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Tristan Watts

Schools of Thought Timeline

Keynesian

Behavioral

Chicago

Neo-Keynesian

Bibliography

Adam Smith

1723 – 1790 born in Kirkcaldy, Scotland

Commonly known as the “a founding father of economics”

Some key concepts:

1) Specialization

2) Consumer Capitalism

3) How to treat the rich

4) Educate Consumers

The Theory of moral sentiments – Based on his lectures, Developed foundation for general system of morals. Showed that moral ideas and action are the basic elements due to humans being social creatures.

The Wealth of Nations (book) 1776 – (KEY CONCEPT - free market seems disorganized but it actually is a self-adjusting mechanism.) Smith took a position which opposed government interference in business and commercial transaction. Although, through the nineteenth century, Smith did agree on the decisive impact of low tariffs and ideas of free trade on government policies. He rejected the Physiocracy view about land and stressed the importance of labour. In this piece of literature, the importance of division of labour and human capital was stressed tremendously; he emphasized that these are necessary for growth of production.

Invisible Hand Theory 1776 (wealth of nations) – The invisible hand is a metaphor for the unseen forces that move the free market economy. It is believed that through a free market economy, self-interested individuals operate through a feeling of mutuality. It is part of the laissez-faire (let do/let go) approach to the market. This approach is not promoting government interference and allows the market to find its equilibrium on its own.

The Division of Labor – dividing the production process into different stages enables workers to focus on specific tasks. If workers can concentrate on one small aspect of production, this increases overall efficiency.

Harmony of interests and limited government Theory – Smith argues that the intervention of government in any form might have an effect on the economy and prevent the market from work efficiently. He did agree with the government with increased spending in order to improve the infrastructures and make easier transaction of trade.

Area of Interest:

- Aimed to enlarge the welfare of society

- Advocated the free trade and self interest in exchange goods or services

- Society is free to choose the ways to trade and which goods to trade in the market to maximize their profit

- Limited role in government, believed that the intervention of the government would be a burden of society

- Wanted government to educate society

“The great secret of education is to direct vanity to proper objects.” -Adam Smith

Classical

Karl Marx

Problems with capitalism:

1) Modern work is alienated – Marx believed that work should be one of the greatest joys and that for that to be the case, workers needed to see themselves in the objects which they created. Because modern work is specialized, workers couldn't see their contribution to society.

2) Modern work is insecure – With capitalism, work was not a guarantee, especially with modern work. Marx wanted people to not be terrified to be alone/fired and believed through communism he could create a society where every individual felt valued and a sense of belonging.

3) Workers get paid little while capitalists get rich – Marx believed that capitalists would skim off wages as much as possible to achieve greater profit margins. Found this to be atrocious and called it "Primitive Accumulation" and thought that Profit is theft (stealing from workforce), and that profit is just the fancy word for exploitation.

4) Capitalism is very unstable – Due to the nature of Capitalism, Marx claimed that there seems to always be a crisis in development. The key changes are that it went from being a crisis of scarcity to a crisis of abundance. He wanted to redistribute wealth from companies throughout society.

5) Capitalism is bad for capitalists – Marx argued that marriage was an extension of business in a sense that a capitalistic system forces everyone to put economic interests at the heart of their lives so that they can no longer know deep meaningful relationships. Marx called this "Commodity Fetishism". He wanted people to feel free from financial constraint.

The Communist Manifesto key points:

- No private property or inherited wealth

- Steeply graduated income tax

- centralised control of the banking, communication, and transport industries

- Free public education.

A Communist system would allow people to develop lots of different sides of their natures.

1818 - 1883, Born, Trier Germany

“Philosophers until now have only interpreted the world in various ways. The point, however, is to change it.” - Karl Marx, Elven Theses on Feuerbach

Marxist

1840-1921, Born in Poland

Carl Menger

Key Concepts:

- Distinctions of being the founder of Austrain economics , and a co-founder of the marginal utility revolution.

-He worked separately from William Jevan and Leon Walras, but reached similar conclusions by a different method.

-He didn't believe that the goods provide “utils” , or units of utility

- He wrote that; goods are valuable because they serve various uses whose importance differs.

-He used insight to resolve the diamond-water paradox that had baffled Adam Smith.

- He also used it to refute the labour theory value

- He used his “subjective theory of value” to arrive at one of the most powerful insights in economics : both sides gain from exchange

- Although Adam Smith beat him to it when he published, ‘The Wealth of Nations’

- Menger came up with an explanation of how money develops, currently is still accepted today

-he pointed out that if people barter, they can rarely get what they want.

-for example, in order to make trades of equal value, sometimes making a few intermediate trades first to gain an item of equal value might be the steps to succeed.

Austrian

1842 - 1924, Born in London

Alfred Marshall

- Marshall principles of economics (1890) was his most important contribution to economic literature. In this work he emphasized that the price and output of a good are determined by supply and demand, which acts like “blades of scissors” determining price.

- Marshall defines economy as:

“ Political economy or economics is a study of mankind in the ordinary business life; it examines that part of an individual and social action which is most closely connected with the attainment and with the use of material requisites of well-being. Thus it is on the one side a study of wealth and on the other and more important side, a part of the study of man.”

- He believed that economics is a study of human beings. That it deals with economic aspects of man and not social, political, or religious aspects of life.

- He considered both induction and deduction as useful for economics

- Marshall was the great interpreter of the method of the partial equilibrium.

- Marshall added the term consumers surplus to economic literature.

- According to Marshall - “The excess or price which he would be willing to pay rather than go without the thing, over that which he actually does pay , is the economic measure of this surplus satisfaction. It may be called consumers surplus“

Neoclassical

1848 - 1923, Born in Paris, France

Vilfredo Pareto

- His principle is also known as the Pareto Rule or the 80/20 Rule. 80% of outputs are the result from 20% of all inputs

- The Pareto principle is merely an observation, not law. Although broadly applied, it doesn't apply to every scenario

- The principle can be applied to a wide range of areas such as manufacturing, management, and human resources.

- Was an italian engineer , sociologist, economist, political scientist, and philosopher

- He wrote MANY books (15+)

- He studied income distribution and in the analysis of individual choices.

John Kenneth Galbraith

1908 - 2006, Born in Iona Station, Ontario, Canada

- Studied at the universities of Toronto and California

- His experiences have included:

-Being the posy Chief economist for the American Farm Bureau Federation

-High positions with the U.S. Government during World War II

-Membership on the board of editors for Fortune Magazine

-Ambassador of India during the Kennedy administration

-Professor of economics at Harvard

-Chairman of the Americans for Democratic Action

- He is also a novelist and an expert of Far Eastern Art

- His major writings constitute both an attack on neoclassical economic thought and also on analysis of modern capitalism

- He is a critic of the neoclassical “conventional wisdom”: a set of ideas that is familiar to all, widely accepted, but no longer relevant

- Galbraith said, “Ideas are inherently conservative. They yield not to attack other ideas but to massive onslaughts of circumstances with which they cannot contend.”

- According to him, “modern capitalism is dominated by large enterprises and characterized by an abundance of contrived wants that are the product of corporate planning and massage advertising.”

- His “revised sequence”, producers decide what shall be produced and then mold consumers tastes so that they buy the products

Institutional

John Maynard Keynes

1883 – 1946 Cambridge, United Kingdom

Dominated after WWII -> 1970’s

Argued that inadequate overall demand could lead to prolonged periods of high unemployment. He stated that during a recession, strong forces often dampen demand as spending goes down. When the economy is down consumers are more hesitant to buy. If they continue to not buy the economy progressively will become worse. Keynes economics states that intervention is necessary to moderate the booms and busts in economic activity (business cycle). Keynes advocated for lower taxes to stimulate demand and pull the global economy out of the depression.

- Argued with the Austrian School of Economics. They believed that recessions and booms are a part of the natural order and that government intervention only worsens that recovery process.

Milton Friedman

1912 – 2006, Brooklyn, New York, United States

Friedman argued for free trade, smaller government, and a slow, steady increase of the money supply in a growing economy. Friedman emphasised the monetary policy and the quantity theory of money which is now known as monetarism. From this, he was able to attract other likeminded individuals to the University of Chicago (rise of the Chicago School of economics).

Friedman was awarded the Nobel Prize in Economic Science in 1976. Once he won, the main economic theory everyone followed shifted from Keynesianism more toward the Chicago School/ Monetarism.

Key Implications:

1) Judge policies by their results, not their intentions

2) Economics can be communicated to the masses

3) “Inflation is always and everywhere a monetary phenomenon”

4) Technocrats must not control the economy

5) Government failures can be as bad, or worse, than market failures

Joseph E. Stiglitz

1943- , Gary, Indiana, United States

In 2001 Stiglitz was awarded the Nobel Memorial Prize in Economics for the research on information asymmetry. This research was ground breaking in many different areas, monopolistic competition, and risk aversion. Stigliz’ research has contributed to the understanding of how microeconomics can provide a foundation for macroeconomics. He was the chairman of the President’s Council of Economic Advisers (CEA), during the Clinton administration. He was also a former senior vice president and chief economist of the World Bank. In 2011 Stiglitz was named by Time magazine as one of the 100 most influential people in the world. He is the author of numerous books, many of which are best sellers.

James Tobin

1918 – 2002 Champaign, Illinois, United States

1981 Nobel Prize “for his analysis of financial markets and their relations to expenditure decisions, employment, production, and prices.”

Tobin Tax - “The Tobin tax is a tax on spot currency conversions that was originally proposed with the intention of penalizing short-term currency speculation. Rather than a consumption tax paid by consumers, the Tobin tax was meant to apply to financial sector participants as a means of controlling the stability of a given country's currency. It is more formally known today as a Financial Transactions Tax (FTT), or less formally a Robin Hood tax.” (Investopedia). In 2009 the U.K regulator Adair Turner suggested a “Tobin Tax”, this was to suppress a currency speculation.

Portfolio Selection Theory – This Theory was the reason why Tobin was awarded the Nobel Memorial Prize in Economics in 1981. This theory describes how the changed in financial markets can change investment decision of businesses and household. Businesses and households would choose different financial assets to hold in their portfolios based on the weighted risks and expected rates of return.

James Tobin

Paul Krugman

1953-, Albany, New York, United States

Paul Krugman is an economist and writer for the United States; he is known for his work on international economics and trade issues. In 2008 he was awarded the Nobel Prize in economics for his work on New Trade Theory and New Economic Geography. Currently, he is considered to be one of the most influential economists. He has taught at Yale, Princeton, Stanford, and the Long School of Economics. Currently, he is a distinguished professor of economics at the Graduate Center of the City University of New York, and a regular columnist for The New York Times.

New Trade Theory and New Economic Geography: Krugman’s theory explains observed patterns of trade in the modern era as based on the interaction of consumer preferences for diverse brands of products. The home market effect supports specialization in producing specific brands and concentrates their production in certain countries based on economies scale. His theory grew out of the previous “New Trade Theory”.

Paul Krugman

Daniel Kahneman

1934-,Tel Aviv-Yafo, Israel

- An israeli economist and psychologist

- Notable for his work on the psychology of judgment and decision making

- He also focused on behaviour economics

- Was awarded the 2002 Nobel Memorial Prize in Economic Sciences.

- Education = University of California , Berkeley

- His work on heuristics and cognitive biases is popular among investors because it sheds light on how people make investment decisions.

- He published a book ‘Thinking, Fast and slow’ (2011)

- One such bias which is especially relevant for investing is the phenomenon of loss aversion, according to which the psychological impact of experiencing losses is roughly twice as strongly felt as that of experiencing gains.

- His research suggests that investment decisions are in fact often driven by irrational considerations, despite the beliefs and best intentions of investors.

Bibliography

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