Economic theories arise from problems occurring in different time periods, they are simply solutions that are carried on forward and learned from through the centuries. Economics has been changing through the course of history.
The 18th century
During the 18th century land was divided into sections, these were gated and guarded sections. Each section was entitled to a manor and the manor was run by the lord. There were merchants in the manor who worked providing labor to the lords. In return the lords provided the laborers with protection. At the top of this hierarchy was the king. The lords all reported back to the king. The exchanging of goods was done through organizing market sales often and bartering goods. Bartering goods is the idea of exchanging a good for another.
However there were many problems with barter, the main ones being saving, double coincidence of wants and finding a unit of exchange. Saving was a problem because if someone offered another person fish in exchange for some tools, the fish would only stay fresh and be useful for a couple of days therefore the person would have to exchange it for something else quickly therefore they cannot save. Having a double coincidence of wants is evident in the situation of a person who wants tomatoes but only has farming tools to offer. What if the tomato seller does not want farming tools? Deciding a value for a good was also a problem, how many tomatoes is one potato worth?
It seemed that this system did not only have a problem with their exchanging aspect, they also had a problem with their hierarchy. Soon merchants started making money and rising above the lords. Many merchants started working directly for the king instead of the lords, this not only helped the kings become more powerful but also overthrew the lords in their position of respect. Soon this system faded and there came a new one.
Adam smith – the father of economics
Adam Smith in the 1700’s wrote a book called “An Inquiry into the Nature and Causes of the Wealth of Nations.” In this book he introduced the idea of the invisible hand. This is the tendency of the free market to regulate itself through competition in a search of self interest. Essentially the powers of demand and supply regulate themselves and there is economic prosperity. Smith’s ideas were focused on the advocacy of the free market and the evading of government intervention. A famous latin phrase was written after his ideology “laissez faire” this literally means to let pass or let do. Once again supporting the idea of less government intervention leads to better economic growth and condition.
Says law of markets
In 1803, a French economist called Jean-Baptiste Say (1767–1832) published his book Treatise on Political Economy, where he became famous for what is now called Say’s law of Markets. This law is centralized in the idea that supply creates its own demand. To break it down for you, when a firm sells a good the workers in the firm are paid for it and therefore they earn an income. With this income they save a proportion of it and spend the other on their needs and wants, this leads to higher demand in the economy. He introduced the idea that the source of demand is not money itself but it is production. Which lead people to believe that increasing production would increase demand and therefore cause economic growth. Say’s ideas still supported the free market theory.
Karl marx – the father of socialism
Karl marx was not against the idea of capitalism and the free market, however he did see some flaws in the dynamics of it all. He predicted that due to the horrible working conditions and inequalities the free market brought on the working population, they would revolt. This revolt would cause a recession in the economy and force the government to spend in attempts to increase demand. This would also lead the economy and the government into a debt. People quickly became aware of this and adopted the marx way, which was enabling a minimum wage and introducing trade unions.
20th century
After the age of many white old men making the theories of economics and philosophy being the main knowledge area in economics came a time of revolution and modernisation. The law of diminishing utility was just discovered. This is the idea that marginal utility (satisfaction) decreases for each extra unit of good or service you consume. This came with supply and demand diagrams transforming economics into a mathematical social science. The usage of the internet was also increasing creating the stock market and shareholders in companies, new things and inventions were arriving. For example, cars, with this the mobility of factors of production was increasing and there was a decrease in costs of production which in turn increased the supply in the economy producing economic growth.
Keynesian economic school
During all this chaos came another old white male economist. John Maynard Keynes (1883–1946). In 1936, he published his landmark work, The General Theory of Employment, Interest and Money , in which he described a new approach to economics. He promoted government intervention in a time of economic recession. He supported the structure of the multiplier effect. Stressing the fact that governments should spend when consumer spending falls. He sold the idea that if the government spends it creates income for people, people will save a proportion and spend a proportion, creating more income for people who sell the goods that others are spending on.
The monetarist/new classical counter revolution
The neo liberal problems generated new economic ideologies and the structures of demand and supply side. After the involvement of US in the yom kippur war, oil prices rose from 3 dollars per barrel to 12. With oil being one of the main factors of production in the high demanding market of energy, the costs of production for almost all firms quickly rose very high. In order to still be making profits the companies started either firing staff or passing the costs on to their customers and increasing the price. With inflation rising at a steady rate and incomes not changing the purchasing power tremendously decreased. The Keynesian theory could no longer be used as government spending would just lead to more inflation. They had to use the supply side policies to improve competitiveness and control money supply in order to stop inflation.
21st century
With the current alarming problems of our world being waste and global warming, the economy is trying to adapt to the circular economy in place of their linear economy. With recycling being the procedure that connects it all.
- Previous linear economy
- New circular economy
Behavioral economics
It has come to many economists’ attention that all the models of economics up until the 21st century are dependent on the assumption that all consumers make rational decisions on their consumption. This essentially means that all consumers purchase products that bring them the maximum utility, they have perfect information on the alternatives to what they are purchasing and an idea of products that would provide them with the most satisfaction. However this is not the case at all, there are so many biases that come into play when a consumer makes a purchase, this comes in the way of this idea of homo economicus.
