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The Economists
Robert M. Hayes
2005
Overview
Personal Economics
Microeconomics
Macroeconomics
The economists
What is economics?
First, lets look at economics. What is it?
To answer that question, I will first briefly review the history of
economics. Then, describe the contexts for economics , the major
concerns of economics, and finally the major schools of thought
about those concerns.
Mercantilism
Physiocrats
Classicism
Utilitarianism
Marginalism
Marxism
Institutionalism
Keynesianism
Current Theories
Mercantilists
Mercantilism was the economic philosophy adopted by merchants
and statesmen during the 16th and 17th centuries. Mercantilists
believed that a nation's wealth came primarily from the
accumulation of gold and silver. Nations without mines could
obtain gold and silver only by selling more goods than they bought
from abroad. Accordingly, the leaders of those nations intervened
extensively in the market, imposing tariffs on foreign goods to
restrict import trade, and granting subsidies to improve export
prospects for domestic goods. Mercantilism represented the
elevation of commercial interests to the level of national policy.
Physiocrats
Physiocrats, a group of 18th century French philosophers,
developed the idea of the economy as a circular flow of income and
output. They opposed the Mercantilist policy of promoting trade
at the expense of agriculture because they believed that
agriculture was the sole source of wealth in an economy. As a
reaction against the Mercantilists' copious trade regulations, the
Physiocrats advocated a policy of laissez-faire, which called for
minimal government interference in the economy.
Classical Economics
The Classical School of economic theory began with Adam Smiths work,
The Wealth of Nations. In Smith's view, the ideal economy is based on a
self-regulating market system. He described it as an "invisible hand" that,
if each individual pursues self-interest, results in producing the greatest
benefit for society as a whole. Smith incorporated some of the
Physiocrats' ideas, including laissez-faire, into his own economic theories,
but rejected the idea that only agriculture was productive.
While Adam Smith emphasized the production of income, David Ricardo
focused on the distribution of income among landowners, workers, and
capitalists.
Thomas Robert Malthus used the idea of diminishing returns to explain
low living standards. Population, he argued, tended to increase
geometrically, outstripping the production of food, which increased only
arithmetically.
Utilitarianism
Coming at the end of the Classical tradition, John Stuart Mill
parted company with the classical economists on the inevitability
of the distribution of income produced by the market system. Mill
pointed to a distinct difference between the market's two roles:
allocation of resources and distribution of income. The market
might be efficient in allocating resources but not in distributing
income, he wrote, making it necessary for society to intervene.
Marginalism
Classical economists theorized that prices are determined by the costs of
production. Marginalist economists emphasized that prices also depend
upon the level of demand, which in turn depends upon the amount of
consumer satisfaction provided by individual goods and services.
Marginalists provided modern macroeconomics with the basic analytic
tools of supply and demand, consumer utility, and a mathematical
framework for using those tools. Marginalists also showed that in a free
market economy, factors of production - land, labor, and capital - receive
returns equal to their contributions to production. This principle was
sometimes used to justify the existing distribution of income: that people
earned exactly what they or their property contributed to production.
Marxism
The Marxist School challenged the foundations of Classical theory.
Writing during the mid-19th century, Karl Marx saw capitalism as an
evolutionary phase in economic development. He believed that capitalism
would ultimately be succeeded by a world without private property.
Advocating a labor theory of value, Marx believed that all production
belongs to labor because workers produce all value within society. He
believed that the market system allows capitalists, the owners of
machinery and factories, to exploit workers by denying them a fair share
of what they produce.
Marx predicted that capitalism would result in growing misery for
workers as the effort of capitalists to maximize profit would lead them to
adopt labor-saving machinery, creating an "army of the unemployed"
who would eventually rise up and seize the means of production.
Institutionalism
Institutionalist economists regard individual economic behavior as
part of a larger social pattern influenced by current ways of living
and modes of thought. They rejected the narrow Classical view
that people are primarily motivated by economic self-interest.
Opposing the laissez-faire attitude towards government's role in
the economy, the Institutionalists called for government controls
and social reform to bring about a more equal distribution of
income.
Keynesianism
Reacting to the severity of the worldwide depression of the 1930s, John Maynard
Keynes in 1936 broke from the Classical tradition with the publication of the
General Theory of Employment, Interest, and Money. The Classical view assumed
that in a recession, wages and prices would decline to restore full employment.
Keynes held that the opposite was true. Falling prices and wages, by depressing
people's incomes, would prevent a revival of spending. He insisted that direct
government intervention was necessary to increase total spending.
Keynes' arguments provided a rationale for the use of government spending and
taxing to stabilize the economy. Government would spend and decrease taxes
when private spending was insufficient and threatened a recession; it would
reduce spending and increase taxes when private spending was too great and
threatened inflation. His analytic framework, focusing on the factors that
determine total spending, remains at the core of modern macroeconomic
analysis.
Current Theories
Keynesian theory, with its emphasis on activist government policies to promote
high employment, dominated economic policymaking in the early post-war
period. But, economic theories are constantly changing, and starting in the late
1960s, troubling inflation and lagging productivity prodded economists to look
for new approaches. From this search, new theories emerged:
Monetarism, which updates macroeconomic analysis before Keynes. It
reemphasizes the critical role of monetary growth in determining inflation.
Rational Expectations Theory provides a contemporary rationale for the
pre-Keynesian tradition of limited government involvement in the economy.
It argues that the market's ability to anticipate government policy actions
limits the effectiveness of government intervention.
Supply-side Economics recalls the Classical School's concern with economic
growth as a fundamental prerequisite for improving society's material wellbeing. It emphasizes the need for incentives to save and invest if the nation's
economy is to grow.
Future Theories
It seems to me that we are now in an economic context in which the change is
at least as dramatic as that involved in the addition of an industrial economy
to the agricultural economy during the 19 th century. Of course, it is the
addition of an information economy to the industrial and agricultural
economies.
This implies to me that there will need to be new economic theories that
recognize new facts of life.
Now, the agricultural and industrial economies obviously will continue to
function, as did the agricultural when the industrial revolution occurred. But
the agricultural economy changed in very important ways as it was affected
by the industrial revolution. And, in the same way, there should be changes in
both the agricultural and industrial economies as they are impacted by the
information revolution.
Since libraries are a significant component of the information sector of the
economy, their role in the information revolution, and in the economic
theories to deal with it, must be understood.
(2) Microeconomics
Microeconomics, or the economics of the firm, is concerned with
the balance between costs and income, especially as determined by
the interactions in the marketplace. The costs arise from labor,
materials, and investment in and return on capital. The income
derives from the customers, based on the prices charged and
payments received from the sale of products and services.
In arriving at that balance, the individual firm faces not only the
forces of the marketplace but those of competition as well. It must
therefore deal with changing costs and demands and changing
competitive environments.
Thus, in micro-economics, we are concerned with
The Marketplace
What is the Marketplace? In this context, it is the place for meeting together
of people for the purchase and sale of goods, publicly exposed, at a fixed time
and place. (OED definition 1 for Market)
It must be said, though, that a marketplace usually is much more than that
and, indeed, is a social institution, a forum in which more than merely
economic activities occur.
Having said that, we will now focus on the economic role of the marketplace.
Before doing so, though, I think it is important to recognize a possible
confusion in terminology. Economists and businessmen, but especially the
latter, both use the term market in two quite different ways. One is to refer
to what I have called the marketplace and the other is to refer to the customers
(i.e., the market) for a product of service.
I will try to avoid the possible confusion by identifying the word market
with marketplace and refer to the customers as customers.
Management of a Marketplace
There is, to some degree, the perception that a marketplace functions without
management. Adam Smith referred to it as the invisible hand as though the
processes occur almost without intervention.
The facts, though, are that marketplaces must be managed.
One need is to manage the process of agreement on the terms of exchange,
that is, to manage the individual transaction.
Price must be agree on.
Product or service specification must be agreed on.
Terms of delivery must be agreed on.
But the other is to provide oversight on processes and transactions
To ensure legality of trade
To enforce standards and regulations
To assure fair trading
To determine effects on third parties (called externalities)
Asymmetric Information
Asymmetric information arises when the seller and the buyer have
different information related to the transaction.
Typically, the seller knows more about the good (and its defects)
than the buyer
Buyers cannot easily distinguish reliable goods from faulty goods
The result of asymmetric information is that the decisions by the
buyer and seller will not lead to the best result, for one or the other
and therefore for the effectiveness of the market.
In the case of the library, there are usually significant asymmetries
between the knowledge of the library and its staff and that of the user.
But, interestingly enough, this has been one of the strengths of the
relationship between the library and its users, not a deficiency. And
this is an issue worth pursuing!
Externalities
Externalities arise when there are effects of a transaction upon
others not involved in it. Those effects might be negative (e.g.
pollution) or they might be positive (e.g., R&D spillovers).
With negative externalities, the effect of the market is that too
much may be produced.
With positive externalities, the effect of the market is that too little
may be produced.
For the library, there would appear to be many externalities, with
benefits from its existence and use arising in many ways. This is an
issue well worth exploring!
Increasing Returns
Increasing returns to scale (what are called economies of scale)
are in principle a good thing, since they improve the efficiency in
use of fixed resources.
But increasing returns to scale are inconsistent with perfect
competition and therefore lead to market failure.
Either small firms fail to exploit increasing returns
Or increasing returns tends to lead to monopoly
For the library, the issue of whether there are economies of scale
has been investigated, but the results to date have been at best
equivocal.
Sources of Cost
Opportunity Cost vs. Purchase Cost
Fixed Cost vs. Sunk Cost
Total Cost (i.e., fixed cost plus variable cost)
Unit Cost
Marginal Cost vs. Average Cost
Sources of Cost
There are three sources of cost:
Labor
Capital, as the investment in the tools of production
Materials that must be acquired for the substance of production
Total Costs
Total costs of production are the sum of fixed and variable costs. If
T = Total Cost, F = Fixed Costs and V = Variable Costs, then: TC
= FC + VC
Fixed costs have to be incurred whatever the scale of production.
They are taken as constant within a pre-determined maximum
scale of operation. It should again be noted that there will be
dependence of the magnitude of fixed costs on the maximum scale
of operation they can handle.
Variable costs depend on the volume of production, the actual
scale of operation.
Unit Costs
In economics, there are two measures of unit cost:
Marginal cost is the additional cost of producing the next unit
given that the company has already produced a number of units
Average cost is the total cost for producing n units divided by n.
That is, A = T/n
If there are large fixed costs, then marginal cost will usually fall
below average cost.
Economies of Scale
Economies of Scale arise when the average cost declines as the scale of
production increases.
This will usually be the case when there are large fixed costs, since those
fixed costs will be divided among a larger number of units. It will sometimes
be the case when the learning curve results in increased efficiency.
This will usually NOT be the case when the variable costs increase as the
number of units increase. This can arise, in particular, when production
consumes a scarce resource or results in decreased efficiency.
In principle, one would expect a library to have substantial economies of
scale, given the usually large capital investment in collection, building, and
facilities. There have been studies made to examine whether that indeed is
the case, but the results were at best equivocal.
(3) Macroeconomics
Macroeconomics tries to answer questions like the following:
Why do prices change from one time period to another?
Why does national employment vary from year to year?
Why does average income vary among countries?
The role of macroeconomics is to help in the following areas:
Establishing social policy and making social choices
Measuring national income
Determining national fiscal policy
Managing money and banking
Dealing with inflation, unemployment, and economic growth
Fitting a country into the world economy
The tools of macroeconomics are valuable to library management in
Fitting libraries into the national economy
Determining the level of resources appropriate for libraries
Guiding social and institutional policies with respect to libraries
Output from
Markets
Receive
goods/services
Input to
Markets
Provide Labor,
Money, Land
Pay taxes
Output from
Markets
Receive income
Individuals,
Households
Input to
Markets
Order, pay for
goods/services
Pay taxes
Receive
revenue
Receive
goods/services
Provide factors of
production
Order, pay for
factors of production
Pay income for
wages, rents, profit
Pay taxes
Receive revenue
Firms
Provide goods
and services
Order, pay for
goods/services
Receive taxes
and fees
Receive
goods/services
Provide
infrastructure
Order, pay for
factors of production
Pay income for
wages, rents
Receive taxes
and fees
Receive factors
of production
Pay taxes
Governments
Provide
infrastructure
Order, pay for
goods/services
Receive factors
of production
Economists
It needs to be recognized that economic positions and theories are not like
those about the physical and biological world. The things they deal with
reflect the decisions of people, not the laws of the world, which presumably
are independent of what people do.
The positions and theories are the result of the work of individuals, called
economists. They have brought to the process of creating those positions
and theories their own views of what is right and what should be social
policies., governing what people do.
It is therefore essential to understand who these persons were and what
their positions were.
I will review a selected set of economists in two groups
1723-1790
1766-1834
1772-1823
1842-1924
1848-1923
1858-1940
1748-1832
1806-1873
1818-1883
1839-1897
1857-1929
1883-1946
METHODOLOGY ORIENTED
Leon Walras
Francis Edgeworth
Irving Fisher
Joseph Schumpeter
John von Neumann
1834-1910
1845-1926
1867-1947
1883-1950
1903-1957
Private-Value Oriented
The next six displays present the economists that I identify as
private-value oriented.
Please recognize that each of the economists will be concerned
with both public and private values, as well as methodology, so
this assignment simply represents my own interpretation of the
primary focus.
Public-Value Oriented
The next six displays present the economists that I identify as
public-value oriented.
Please recognize that each of the economists will be concerned
with both public and private values, as well as methodology, so
this assignment simply represents my own interpretation of the
primary focus.
Methodology Oriented
The next five displays present the economists that I identify as
methodology oriented.
Please recognize that each of the economists is very methodology
oriented, so this assignment simply represents my own
interpretation of the primary focus.
Relevant Non-Economists
I think it is important to recognize and to include in this listing a
number of persons who, while not economists, are very relevant to
the development of economic positions and theories.
1974. Gunnar Myrdal and Friederich von Hayek "For their pioneering work in
the theory of money and economic fluctuations and for their penetrating
analysis of the interdependence of economic, social, and institutional
phenomena."
1975. Leonid Kantovarich and Tjalling Koopmans "For their contributions to
the theory of the optimum allocation of resources."
1976. Milton Friedman "For his achievements in the field of consumption
analysis, monetary history and theory and for his demonstration of the
complexity of stabilization policy."
1977. Bertil Ohlin and James Meade "For their pathbreaking contribution to
the theory of international trade and international capital movements."
1978. Herbert Simon "For his pioneering research into the decision making
process within economic organizations."
1979. Theodore Schultz and Arthur Lewis "For their pioneering research into
economic development, with particular consideration of the problems of
developing countries."
1980. Lawrence Klein "For the creation of econometric models and their
application to the analysis of economic fluctuations and economic
policies."
1981. James Tobin "For his analysis of financial markets and their
relations to expenditure decisions, employment, production and prices."
1982. George Stigler "For his seminal studies of industrial structure,
functioning of markets and causes and effects of public regulation."
1983. Gerard Debreu "For having incorporated new analytic methods into
economic theory and for his rigorous reformulation of the theory of
general equilibrium."
1984. Richard Stone "For having made fundamental contributions to the
development of systems of national accounts and hence greatly improved
the basis for empirical economic analysis."
1985. Franco Modigliani "For his pioneering analysis of savings and
financial markets."
In 1994, John Forbes Nash, Jr. won the Nobel Prize for pioneering work
in game theory. Nash was 66. While he was still only 21, he wrote a 27page doctoral dissertation on game theory -- the mathematics of
competition. The great John von Neuman, then at Princeton, had treated
win-lose competitions. Now Nash showed how to construct mathematical
scenarios in which both sides won. Nash put a whole new face on
competition, and he drew the attention of theoretical economists. He had
turned game theory into a tool. This young genius brought the field to
fruition. He went on to MIT and for eight years dazzled the
mathematical world. He worked in economics as well as mathematics.
He even invented the game of Hex, marketed by Parker Brothers. Then,
disaster! For 25 years, from about 1957, he suffered from paranoid
schizophrenia. Mental illness wrapped about him like an evil cloud.
Today, though, he is working on novel uses of the computer in a research
post at Princeton. Nash has survived what looked like death.
The End