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A Brief History of Economics

Free Market (late medieval and early-modern Europe)


A free market describes a theoretical, idealized, or actual market where the price of
an item is arranged by the mutual non-coerced consent of sellers and buyers, with
the supply and demand of that item not being regulated by a government (see supply
and demand); the opposite is a controlled market, where government sets or
regulates price directly or through regulating supply and/or demand. However, while a
free market necessitates that government does not regulate supply, demand, and
prices, it also requires the traders themselves do not coerce or mislead each other,
so that all trades are morally voluntary. This is not to be confused with a perfect
market where individuals have perfect information and there is perfect competition.

Somewhat idealistic in its concept, a free market assumes that participants do not
mislead or coerce aspects of the market price, supply, demand, do not participate in
price fixing and do not mislead investors. In actual practice history has repeatedly
shown that this ideal world does not exist, price fixing is still practiced and all
market aspects are manipulated by coercion, in the political arena as well as the
marketing to investors and the recipients of goods and services.

The precept of the free market is that government does not regulate, supply, demand
or prices. With special interests paying for political campaigns it is obvious that this
ideal is confounded by market realities and the natural tendency or desire for wealth
and power.

Mercantilism (16th - 18th century)


Mercantilism is an economic theory that holds that the prosperity of a nation
depends upon its supply of capital, and that the global volume of trade is
"unchangeable". Economic assets, or capital, are represented by bullion (gold, silver,
and trade value) held by the state, which is best increased through a positive
balance of trade with other nations (exports minus imports). Mercantilism suggests
that the ruling government should advance these goals by playing a protectionist role
in the economy, by encouraging exports and discouraging imports, especially through
the use of tariffs. The economic policy based upon these ideas is often called the
mercantile system.
Classical Economics (1776)
Classical economics is widely regarded as the first modern school of economic
thought. Its major developers include Adam Smith, David Ricardo, Thomas Malthus
and John Stuart Mill. Sometimes the definition of classical economics is expanded to
include William Petty, Johann Heinrich von Thünen, and Karl Marx.

The publication of Adam Smith's The Wealth of Nations in 1776 is usually considered
to mark the beginning of classical economics. The school was active into the mid
19th century and was followed by neoclassical economics in Britain beginning
around 1870.

Classical economists attempted and partially succeeded to explain growth and


development. They produced their "magnificent dynamics" during a period in which
capitalism was emerging from a past feudal society and in which the industrial
revolution was leading to vast changes in society. These changes also raised the
question of how a society could be organized around a system in which every
individual sought his or her own (monetary) gain.

Classical economists reoriented economics away from an analysis of the ruler's


personal interests to a class-based interest. Physiocrat Francois Quesnay and Adam
Smith, for example, identified the wealth of a nation with the yearly national income,
instead of the king's treasury. Smith saw this income as produced by labor applied to
land and capital equipment. Once land and capital equipment are appropriated by
individuals, the national income is divided up between laborers, landlords, and
capitalists in the form of wages, rent, and interest.

Laissez-faire Economics (19th century - 1867 treaty marked use)


Laissez-faire is a French phrase meaning "let it be" (literally,"Let do"). From the
French diction first used by the 18th century physiocrats as an injunction against
government interference with trade, it became used as a synonym for strict free
market economics during the early and mid-19th century. It is generally understood
to be a doctrine that maintains that private initiative and production are best allowed
to roam free, opposing economic interventionism and taxation by the state beyond
that which is perceived to be necessary to maintain individual liberty, peace,
security, and property rights. Free-market anarchists take the idea to its full length
by opposing all taxation.
In the laissez-faire view, the state has no responsibility to engage in positive
intervention to force equal wealth distribution or to create a welfare state to protect
people from poverty, instead relying on charity. Laissez-faire also embodies free
trade, namely that a state should not use protectionist measures, such as tariffs and
subsidies, in order to curtail trade through national frontiers. It also contains the
idea that the government should not create legal monopolies or use force to damage
de facto monopolies.

In the early stages of European and American economic theory, laissez-faire


economic policy was contrasted with mercantilist economic policy, which had been
the dominant system of the United Kingdom, Spain, France and other European
countries, during their rise to power.

The term laissez-faire is often used interchangeably with the term "free market".
Some use the term laissez-faire to refer to "let do, let pass" attitude for matters
outside of economics.

Laissez-faire is associated with classical liberalism, libertarianism, and Objectivism.


It was originally introduced in the English-language world in 1774, by George Whatley,
in the book Principles of Trade, which was co-authored with Benjamin Franklin.
Classical economists, such as Thomas Malthus, Adam Smith and David Ricardo did
not use the term—Bentham did, but only with the advent of the Anti-Corn Law League
did the term receive much of its (English) meaning.

Austrian Economics (1871)


Austrian Economics (founded by Carl Menger) otherwise known as "The Austrian
School", "Vienna School" or the "Psychological School", is a school of economic
thought that derives from an Aristotelian/rationalist approach that derives from basic
principles of human nature and action.

This Aristotelian/rationalist approach differs both from the currently dominant


Platonic/positivist approach of contemporary neo-classical economics and the once
dominant historical approach of the German historical school and the American
institutionalists.

A student of Austrian Economics and Eugen von Böhm-Bawerk was Ludwig von
Mises. George Reisman, author of "The Government against the Economy" and
"Capitalism" (wherein he endeavored to reconcile Keynesean and Austrian
economics) was mentored by Mises.

Along the lines of thought within this economic theory, Mises felt that the market
would self regulate if given free reign. In many ways he was correct but some points
seem to be missing. The model does not consider mainly the immediate needs and
desires of the businesses and the people without due consideration of long term
needs. All in all the theory is strong but fails to serve the people when weighed with
long term need. This is mainly due to the lack of foresight that desire tends to
engender.

In "Interventionism, An Economic Analysis" (1940), Ludwig von Mises wrote:

The usual terminology of political language is stupid. What is 'left' and what is 'right'? Why
should Hitler be 'right' and Stalin, his temporary friend, be 'left'? Who is 'reactionary' and who is
'progressive'? Reaction against an unwise policy is not to be condemned. And progress towards
chaos is not to be commended. Nothing should find acceptance just because it is new, radical,
and fashionable. 'Orthodoxy' is not an evil if the doctrine on which the 'orthodox' stand is sound.
Who is anti-labor, those who want to lower labor to the Russian level, or those who want for
labor the capitalistic standard of the United States? Who is 'nationalist,' those who want to bring
their nation under the heel of the Nazis, or those who want to preserve its independence?

Neoclassical Economics (1871-1877)


Neoclassical economics refers to a general approach in economics focusing on the
determination of prices, outputs, and income distributions in markets through supply
and demand. These are mediated through a hypothesized maximization of income-
constrained utility by individuals and of cost-constrained profits of firms employing
available information and factors of production. Mainstream economics is largely
neoclassical in its assumptions, at least at the microeconomic level. There have
been many critiques of neoclassical economics, often incorporated into newer
versions of neoclassical theory as human awareness about economic criteria
change. Neoclassical economics is often called the marginalist school.
Keynesean Economics (1921-1936)
Keynesian economics promotes an economy where the state and the private sectors
play an important role. The theory promotes the idea that demand for goods is the
driving factor of the economy. This theory, which happens to be the main economic
theory of our current economy concludes that there is no impetus to achieve full
employment or drive output and that the state and private businesses must work
toward driving policies to encourage such ends. This seems to be in contrast to the
tenets of classical and supply-side economics as well as the Austrian School.

http://en.wikipedia.org/wiki/John_Maynard_Keynes

Criticism

Wikipedia

The Failure of the "New Economics" (1959) is a book by Henry Hazlitt offering a
detailed critique of John Maynard Keynes's work The General Theory of Employment,
Interest and Money (1936).

Bettina Bien Greaves, in A Man for All Seasons says:

In Economics in One Lesson, Hazlitt demolished various Keynesian programs in a


rather low-key manner. Then in 1959, in The Failure of the "New Economics," he
critiqued Keynes' major work, The General Theory of Employment Interest and Money
(1936) in detail, citing chapter and verse. The Failure of the "New Economics" (1959)
is much more scholarly than Economics in One Lesson, its market narrower, but it is
by no means less important.

To refute each Keynesian error, Hazlitt expounded sound economic theory in a way
academia couldn't ignore. John Chamberlain, who reviewed the book in The Freeman,
titles his review "They'll Never Hear The End of It." The dean of the Department of
Economics at a leading university questioned Hazlitt's credentials for critiquing the
noted Keynes. Mises came to Hazlitt's defense. Hazlitt, Mises responded, was "one of
the outstanding economists of our age," and his anti-Keynes book was "a devastating
critique" of the Keynesian doctrines.

Critics of Hazlitt have asserted that he repeatedly fails to understand Keynes


properly and also never possessed sufficient mathematical ability to critique Keynes.

Full text available on mises.org


Demand-Side Economics
(See Keynesean Economics above)

Supply-Side Economics (1975)


Supply-side economics is a school of macroeconomic thought that argues that
economic growth can be most effectively managed using incentives for people to
produce (supply) goods and services, such as adjusting income tax and capital gains
tax rates. This can be contrasted with the classic Keynesian economics or demand
side economics, which argues that growth can be most effectively managed by
controlling total demand for goods and services, typically by adjusting the level of
Government spending. Supply-side economics is often conflated with trickle-down
economics.

The term was coined by journalist Jude Wanniski in 1975, and further popularised by
the ideas of economists Robert Mundell and Arthur Laffer. Supply-side economics is
controversial because its typical recommendation, reduction of the higher marginal
tax rates, offers benefits to the wealthy, which commentators such as Paul Krugman
see as politically rather than economically motivated.

This may have marked the beginning of the advancement of artificial inflation. By placing
incentives to produce (supply) goods and services into the market, a host of things were inspired
to change. Legislative manipulation and even the production of things that were not needed can
easily spawn from such an idea. If the idea was introduced in 1975 and took a little while to catch
hold it may not be unreasonable to assume that this policy direct may have led to or be a
principle factor in the legislative changes that have enabled the conditions described above.

This dramatic change in incomes in the upper class was not shared even in the upper middle
class and negligible to null in the middle and lower income class segments.

Reaganomics (1981)
Reaganomics (a portmanteau of "Reagan" and "economics," coined by radio
broadcaster Paul Harvey) is a term that has been used to both describe and decry
free market advocacy economic policies of U.S. President Ronald Reagan, who
served from 1981 to 1989 and economic policies perceived as similar. A term parallel
in use and import is Thatcherism, which refers to the economic philosophy of British
Prime Minister Margaret Thatcher (1979–1990), who was Reagan's contemporary.
Reaganomics is most closely associated with neoliberal economic thought.

Trickle-down Economics (1981)


"Trickle-down economics" and "trickle-down theory," in political rhetoric, are
characterizations by opponents of the policy of lowering taxes on high incomes and
business activity. Proponents of these policies claim that they will promote new
investment and economic growth, thereby indirectly benefiting people who do not
directly pay the taxes. Opponents characterize this as a claim that the people who
would otherwise pay the tax will distribute their benefit to less wealthy individuals,
so that a fraction will reach the general population and stimulate the economy.
Proponents of the policies generally do not use the terms "trickle-down economics"
themselves.

Today "trickle-down economics" is most closely identified with the economic policies
of the Ronald Reagan administration, known as Reaganomics or supply-side
economics. A major feature of these policies was the reduction of tax rates on
capital gains, corporate income, and higher individual incomes, along with the
reduction or elimination of various excise taxes. David Stockman, who as Reagan's
budget director championed these cuts but then became skeptical of them, told
journalist William Greider that the term "supply-side economics" was used to
promote a trickle-down idea.

The term "trickle-down" comes from an analogy with a phenomenon in marketing,


the trickle-down effect.

Natural Capitalism (1990's)


Natural capitalism is a set of trends and economic reforms to reward energy and
material efficiency and remove professional standards and accounting conventions
that prevent such efficiencies. It emerged in the 1990s as a coherent theory of how
to exploit market systems and mechanisms of neoclassical economics to save
energy, discourage waste, mimic ecology (biomimicry), and in general to support the
goals of environmentalism by reframing commodity and product relations towards a
strictly service economy, thereby extending the services of natural capital.

When capitalized, the term Natural Capitalism usually refers to the specific set of
reforms described in 1999 by Paul Hawken, Amory Lovins, and Hunter Lovins in the
book of the same name. There is a well-developed theory of natural capital that
predates this work and some generic use of the phrase to apply to environmental
economics. The book and additional material are available online at the book's
promotion site: http://www.natcap.org/

A related, sometimes overlapping, movement believes that networks are inefficient


ways to provide services and advocates autonomous buildings.

DEFINITIONS

Planned (Command) Economy


A planned economy (also known as a command economy or centrally planned
economy) is an economic system in which the state or government controls the
factors of production and makes all decisions about their use and about the
distribution of income. In such an economy, the planners decide what should be
produced and direct enterprises to produce those goods. Planned economies are in
contrast to unplanned economies, i.e. a market economy, where production,
distribution, and pricing decisions are made by the private owners of the factors of
production based upon their own interests rather than upon furthering some
overarching macroeconomic plan.

Market Economy
A market economy (aka. free market economy or free enterprise economy) is an
economic system in which the production and distribution of goods and services
take place through the mechanism unconstrained markets. Businesses and
consumers decide what they will produce and purchase; how much to produce, what
to charge goods and services, what to pay employees, etc. In the ideal market
economy the government does not constrain the market. Price and production are
naturally regulated by supply, demand and competition.
Generally, all economies are mixed economies combining varying degrees of market
and command economy traits. For example, in the United States there are more
market economy traits than in Western European countries.

Mixed Economy
A mixed economy Typically contains a mix of economic systems, both private-owned
and state-owned enterprises or combined elements of competing economic theories.

Relevant aspects might include: various degrees of private economic freedom


(including privately owned industry) intermingled with centralized economic planning
(which may include intervention for environmentalism and social welfare, or state
ownership of some of means of production).

SUBMITTED BY: SANTOS ANTONIO P. ABAD II


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