Short History Of Economics

1   Adam Smith

Since the dawn of modern economics in the late 18th century (i.e. Adam Smith) there have been two main types of economic philosophies: (i) financial and (ii) material. Back in Smith's time, (roughly speaking) these were called the Mercantilist and Physiocrat movements respectively - then considered fairly separate philosophies, because Mercantilism was the belief in a gold-orientated (i.e. money-orientated) export-led manufacturing economic policy whereas the Physiocrats believed that all added value (i.e. surplus) ultimately stemmed solely from agricultural development (i.e. improving the efficiency of energy extraction by land from the sun) which implies a more localised and regionalised focus.

One should not underemphasise the importance of this distinction. Mercantilism perceives its pinnacle as a well-oiled command & control trading network spanning empire-sized geographical distances with the "machine" organised using some variant of the price mechanism. Physiocratism perceive its pinnacle as (in modern parlance) the localised optimisation of the value extracted from a wealth-generating economic system. These two philosophies are in fact identical, however the former is relatively easy to organise and generate whereas the latter is considerably harder i.e. as a nasty simplification, Western civilisation readily agrees that gold is wealth but it has much more discord regarding non-monetary AND non-subjective forms of wealth. Most of the history of Economics is characterised by an increasing improvement in the integration of Physiocrat practice into Mercantilism.

Smith's great innovation of two centuries ago was the integration of the Physiocrat theory of self-specialisation into Mercantilism in a laissez-faire fashion, so for example if France specialised in grain production then Britain may focus its resources elsewhere and simply import France's grain surplus (Smith exemplified this using the famous "pin manufacture" quotation). Smith, and pretty much every liberal economist since, has hence argued strongly for the reduction or removal of every (human-imposed) impediment to free trade with the intent that the price mechanism would help each geographical region to determine its own optimal policy. Sadly, most modern treatments of Smith completely ignore his larger contributions to moral wealth theory which he himself recognised towards the end of his life - despite, oddly enough, that for most of his life his moral work was widely read and his economic work barely known except by those who it turned out mattered in the long run.

2   David Ricardo

If Adam Smith was the first of the "fathers" of modern economics, then early 19th century David Ricardo was its second "father". Probably his single biggest contribution relevant to contemporary times was the theory of comparative advantage which is still the main theoretical economic argument in favour of Globalisation - while Smith had implicitly assumed comparative advantage, Ricardo gave it a mathematical formulation and that meant that its specific effects could be modelled and therefore examined theoretically without having to engage in risky social experiments. Another important contribution was reducing an entire economy down to just three variables: land, labour and capital, and Ricardo's opinion that owners of capital would always grow rich by extracting value from the workers who would therefore always remain poor. Much of Ricardo's work has been significantly improved upon by later Economists so his specific theories aren't so important nowadays, especially with the death of Communism as Karl Marx had based much of Communist Economic Theory on Ricardian Economics, particularly the extrapolation of Capitalist behaviour as fundamentally unsustainable as the inevitable repression of the masses of poor would "obviously" lead to violent revolution. Therefore his influence - especially on the geopolitics of the last century - cannot be underestimated, but I personally think that his star will be much faded in a century's time.

3   William Stanley Jevons

The third "father" of economics was undoubtedly the mid-19th century Economist William Stanley Jevons whose The Coal Question of 1865 is in particular as important today as it was then. Despite his short life, his contributions were profound: Jevons was one of the first to properly integrate differential calculus and constrained (Lagrangian) optimisation into Economics (Marginal Utility Theory), and he also explored the logical consequence of compounding growth i.e. you get exponentiality which will consume all your resources very quickly indeed if left unchecked. Much then as Thomas Malthus had argued some sixty years beforehand, one inevitably obtains social collapse.

Probably the single most important consequence of Jevons was that one could now construct somewhat representative economic models of real economies and that therefore political policies could be tested in a "sandbox" to determine their desirability and consequences. This ability is undoubtedly a very good thing - Neo-Capitalist theories are similarly explored in computer models - however, 19th century mathematics could not properly handle irrationality, altruism, individuals behaving differently from one another nor the progress of time. Therefore, Neo-Classical Economics is still making highly unrealistic assumptions of human and environmental behaviour with some extremely deleterious consequences for the planet and society as a result. For example, our society is still designed according to economic models consisting of identical clones possessing a nearly perfect knowledge of all possible future states, with a static equilibrium (i.e. zero growth) considered the "natural", even desirable consequence. From such a maladapted viewpoint, and after two hundred years of exponential growth, it is no wonder that the world looks as it does.

4   Alfred Marshall

Jevons died early in 1881 from a freak accident at a young age - had he lived longer, he almost certainly would have achieved much of what the great 19th century economist Alfred Marshall consequently contributed. Marshall's contributions were also immense, not least the establishment of a separate Economics school at Cambridge University which signalled its mainstream acceptance as a "proper" subject. Marshall, more than any other person in History, defined what is now known as Microeconomics and indeed it is barely different in today's textbooks than it was by the time of his death in 1924 (indeed, the only significant difference is the addition of John Nash's Game Theory). Put another way, if you are an undergraduate who finds Microeconomics textbooks boring, you'll find Marshall's 1890 Principles of Economics a vastly more interesting book (it was the standard Microeconomics textbook for most degrees in Economics until the 1970s). You'll also find studying just his book alone will earn you a first class honours in Microeconomics even today.

Much as with earlier economists, most of Marshall's contributions of his time have since been forgotten. Marshall strongly believed that Economics was actually the study of human behaviour in its wider more holistic sense - which we have since split up into separate and usually isolated specialisms such as psychology, sociology, anthropology and so on. To quote him:

"a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment, and with the use of the material requisites of wellbeing"

One notes the increasing focus on material wellbeing rather than overall wellbeing - unlike Smith whose treaties on moral wealth were unfortunately sidelined by his treaties upon physical wealth. Modern Neo-Classical Economics theory most definitely equivocates wellbeing with material consumption, such that contemporary economic theory is usually defined as a social science which studies human behaviour as a relationship between (given) ends and scarce means which have alternative uses. This is sad, because by assuming a reduced view of what it is to be a human being, one inevitably tends to bring forth such a reduced condition. Note that we have been slipping back into Mercantilist forms of thought (money & trade based wealth) rather than integral wealth self-generated from within (Physiocrats).

Despite that Marshall matched consumption with utility, he himself viewed this as a useful temporary theoretical construct rather than something laudable or desirable. For example, most modern economists don't realise that he was involved in the Cooperative movement, even being invited to serve as President of the 1889 Cooperative Congress.