THE GREAT THINKERS

ADAM SMITH (1723-1790)

A key figure of the Scottish Enlightenment, Smith is the giant on whose shoulders
subsequent economists have stood. He is best known for The Wealth Of Nations, his 1776
landmark book on economics, published at the dawn of the Industrial Revolution - and was
even consulted on economic matters by Pitt The Elder, the Whig politician and Prime
Minister. His arguments for free trade, market competition and the morality of private
enterprise remain as fresh and influential as when written over 200 years ago. That said,
Smith - who studied and later taught at Glasgow University - saw only a limited role for
government and was hostile to economic nationalism. However, his arguments have at
times been misinterpreted by free marketeers in recent decades. The fact is that he did not
believe in 'laissezfaire' (an earlier French doctrine opposing any government intervention in
economic matters) - he saw government's sole job as to establish law and justice, and
provide for the nation's education and basic infrastructure.
DAVID RICARDO (1772-1823)
British political economist - the third of 17 children from a Sephardic Jewish family of
Portuguese origin - Ricardo was a huge influence on 19th-century economics. After making a
fortune as a stockbroker, he became fascinated by economics - and wrote the influential
The Principles Of Political Economy And Taxation (1817). In it, he dealt with questions of
distribution (worker and landlord rewards, etc) and the link with the value of production: in
particular, the idea of economic 'rent', where rewards are greater than the cost of
production. This foreshadowed today's debate about 'fair' pay and rewards. Crucially, he
developed Adam Smith's thinking on free trade, and his work helped the Anti-Corn Law
League win the battle over the Corn Laws (protective duties on corn, designed to protect
the landed gentry, which were repealed in 1846) which established Britain as a free-trading
nation.
FUKUZAWA YUKICHI (1834-1901)
An author, entrepreneur and political theorist, Yukichi's ideas made a lasting impact on
Japan following the 1868 Meiji Revolution, which saw the restoration of imperial rule in
Japan and set in train its economic modernisation. Widely regarded as one of Japan's
founding fathers, Yukichi tried to understand how modern systems and organisations worked
and how 'civilisation', including business enterprise and new technology, could be
transplanted to Japan to create economic development. He was an educator rather than an
economist but wrote many books that influenced a generation of Japanese to embrace a
rational and scientific approach to economic, and wider, policy. If it hadn't been for Yukichi,
I suspect the modernisation and industrialisation of Japan, and subsequently the rest of
east Asia, would have probably been longer in coming.

KARL MARX (1818-1883)

Karl Marx, who spent much of his life in London (and is buried in Highgate Cemetery),
developed theories to explain why capitalist economies - which he opposed - have
fluctuations and crises
OK, Marx might now be remembered as a revolutionary advocate of communism - he cowrote The Communist Manifesto - but he was a leading 19th-century economist in the
'classical' tradition. Indeed, in many ways he is the father of Economic History, having
developed explanations for the evolution of the economic structure from feudalism to
capitalism. The German philosopher, sociologist and economist, who spent much of his life
in London (and is buried in Highgate Cemetery), developed theories to explain why
capitalist economies - which he opposed - have fluctuations and crises. However, despite
his belief in capitalism's self-destructive tendencies, much of his economic thinking stands
up to scrutiny. Had it not been for The Communist Manifesto, I think Western commentators
would recognise more readily today his role in advancing economic thinking.
AMARTYA SEN (1933-)
Among the most important events of my lifetime has been the economic emergence
through rapid growth of major developing countries - most notably China and India, but also
Korea, Brazil and Mexico among others. A variety of fine economists have contributed to
understanding growth and development in the late 20th century: among them Sen, the
Indian Nobel Laureate (he was awarded the 1998 Nobel Prize in Economic Sciences). One of
the Bengal-born economist's key contributions was a book on famine whose essential point
was that it originates in a shortage of income rather than food. More recently he has sought
to inject an ethical dimension into economic thinking. It's interesting to note that not only
are nations like India now making their mark economically, so are their economists.

JOHN MAYNARD KEYNES (1883-1946)

The greatest economic thinker of the 20th century, Keynes (a Liberal incidentally)
challenged fundamentally the idea that market economies will automatically adjust to
create full employment. After working at the Treasury during World War I, he was its chief
representative at the post-war Paris peace conference, but resigned in protest at the
harshness of the planned reparations. In the Twenties he developed radical plans for dealing
with unemployment through deficit financing and state intervention. His insistence on the
central role that uncertainty plays in economic decisions foreshadows much of the current
interest in behavioural economics. While his basic economic framework - in which shortterm economic growth (and employment) depends on 'aggregate demand' (consumption,
investment and net exports) is built into many of our forecasting models today. Later on, he
participated in the Bretton Woods conference (which looked at how to establish a post-war
monetary system that would avoid further economic crises) that led to the creation of the
International Monetary Fund and the World Bank. Admittedly, he went out of fashion in
recent decades when inflation was a bigger worry than unemployment. However, the
present crisis has led to something of a revival in Keynesian thinking, and his insights into
how international imbalances should be tackled remain highly relevant.

MILTON FRIEDMAN (1912-2006)

Wrongly described as the antithesis and an opponent of Keynes, Friedman is associated
essentially with two big ideas which have inspired the Chicago School of Economics. One is
an uncompromising restatement and development of Adam Smith's views on the merits of
free markets. He made the case for floating exchange rates (as Britain has had since Black
Wednesday in 1992) - but the translation of this idea into a belief in 'efficient' financial
markets has been severely tested (perhaps to destruction) in the recent financial crisis. His
other major contribution, the quantity theory of money - given its first clear statement by
the great Scottish thinker David Hume - linking money supply to inflation, was embraced in
the Eighties by Mrs Thatcher's government with mixed results. It has, however, moved back
to centre stage in the current crisis as central banks have fought recession (and the risks of
deflation) by means of aggressive monetary policy: minimal interest rates and expanding
money supply via quantitative easing.
JOSEPH SCHUMPETER (1883-1950)
The Austrian-American economist and political scientist is responsible for the idea of
capitalism as a (positive) source of 'creative destruction'. Technology and capitalism
together drive change and growth - but traditional freemarket thinking would worry about
monopolies (albeit temporary) such as Microsoft's software platforms, which are based on
intellectual property protection of an innovation. However, Schumpeter, who moved to the
USA in 1932, saw the process as benign. He believed that such 'monopoly rents' encouraged
innovation and investment, which are essential to growth. Modern capitalism - often based
on competition between innovative giant companies - is somewhat closer to the
Schumpeter model than Adam Smith's. Incidentally, Schumpeter's followers are a part of the
so-called Austrian School, which is highly critical of the orthodox (Keynesian and
Friedmanite) attempt to fight the current crisis through reflationary fiscal and monetary
policy. They believe banks, governments and individuals have no alternative but to learn
from their mistakes, not be rescued from them.
DANIEL KAHNEMAN (1934-)
Daniel Kahneman, an Israeli-American psychologist - not an economist - did much of the
pioneering work in the fascinating field of 'behavioural economics'
Perhaps the most radical change in direction in economics in recent decades has been the
emergence of 'behavioural economics'. And Kahneman, an Israeli-American psychologist not an economist - did much of the pioneering work in this fascinating field. Traditional
economics, from Smith and Ricardo to Marx, Keynes and Friedman, has been based on
general theories which treat it as a branch of natural science. But people are not like
atoms, or plants, or rats in mazes. They learn and adapt (or we hope they do), invalidating
models based on past behaviour. However, people also hang on to irrational habits and
seemingly perverse ways of evaluating choices, confounding those economists who premise
their models on 'rational economic man'. Some economists have retaliated by applying
economic rationality to explain non-economic problems such as crime and punishment,
prostitution and marriage patterns.

HYMAN MINSKY(1919-1996)
The Western world has been painfully reminded over the past three years of the way
capitalist economies - especially their banks - can be caught in speculative financial
bubbles which burst with disastrous effects.
The South Sea Bubble (which saw shares in an 18th-century British company soar before
crashing) was an early example of such an event. The philosopher John Stuart Mill wrote
about cycles leading to bank collapses and ensuing 'credit crunches' in the 19th century and Minsky was the best analyst of the problem in recent times.
Sometimes described as a post-Keynesian economist (because he supports some government
intervention), the American described with uncanny accuracy the seven stages of a boom
and bust cycle which we have now seen enacted in our own country.
The Coalition Government is now seeking to manage the consequences and to stop another
Minsky cycle developing.

Evolution of Economics as a Discipline

A brief History of Economics:
The modern Economics, which we still study now, is the result of the efforts of ancient or
Pre classical (384BC-1776), classical (1776-1871) , Neoclassical (1871-Today) and Islamic
Economists.
Ancient or Pre classical (384BC-1776):
The study of the economy in western civilization was begun largely with the Greeks,
particularly Aristotle (384-322 BC) and Xenophon (420?-355? BC). The ancient economic
thinkers concerned with the theories of money, Taxation, usury, property rights,
Entrepreneurship, Price differentials, Justice in economic exchange and analyzed the
impact of ethics in economics.
Famous economists of the ancient school include St. Thomas Aquinas(1225-1274?),John Duns
Scotus (1265-1308), Jean Buridan(1295 1358), Jean Buridan, (1295 1358),Nicole de
Oresme, (1320-1382),Gabriel Biel, (1425-1495), Sir William Petty (1623-1687).
Classical (1776-1871):
The classical economists developed the theories about how markets and market economies
work focusing the dynamics of economic growth which stressed economic freedom and
promoted ideas such as laissez-faire and free competition. They introduced the labor
theory of value, theory of distribution (Smith),, Principles of Political Economy and
Taxation((Ricardo 1817, Mill 1848), the theory of surplus value(Karl Marx), principle of
comparative advantage ,international-trade theory (Ricardo) and Monetary theories.
Famous economists of the classical school include Adam Smith, David Ricardo, W. Jevons,
Jean-Baptiste Say, John Stuart Mill, Thomas Malthus, Professor Pigou, and Alfred Marshall.
Neoclassical (1871-Today):
Neoclassical economists first introduced the theories of Rationality & individual
preferences, utility maximization (Utilitarianism, Jeremy Bentham) and Information
economics, Theories of market forms and industrial organization, general equilibrium
theory, indifference curves and the theory of ordinal utility. Neoclassical economics also
increased the use of mathematical equations in the study of various aspects of the
economy.
Famous economists of the Neoclassical school are William Stanley Jevons (Theory of
Political Economy (1871), Carl Menger (Principles of Economics (1871), Leon Walras

(Elements of Pure Economics (1874 1877), Joan Robinson (The Economics of Imperfect
Competition (1933), Edward H. Chamberlin (the Theory of Monopolistic Competition (1933),
Paul Samuelson and so on.

Economic Growth and the Early Industrial Revolution

The transition from an agricultural to an INDUSTRIAL ECONOMY took more than a century
in the United States, but that long development entered its first phase from the 1790s
through the 1830s. The INDUSTRIAL REVOLUTION had begun in Britain during the mid18th century, but the American colonies lagged far behind the mother country in part
because the abundance of land and scarcity of labor in the New World reduced interest in
expensive investments in machine production. Nevertheless, with the shift from handmade to machine-made products a new era of human experience began where increased
productivity created a much higher standard of living than had ever been known in the
pre-industrial world.
The start of the American Industrial Revolution is often attributed toSAMUEL SLATER who
opened the first industrial mill in the United States in 1790 with a design that borrowed
heavily from a British model. Slater's pirated technology greatly increased the speed with
which cotton thread could be spun into yarn. While he introduced a vital new technology to
the United States, the economic takeoff of the Industrial Revolution required several other
elements before it would transform American life.
Another key to the rapidly changing economy of the early Industrial Revolution were new
organizational strategies to increase productivity. This had begun with the "OUTWORK
SYSTEM" whereby small parts of a larger production process were carried out in numerous
individual homes. This organizational reform was especially important for shoe and boot
making. However, the chief organizational breakthrough of the Industrial Revolution was
the "FACTORY SYSTEM" where work was performed on a large scale in a single centralized
location. Among the early innovators of this approach were a group of businessmen known
as the BOSTON ASSOCIATES who recruited thousands of New England farm girls to operate
the machines in their new factories.
The most famous of their tightly controlled mill towns was LOWELL, MASSACHUSETTS,
which opened in 1823. The use of female factory workers brought advantages to both
employer and employee. The Boston Associates preferred female labor because they paid
the young girls less than men. These female workers, often called "LOWELL GIRLS,"
benefited by experiencing a new kind of independence outside the traditional maledominated family farm.
The rise of WAGE LABOR at the heart of the Industrial Revolution also exploited working
people in new ways. The first strike among textile workers protesting wage and factory
conditions occurred in 1824 and even the model mills of Lowell faced large STRIKES in the
1830s.
Dramatically increased production, like that in the New England's textile mills, were key
parts of the Industrial Revolution, but required at least two more elements for widespread
impact. First, an expanded system of credit was necessary to help entrepreneurs secure the
capital needed for large-scale and risky new ventures. Second, an improved transportation
system was crucial for RAW MATERIALS to reach the factories and manufactured goods to
reach consumers. State governments played a key role encouraging both new banking

institutions and a vastly increased transportation network. This latter development is often
termed theMARKET REVOLUTION because of the central importance of creating more
efficient ways to transport people, raw materials, and finished goods.
Alexander Hamilton's Bank of the United States received a special national charter from the
U.S. Congress in 1791. It enjoyed great success, which led to the opening of BRANCH
OFFICES in eight major cities by 1805. Although economically successful, a governmentchartered national bank remained politically controversial. As a result, President Madison
did not submit the bank's charter for renewal in 1811. The key legal and governmental
support for economic development in the early 19th century ultimately came at the state,
rather than the national, level. When the national bank closed, state governments
responded by creating over 200 state-chartered banks within five years. Indeed, this rapid
expansion of credit and the banks' often unregulated activities helped to exacerbate an
ECONOMIC COLLAPSE IN 1819 that resulted in a six-year DEPRESSION. The dynamism of a
capitalist economy creates rapid expansion that also comes with high risks that include
regular periods of sharp economic downturns.
The use of a STATE CHARTER to provide special benefits for a PRIVATE CORPORATION was
a crucial and controversial innovation in republican America. The idea of granting special
privileges to certain individuals seemed to contradict the republican ideal of equality
before the law. Even more than through rapidly expanded banking institutions, state
support for internal transportation improvements lay at the heart of the nation's new
political economy. Road, bridge, and especially canal building was an expensive venture,
but most state politicians supported using government-granted legal privileges and funds to
help create the INFRASTRUCTURE that would stimulate economic development.
The most famous state-led creation of the Market Revolution was undoubtedly New
York's ERIE CANAL. Begun in 1817, the 364-mile man-made waterway flowed between
Albany on the Hudson River and Buffalo on Lake Erie. The canal connected the eastern
seaboard and the Old Northwest. The great success of the Erie Canal set off a canal frenzy
that, along with the development of the steamboat, created a new and complete national
water transportation network by 1840.