Major Figures in the Development of the Field of Economics

Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and is currently working on his PhD in Higher Education Administration.

Economics is a mature discipline, and many minds have shaped the field into what it is today. In this lesson, we'll focus on three economic superstars: Adam Smith, Karl Marx and John Maynard Keynes.

Definition of Economics

About 5,000 years ago, a merchant used customer demand and inventory to adjust prices, which describes the field of economics. Formally speaking, economics involves the study of how companies, countries, governments and people decide how they'll use resources to satisfy their needs and wants. Before 1776, you couldn't find a decent textbook that identified, organized and presented economic theories and practices. That's the year our first economic superstar, Adam Smith, wrote 'The Wealth of Nations,' a book that would turn economics into an academic field of study.

Adam Smith

Adam Smith was a Scottish philosopher and teacher that lived from 1723 to 1790. Most modern day economists agree that Smith is the father of modern economics. In his most famous book, 'The Wealth of Nations,' Smith introduced ideas concerning the invisible hand, division of labor and the economic man. These concepts are fundamental to a free market economy, which is why Smith is so heavily cited as the inventor of our current capitalist economy.

Adam Smith

Adam Smith

  • The Invisible Hand: According to Smith, 'free markets would effectively and efficiently allocate resources among producers and consumers' through the invisible hand. He used the invisible hand as a reference because the constant state of fluctuation, rather than active government policies or economic rules, affects markets seeking equilibrium.
  • Division of Labor: Prior to 'The Wealth of Nations,' one worker oversaw the entire process associated with the manufacturing of a good, from procuring the raw materials to finishing the final product. Smith suggested that division of labor, or 'breaking a process into specialized pieces and having one individual focus on that piece of the process would be more efficient.' For example, Smith recommended having different individuals responsible for individual tasks, such as cutting, shaping, assembling and finishing the pieces of wood that would eventually become a table. As a result, teams of specialists could generate more output than a single generalist responsible for every stage.
  • The Economic Man: Smith's idea of the economic man stated that 'individuals will act in their own, economic self-interest, which actually ends up being good for the entire group.' As an economic man, I want to buy the best quality and pay the lowest price, and by so doing, reward the producer that creates the best product at the lowest cost. Such behavior sends signals to the invisible hand to allocate more raw materials to that producer. This idea is fundamental to a free market economy.

Karl Marx

Karl Marx, a German who lived from 1818-1883, approached economics very differently from Adam Smith. Just as Smith is considered the founder of modern capitalism, Marx is considered the father of modern socialism, through which a population controls how goods are produced and distributed. Marx saw socialism as the answer to what he saw as abuse of the working class. According to Marx, in a socialist economy, the 'government is heavily involved in allocating resources to producers and consumers to make a level playing field'.

Karl Marx

Karl Marx

Instead of allowing producers to exploit workers by paying them as little as possible and working them as hard as they could, Marx envisioned a system where the government played an active role in allocating resources to producers and the working class so that no single producers, or small group of producers, gained enough power to abuse or exploit consumers.

Marx saw the relationship between consumers and producers very differently than Smith. He believed that society viewed working class individuals as the input necessary to produce. As such, the ruling class, or those who controlled production, assumed the role of Adam Smith's economic man. Lower-class individuals were just sources of labor that the ruling class exploited.

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