growth, not by birth control, contrary to Malthusian religious convictions, but by delaying the marriage age, thus reducing the size of families. The pessimistic doctrines of this classic author gave economics the nickname of “dark science.”
Mill’s Principles of Political Economy constituted the center of this science until the end of the 19th century.
Although Mill accepted the theories of his classical predecessors, he trusted more in the possibility of educating the working class to limit its reproduction than did Ricardo and Malthus.
Furthermore, Mill was a reformer who wanted to tax inheritances heavily, and even allow the government to take a greater role in protecting children and workers.
He was very critical of the practices developed by the companies and favored the cooperative management of the factories by the workers. Mill represented a bridge between classical laissez-faire economics and the welfare state.
About markets, classical economists accepted “Say’s Law,” formulated by the French economist Jean Baptiste Say.
This law holds that the risk of mass unemployment in a competitive economy is negligible because supply creates its demand, limited by the amount of labor and natural resources available to produce.
Each increase in production increases wages and other income needed to buy that additional amount produced.
D. Marxism (some authors put it within the Classical School)
Opposition to the Classical School came from early socialist authors, such as the French social philosopher Claude Henri de Rouvroy, Count of Saint-Simon, and the British utopian Robert Owen. However, it was Karl Marx who was the author of the most important socialist economic theories, manifest in his main work, Capital (3 vols., 1867-1894).
For the classical perspective of capitalism, Marxism represented a serious challenge, although it was still, in some respects, a variant of the classical theme.
For example, Marx adopted Ricardo’s labor theory of value. With some qualifications, Ricardo explained that prices were the consequence of the amount of work that was needed to produce a good.
Ricardo formulated this theory of value to facilitate the analysis so that the diversity of prices could be understood.
For Marx, the labor theory of value represented the key to the way capitalism proceeded, the cause of all the abuses and exploitation generated by an unjust system.
Exiled from Germany, Marx spent many years in London, where he lived thanks to the help of his friend and collaborator Friedrich Engels, and the income derived from his occasional contributions to the press. He developed an extensive theory of it in the library of the British Museum.
Marx’s historical studies and economic analyzes convinced Engels that profits and other revenue from unscrupulous exploitation of property and income are the results of fraud and the power exercised by the strong over the weak. Above this critique stands the economic critique that leads to the historical certification of the class struggle.
The “primitive accumulation” in the economic history of England was made possible by the delimitation and enclosure of land.
During the 17th and 18th centuries, landlords used their power in Parliament to strip farmers of their traditional rights to common land. By privatizing these lands, they drove their victims into cities and factories.
Without land or tools, men, women, and children had to work for wages.
Thus, the main conflict, according to Marx, occurred between the so-called capitalist class, which held ownership of the means of production (factories and machines), and the working class or proletariat, which had nothing except their own hands.
Exploitation, the axis of Karl Marx’s doctrine, is measured by the ability of capitalists to pay only subsistence wages to their employees, obtaining a benefit (or surplus value) from their work, which was the difference between the wages paid and the sale prices of goods in markets.
Although in the Communist Manifesto (1848) Marx and Engels paid a small tribute to the material achievements of capitalism, they were convinced that these achievements were transitory and that the contradictions inherent in capitalism and the process of class struggle would end up destroying it, just as in the past it had happened with the extinct medieval feudalism.
In this respect, Marx’s writings depart from the tradition of classical English economics, following the metaphysics of the German philosopher Georg Wilhelm Friedrich Hegel, who considered the history of humanity and philosophy to be a dialectical progression: theses, antithesis, and synthesis. For example, a thesis can be a set of economic agreements, such as feudalism or capitalism. Its opposite, or antithesis, would be, for example, socialism, as a system contrary to capitalism. The confrontation of the thesis and the antithesis would give way to an evolution, which would be the synthesis, in this case, communism that allows combining capitalist technology with public ownership of factories and farms.
In the long term, Marx believed that the capitalist system would disappear because its tendency to accumulate wealth in a few hands would cause increasing crises due to excess supply and a progressive increase in unemployment.
For Marx, the contradiction between technological advances, the consequent increase in productive efficiency, and the reduction in purchasing power that would prevent the acquisition of additional quantities of products would be the cause of the collapse of capitalism.
According to Marx, the crises of capitalism would be reflected in a collapse of profits, greater conflict between workers and employers, and major economic depressions.
The result of this class struggle would culminate in the revolution and in the advance towards, first of all, socialism, to finally advance towards the gradual implantation of communism.
In the first stage, it would still be necessary to have a State that would eliminate the resistance of the capitalists. Each worker would be remunerated based on his contribution to society.
When communism was established, the State, whose main objective is to oppress the social classes, would disappear, and each individual would perceive this utopian future based on their needs.
E. Neoclassical School
Classical economics started from the principle of scarcity, as shown by the law of diminishing returns and the Malthusian doctrine on population.
Beginning in the 1870s, neoclassical economists such as William Stanley Jevons in Great Britain, Léon Walras in Switzerland, and Karl Menger in Austria shifted economics away from supply constraints to focus on interpreting consumer preferences in psychological terms.
By focusing on the study of the utility or satisfaction obtained with the last unit, or marginal unit, consumed, the neoclassical explained the formation of prices, not based on the amount of work necessary to produce the goods, as in the theories of price. Ricardo and Marx, but depending on the intensity of the preference of consumers to obtain an additional unit of a certain product.
The British economist Alfred Marshall, in his masterpiece, Principles of Economics (1890), explained demand based on the principle of marginal utility, and supply based on marginal cost (cost of producing the last unit).
In competitive markets, the preferences of consumers towards the cheapest goods and those of producers towards the most expensive ones would adjust to reach an equilibrium level. That equilibrium price would be the one that would match the amount that buyers want to buy with the amount that producers want to sell.
This equilibrium would also be reached in the money and labor markets. In financial markets, interest rates would balance the amount of money savers want to lend and the amount of money investors want to borrow.
Borrowers want to use the loans they receive to invest in activities that allow them to earn more than the interest rates they have to pay on the loans.
For their part, savers charge a price in exchange for giving up their money and postponing the perception of the utility they will obtain from spending it. An equilibrium is also reached in the labor market.
In competitive labor markets, the wages paid represent, at least, the value that the employer grants to the production obtained during the hours worked, which must be equal to the compensation that the worker wishes to receive in exchange for fatigue and work. labor tedium.
Neoclassical doctrine is implicitly conservative. Defenders of this doctrine prefer competitive markets to operate than public intervention.
At least until the Great Depression of the 1930s, it was argued that the best policy was one that reflected the thinking of Adam Smith: low taxes, savings in public spending, and balanced budgets.
Neoclassicals are not concerned with the cause of wealth, they explain that the unequal distribution of wealth and income is largely due to the different degrees of intelligence, talent, energy, and ambition of people.
Therefore, the success of each individual depends on their characteristics, and not on whether they benefit from exceptional advantages in the sense that Marx spoke.
In capitalist societies, neoclassical economics is the predominant doctrine when it comes to explaining the formation of prices and the origin of income.
Most of the Microeconomics that are studied today in universities (at the undergraduate level) is mainly due to them.
F. Keynesian Economics
John Maynard Keynes was a student of Alfred Marshall and a proponent of neoclassical economics until the 1930s. The Great Depression shocked economists and politicians alike.
Economists continued to argue, despite experience to the contrary, that time and nature would restore economic growth if governments refrained from intervening in the economic process. Unfortunately, the old remedies did not work.
In the United States, the victory in the presidential elections of Franklin D. Roosevelt (1932) over Herbert Hoover marked the political end of laissez-faire doctrines.
New policies and new explanations were needed, which was what Keynes provided at the time.
In his already cited General Theory (1936), a central axiom appeared that can be summed up in two major statements: (1) the existing theories on unemployment did not make any sense; neither a high price level nor high wages could explain the continuing economic depression and widespread unemployment; (2) On the contrary, an alternative explanation for these phenomena was proposed that revolved around what was called aggregate demand, that is, the total spending of consumers, investors and public institutions.
From these two generic statements, a powerful theory emerged that allowed the explanation of economic behavior.
This interpretation forms the basis of contemporary macroeconomics. Since the amount of goods a consumer can purchase is limited by the income the consumer earns, consumers cannot be held accountable for the ups and downs of the business cycle.
Therefore, the driving forces of the economy are investors (entrepreneurs) and governments. During a recession, and also during an economic depression, it is necessary to encourage private investment or, failing that, increase public spending.
If what occurs is a slight contraction, it is necessary to facilitate the granting of credits and reduce interest rates (fundamental substratum of monetary policy), to stimulate private investment and restore aggregate demand, increasing it so that it can be reached full employment.
If the contraction of the economy is great, it will be necessary to incur budgetary deficits, invest in public works or grant non-refundable subsidies to the most affected.
G. Analytical Economics
Both the neoclassical theory of prices and the Keynesian theory of income have been developed analytically by mathematicians, using calculus techniques, linear algebra, and other sophisticated techniques of quantitative analysis.
In the specialty called econometrics, economic science is joined with mathematics and statistics. Econometricians create models that link hundreds, sometimes thousands of equations, to try to explain the aggregate behavior of an economy.
Econometric models are used by companies and governments as forecasting tools, although their degree of precision is neither greater nor less than any other technique for forecasting the future.
Operational analysis and input-output analysis are two specialties in which experts in economic analysis and mathematicians cooperate.
The operational analysis underlines the need to approach problems systematically.
In general, it is about coordinating the different departments and the different operations that take place within a corporation that runs several factories, producing many goods, so you have to use the facilities in such a way that you can minimize costs and maximize efficiency.
For this, engineers, economists, psychologists, statisticians, and mathematicians are used.
According to its creator, the American economist of Russian origin Wassily Leontief, input-output tables “describe the flow of goods and services between all industrial sectors of an economy during a given period.” Although the construction of this table is very complex, this method has revolutionized economic thought. Today it is widespread as a method of analysis, both in socialist and capitalist countries.
H. The current macroeconomic debate: New Classics versus New Keynesians
Two intellectual traditions in macroeconomics have already established themselves in recent decades.
One believes that markets work better if they are not intervened in -the monetarists, the new classics-; the other believes that government intervention can significantly improve the functioning of the economy – Keynesians, New Keynesians.
The contribution of both traditions is given by the refinements that they have been making to the bases of economic theory -developed mainly by the classical, neoclassical, and Keynesian schools-, bases that have shaped the theoretical nucleus currently in force and from which governments base his economic policies.
Thus, in the 1960s the debate between these two traditions involved the monetarists, led by Milton Friedman, on the one hand, and the followers of Keynes, including Franco Modigliani and James Tobin, on the other.
Already in the 1970s, the debate on the same issues made the new classical macroeconomists protagonists.
This school, which maintained its influence in the eighties and nineties, counts among its leaders Robert Lucas,
Thomas Sargent, Robert Barro, Edward Prescott, and Neil Wallace, share Friedman’s many views on economic policy. They conceive of the world as a place where individuals act rationally seeking their interest in markets that adjust quickly to changing conditions.
For them, government intervention only makes things worse.
But although the new classics continue to have a great influence on macroeconomics today, a new generation of academics emerged in the 1980s, the New Keynesians, trained in the Keynesian tradition, although they have gone beyond it. Outstanding in this current are George Akerlof, Janet Yellen, Oliver Blanchard, Greg Mankiw, Larry Summers, and Ben Bernanke -the latter mentioned today as a possible successor to Greenspan at the FED-.
They don’t believe that markets are always clear, but try to understand and explain exactly why this might not happen.
- Dornbusch and Fischer’s Macroeconomics
- The Economy of Editorial Aique
- The economy of Editorial Santillana.