Gonzaga Gutierrez Economic Thought Dr.

Weston May 8th, 2011 Take Home Second Exam 1) Classical Economics: Widely regarded as the first modern school of economic thought, Classical Economics refers to the work done by a group of economists in the 18th and 19th centuries. Comprised predominantly by Adam Smith, David Ricardo, Thomas Malthus, and John Stuart Mill; they developed theories about the way markets and market economies work. The study was primarily concerned with the dynamics of economic growth; it stressed economic freedom and promoted such ideas as laissezfaire and free competition. Followed by Neo-Classical Economics. 2) David Ricardo: Member of the Classical Economics School, Ricardo is known as a political economist, he is often credited for, among other things, systematizing economics. Known primarily for his Iron Law of Wages, labor theory of value, theory of comparative advantage, and theory of rents. Also attributed for discovering with the help of several other economists the law of diminishing marginal returns. 3) Thomas Robert Malthus: 18th century economist and philosopher, who was a member of the Classical Economics School and was very influential in political economy. Known for his ideas about population growth (population theory), which he outlined in his book An Essay on the Principle of Population, Malthus addresses how populations will continue to grow until growth is stopped or reversed by disease, famine, war, or calamity; he developed what is referred to as the Malthusian Growth Model, which is an exponential formula used to forecast population growth. 4) John Stuart Mill: 19th century British philosopher and classical economist, known for one of his most influential works, Principles of Political Economy, which was based on David Ricardo and Adam Smiths ideas, but mostly Ricardo. The work was a compendium of Classical Thought, and it included and illustrated such ideas as Reciprocal Demand, and Demand as a schedule where the demand curve is negative sloping. Also known for publishing On Liberty, which is one of his most influential works that addresses the nature and limits of the power that can be legitimately exercised by society over the individual. 5) Ricardian Rent: Also known as the Law of Rent, this law was formulated by David Ricardo and it is the first clear exposition of the source and magnitude of land rents. Ricardian Rent states that the rent of a land site is equal to the economic advantage obtained by using the site in its most productive use, relative to the advantage obtained by using marginal land for the same purpose, given the same inputs of labor and capital. Also stated that rent was not a cost of production, but instead a residual that went to the owner of a fixed factor of production. As defined by Ricardo, rent is the difference between the produce obtained by the employment of two equal quantities of capital labour. 6) Law of Diminishing Returns: Refers to the progressive decrease in the marginal output of a production process as the amount of a single factor of production is increased, while holding the amounts of all other factors of production constant. With regards to Classical Economics, particularly David Ricardo,

the Law of Diminishing Returns is applied to land, and its diminishing output, as a result of the decreasing quality of the inputs. 7) The Iron Law of Wages: Law of economics which asserts that real wages always tend, in the long-run, toward the minimum wage necessary to sustain the life of the worker. In the case of Ricardo, the average wage will be the subsistence wage as long as new investment, technology, or some other factor caused the demand for the labor to increase faster than population. In that case, both real wages and population would increase over time. Particularly, Ricardo believed that the market price of labor or the actual wages paid could exceed subsistence level indefinitely due to countervailing economic tendencies. 8) The Wages Fund: Also known as the Wage-fund doctrine, this doctrine shows that the amount of money a worker earns in wages, which are paid to them from fixed funds available to employers each year, is determined by the relationship of wages and capital to any changes in population. 9) The Stationary State: Similar to the Iron Law of Wages, the Stationary State refers to the event when the rates of return on capital become 0, meaning there is no return from investing in more capital. As a result, the wages of the workers become stationary, and due to this occurrence growth of the population also becomes stationary it neither grows nor declines, but remains at a constant level. Hence, the phenomenon of the Stationary State. 10) Jeremy Bentham: Although known for his contributions to philosophy and politics, Jeremy Bentham is perhaps best known for his advocacy of utilitarianism, which is the idea that the moral worth of an action is determined solely by its usefulness in maximizing utility as summed among all the individuals of society. As Bentham said, It is the greatest happiness of the greatest number that is the measure of right and wrong. In addition, Benthams opinions about monetary economics, which were quite different to those of Ricardo, focused on monetary expansion as a means of helping to create full employment. Overall, his work is widely regarded to be at the forefront of modern welfare economics. 11) Johann Heinrich von Thunen: A prominent 19th century economist who developed and presented his theory of spatial location in his treatise called The Isolated State. The theory, which uses economic reason, demonstrates the methods of maximizing agricultural production on the basis of location. For instance, in his treatise Heinrich explains how heavy products and perishables should be produced close to a town, while lighter and more durable goods should be manufactured on the periphery because transporting the latter goods to areas distant from the city would prove to cost more. 12) Antoine Augustine Cournot: A 19th century economist who wrote the book Researchers on the Mathematical Principles of the Theory of Wealth, in which he applied mathematical formulas and symbols to economic analysis. Although his work was not well received during his lifetime, due to the fact that no one in society could understand it, Cournots mathematical economics contributed immensely to modern economic analysis and econometrics. Cournot is credited for the introduction of the concepts of elasticity, marginal revenue curve and marginal magnitude. In addition, he presented the concepts of monopoly, oligopoly, and perfect completion, and by demonstrating the equilibrium of his oligopoly provided the basis for John Nashs Game theory equilibrium. 13) The Marginal Revolution: Refers to the discovery of marginal utility, as well as to the connection between use value and exchange value, whereby use value does not determine exchange value; this

revolution also allowed for the introduction of a subjective notion of value. The Marginal Revolution ushered in the use of math, specifically Calculus, with regards to economics. Movement would later be generalized to Marginal Productivity. 14) William Stanley Jevons: As one of the most note worthy economists of the Marginal Revolution, William Stanley Jevons was a 19th century British economist who wrote a book called The Theory of Political Economy; this book began the mathematical implementation in economics, which he defended strongly. As a front-runner of marginal reasoning, Jevons, like other marginal thinkers, developed the theory of marginal utility to understand and explain consumer behavior. According to him, value, depends entirely upon utility, and not the labor used to produce a product, thereby breaking away from the classical theory of value. In his The Theory of Political Economy, Jevons states these views on marginal utility, but additionally, he reinstates Jeremy Benthams theory of utilitarianism in mathematical (Calculus) terms. Moreover, in his The Coal Question, Jevons predicted that Englands prosperity was contingent on the amount of coal the nation withheld. Overall, it can be said that Jevons, like other Marginal thinkers, was well advanced for his time. 15) Carl Menger: Perhaps known best as the founder of the Austrian School of Economics, Carl Menger was also one of the leading marginal thinkers of the marginal revolution. Menger believed that goods are valuable because they serve various uses whose importance differs. Goods, from his perspective, acquire their value not because of the amount of labor used in producing them, but because of their ability to satisfy peoples wants this view of utility refuted the labor theory of value and is called the theory of derived demand. In addition, in his Principles of Economics Menger distinguishes the difference between economic goods and non-economic goods on the basis of scarcity and importance. If a good is scarce, according to Menger, it is an economic good, while if its abundant, it is a non-economic good. Finally, Menger used his subjective theory of value to arrive at the conclusion that exchange is mutually beneficial, since both sides gain from exchange. 16) Eugen von Bohm-Bawerk: As one of the leading members of the Austrian School of economics, Eugen von Bohm-Bawerk is perhaps best known for his work entitled Capital and Interest, which furthered the development of the theories of interest and capital in economics. In his interest theory, Bawerk demonstrates that there is a positive time preference for interest rates because people are willing to pay positive interest rates to get access to resources in the present, and they insist on being paid interest if they are to give up such right. Although Bawerk theories on both capital and interest were the cornerstones to the Austrian School of Economics, now a days little attention is given to Bawerk by modern economists, and instead, Irving Fishers approaches on both subjects are more widely accepted 17) The German Historical School: Historical School that viewed history as the primary source for knowledge concerning human actions and economic matters, due to the fact that economics is culturespecific. The School rejected the universal validity of economic theorems since they saw economics as resulting from careful empirical and historical analysis (as well inductive reasoning) instead of from logic and mathematics; it also rejected the notion of laissez faire. In the end, the German Historical School died because it got too closely related to politics; however, its ideology had a long-term impact in Asia, specifically Japan. 18) Methodensteit: Refers to the controversial debate over the method and epistemological character of economics carried on between the Austrian School of Economics, led by Carl Menger, and the German

Historical School, led by Gustav von Schmoller. On one hand, the Austrian School of Economics held that the best method of studying economics was through reason and finding general theories which applied to broad areas. The German Historical School, on the other hand, believed that the best way to develop new and better social laws was from the collection and study of statistics and historical materials. These contrasting views caused the two economic Schools to clash, resulting in the Methodensteit. 19) General Equilibrium: The General Equilibrium Theory, which was first proposed by French Economist Leon Walras, demonstrates and seeks to explain the behavior of supply and demand fundamentals in a whole economy with several markets, by proving that equilibrium prices for goods exist and that all prices are at equilibrium. The General Equilibrium Theory was the first attempt in neoclassical economics to model prices for a whole economy. 20) Neo-Classical Economics: As opposed to Classical Economics, Neo-Classical Economics focuses on the determination of prices, outputs, and income distributions in markets through supply and demand, and the ability to maximize utility or profit. Moreover, Neo-Classical Economics studies the allocation of resources and holds that free markets bring about the most efficient allocation of these resources. 21) Alfred Marshal: As one of the most influential economists, Alfred Marshall is widely known for his book Principles of Economics, which brings together as a whole the ideas of supply and demand, marginal utility and the (marginal) costs of production. Marshall is credited with attempting to apply mathematics to economics in order to turn the study into more of a science than a philosophy. In his book, moreover, Marshall makes supply and demand the center of economics, and elasticity a measurable phenomenon; he also provides a masterful analysis of consumer surplus, increasing and diminishing returns, short and long terms (run), and marginal utility. Moreover, Marshall demonstrates how Demand is derived from marginal utility curves, and how supply is derived from marginal cost curves. Considered to be the father of Neo-Classical Microeconomic theory, Marshall was the last economist to build an economic system from scratch. 22) Cambridge University: At Cambridge University, Alfred Marshall founded the worlds very first Economics department, thereby providing to the world the first Economics Degree. The goal behind this department was to attempt to answer what Marshall believed to be the chief question of economics: is poverty necessary? While at Cambridge University Marshall perfected and published his book on Principles of Economics. 23) John Maynard Keynes: One of the most influential economists, whose ideas profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of the government. Besides not liking the instability of investment, Keynes did not believe there were any natural benefits to long-term planning. In his General Theory, Keynes states that demand not supply, is the key variable governing the overall level of economic activity. Moreover, within the General Theory, Keynes argues that full employment, or a lower level of unemployment, is contingent on spending money, and not on the price of labor as in Neo-Classical Economics; he believed that it was wrong to assume that markets, in the long run, would deliver full employment 24) John Bates Clark: Known as a neoclassical economist who was one of the pioneers of the Marginal Revolution; he formulated an original version of the marginal utility theory, whereby the repartition of

the social product will be according to the productivity of the last physical input of units of labor and capital; this theory is at the basis of Neo-Classical Microeconomics. 25) The University of Chicago: As one of the most influential economists of the 20th century, Milton Friedman, who studied at the University of Chicago, embodied the Neo-Classical thought of his university that was centered on the concept of monetarism (although this would later change to Rational Expectations). In Friedmans A Monetary History of the United States, the Federal Reserve is blamed for the Great Depression, since it failed at enacting an effective monetary policy. Besides critiquing the Phillips Curve on the basis that it could shift up as a result of peoples adaptive expectations, Friedman was a strong opponent of Keynesian Economics. Moreover, in his efficient market hypothesis, Friedman states that fiscal policy does not help stimulate the economy, but instead changes in the money supply affect average demand and the economy.