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Mistaken Identity

January 11, 1999

The Wall Street Journal seems to have confused two categories in listing the top ten economists of the millennium: the "best and the brightest" and those who "made a difference."

The problem is that these are not the same individuals.

While the Austrians are not entirely excluded from the list below, the Keynesians, positivists, and socialists have an unfortunately large presence.

For responses, see the end of this text.

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Wall Street Journal
January 11, 1999

The Millennium: One Thousand Years of ... Ideas
Best & the Brightest
Economic thinkers who made a difference
By KEMBA DUNHAM

Behind every great thought is... a person who actually came up with the idea.

So, who were the millennium's most influential economic and business thinkers? Who were the people whose ideas fundamentally challenged the conventional wisdom, whose perceptions changed the way millions thought and lived? What follows, in chronological order, is a look at some of them.

 

St. Thomas Aquinas (1225-1274)
Occupation: Theologian and philosopher
Major contribution: Classical systematization of Latin theology

One of the most important figures from the Church during the Middle Ages, St. Thomas tried to reconcile theology with the emerging economic conditions of the time. St. Thomas, who was Italian, didn't believe that wealth was natural or positive, but saw it as another of man's earthly imperfections. He acknowledged property rights, but believed if some were without, theft was acceptable.

St. Thomas viewed trade as unnatural but unavoidable in an imperfect world. Trade, in his view, was justifiable if the merchant's intent was to maintain his home life and if the traded item would benefit the country. St. Thomas also believed that selling something for more than it was worth was a facet of man-made laws, but he supported it if the seller would otherwise take a loss. And he felt that it was unjust to charge interest on a loan.

 

Ibn Khaldun (1332-1406)
Occupation: Historian, social scientist, political activist
Major contribution: Theories on economics and politics

Khaldun's major work espoused ideas that were decidedly different from the mainstream Islamic thinking on economics. Some historians believe that Ibn Khaldun, who was born in Tunis, was the first medieval thinker to recognize the synergy between economics and politics. Eschewing idealism -- which was prevalent at the time -- for a realistic approach, Khaldun's "Muqaddimah" (an introduction to history) gave an in-depth and clear analysis of the cyclical nature of the rise, maturation and decline of political regimes and economies. He stated that a normal economy grows out of basic needs and community solidarity, but once it becomes highly productive, solidarity wanes and people become immoral, often driven by the pursuit of luxury. Thus, an economy cannot sustain itself for the long term.

 

Adam Smith (1723-1790)
Occupation: Professor of moral philosophy, University of Glasgow, Scotland; economist
Major contribution: Promoted laissez-faire economics

Smith's "An Inquiry into the Nature and Causes of the Wealth of Nations" is the capitalist manifesto (though the word "capitalism" wouldn't emerge for another century). In this groundbreaking work, Smith -- a Scot known as the father of classical economics -- argued that guild restrictions, monopolies and trade barriers were impediments to a flourishing, healthy economy. Smith's theory became known as laissez faire (literally, "let [the people] do") economics.

If governments freed people and businesses from economic restraints and allowed them to pursue their own self-interest, Smith maintained, an "invisible hand" would lead to a more efficient division of labor and steer an economy toward faster growth. This doctrine contrasted sharply with mercantilism, in which controls on industry and trade were viewed as the most effective way to serve a country's economic interests.

 

David Ricardo (1772-1823)
Occupation: Stockbroker, economist
Major contribution: "Labor theory of value"

Ricardo, along with Malthus, helped change the prevailing social view from one of optimism to one of pessimism, helping to make economics the "dismal science." Ricardo, who was British, postulated that landlords became rich at the expense of the society, while the workers and the industrial capitalists were the losers. In his "Principles of Political Economy and Taxation" (1817), Ricardo argued for a "labor theory of value." Following Smith, Ricardo postulated that the value of most goods depended on the amount of labor needed to produce them. For example, land with fertile soil commands a higher rent than that with poor soil because it produces more. But as the population grows, the poorer-quality land needs to be cultivated to meet the demands of the burgeoning society.

Rent on the fecund land then rises, along with the price of food in general. This process results in falling profits as well as increasing use of poor-soiled land that requires ever more work to cultivate. So, as rents rise, profits fall. Economic progress is thus thwarted by rising rents, and the only one who benefits is the landlord.

 

John Stuart Mill (1806-1873)
Occupation: Economist and philosopher
Major contribution: Promoted utilitarianism

Known as the last great economist of the classical school, Mill advocated policies that he felt were most consistent with individual liberty. Liberty, he wrote, could be threatened by both social and political tyranny. Mill's seminal "Principles of Political Economy" theorized that the real basis for economic law was production, not distribution. Mill, a Briton, strayed from the classical economists, however, on the issue of the inevitability of the distribution of income produced by the market system. He felt that the market was capable of allocating resources, but not of distributing income, so society had to intervene. He didn't like capitalism, but recognized its vitality. At the same time, he wasn't a socialist, either, but studied pre-Marxian socialist dogma and sought to improve the conditions of working people.

 

Karl Marx (1818-1883)
Occupation: Social philosopher and revolutionary
Major contribution: "Communist Manifesto" and ideas on socialism

"Workers of the world, unite! You have nothing to lose but your chains," urges the final phrase of the "Communist Manifesto," which Marx wrote along with Friedrich Engels in 1848. This work contained the Marx/Engels prediction that capitalism would lead to revolution. The German-born Marx believed that the emerging capitalism and the various revolutions occurring in Europe were one stage of history evolving into another. He argued that history was marked by various stages of class struggles. Feudalism had given way to capitalism, exemplified by the Industrial Revolution. The capitalists, driven by greed and competition, would then exploit their workers by not giving them a fair share of what they produced. Eventually the proletariat, or the worker class, would revolt and usurp the means of production and implement socialism. Once private property was eliminated, true communism would exist -- an ideal, classless society.

 

Leon Walras (1834-1910)
Occupation: Economist
Major contribution: A founder of marginalist school of economic thought

Walras was one of the founders of the marginalists, who argued that prices depend on the level of customer demand, and not just on the cost of production, as the classical economists believed. Marginalist economics gave modern-day macroeconomics the basic tools of supply and demand. Walras, who was French, is best known for revolutionizing economics with his mathematical formulation of the mechanics of the price system. He presented equations that tied together theories of production, exchange, money and capital. His general equilibrium theory has come to be called "Walrasian general equilibrium" -- and is still very much a part of modern economic theory.

 

Alfred Marshall (1842-1924)
Occupation: Professor at Cambridge University, economist
Major contribution: Chief founder of neoclassical school of economics

Marshall combined some concepts of classical economics with marginalist thinking, which led to the term neoclassical (often used synonymously with marginalist). Neoclassical economists study both human behavior and wealth to understand why humans make certain choices. Marshall's influential "Principles of Economics" (1890), considered the bible of British economics, stressed that the output and price of a good are determined by supply as well as demand. He also introduced several key economic concepts, including consumer's surplus (the difference between the actual value of what the consumer bought and what he actually paid for it), quasi-rent, elasticity of demand and the representative firm. His work shed light on the importance of supply and demand curves, as well as on the importance of time in the equilibrium process, distinguishing between the short run and the long run.

 

Thorstein Veblen (1857-1929)
Occupation: Political economist and social critic
Major contribution: Laid groundwork for school of institutionalist economics

Veblen analyzed American social and economic institutions and their psychological bases. He was catapulted to fame with the publication of his first and best-known work, "The Theory of the Leisure Class" (1899), in which he attacks the influence of laissez faire economics and big business on society. In this work, he coined the phrase "conspicuous consumption," denigrating the flamboyance of the leisure class. Veblen set out to apply Darwin's theory of evolution to the study of modern economic life, looking at how economies evolve -- for instance, from a fishing economy to a farming one. Veblen's reputation reached its apex in the 1930s, when the Depression seemed to validate his views about the business economy. His concepts ledthe way to increased governmental involvement in the economy.

 

Irving Fisher (1867-1947)
Occupation: Professor at Yale University, economist
Major contribution: Principles on monetary theory

Fisher is widely regarded as America's first mathematical economist and was instrumental in making economics a more exact science. He developed the modern concept of the relationship between the quantity of money and changes in the general level of prices. His equation of exchange is perhaps the most successful attempt to explain the causes of inflation. Fisher maintained that the overall price level could be stabilized, which would lead to the stabilization of the economy.

In 1923, Fisher established the Number Institute, a company that would develop and sell index numbers -- an important means of measuring general price levels -- in addition to other economic data. The institute was the first organization to offer systematic index-number information in data form to the general public. Fisher was a leader in the development of econometrics, a new field that made statistical methods a larger part of economic theory.

John Maynard Keynes (1883-1946)
Occupation: Economist, financier and journalist
Major contribution: Theories on causes of prolonged unemployment

Keynes's "The General Theory of Employment, Interest and Money" (1936) recommended frequent government intervention in the market and, during a recession, deficit spending and fluid fiscal policies. The British economist's theories were instrumental during the Depression, when the international monetary system fell apart. The governments of both the U.S. and Britain initially decided to cut government spending and deny credit to jump-start the economy while attempting to keep prices high -- measures Keynes disagreed with.

In 1934 and 1935, various European nations pulled out of the Depression after the governments increased unemployment benefits, raised government salaries and subsidized home building, all of which lifted consumer confidence. Keynesian economics also played a part in President Roosevelt's New Deal, which helped to revive the U.S. economy by lending money to banks, helping out businesses and farmers, and assisting the unemployed via public-work programs.

 

Joseph Alois Schumpeter (1883-1950)
Occupation: Economist
Major contribution: Theories of capitalist development and business cycles

Schumpeter's work focused on how the interaction between individuals and the economy brings about economic change. Schumpeter, a Moravian-born American, emphasized the importance of entrepreneurs as the drivers of capitalist development. He also emphasized bankers and banks as providers of created credit that allow entrepreneurs to carry out their plans. Schumpeter was a leader in econometrics, a new branch of theory-driven statistical inquiry that attempted to fortify the scientific center of economic inquiry.

 

Friedrich August von Hayek (1899-1992)
Occupation: Economist
Major contribution: Found solutions to problems posed by Keynesian economics

Although he won a Nobel Prize for Economics Science in 1974, Hayek made major contributions to the understanding of government intervention and the development of social structures. An Austrian-born Briton, he first became famous at a young age for his trade-cycle theory, which he put forth during the 1920s and 1930s, but these views were eclipsed by Keynes's "General Theory." Hayek asserted that only a free economy could organize an efficient distribution of resources into productive industries, and that inflation, unemployment or recession result from governmental interference. Hayek was dedicated to illuminating the problems of socialism. His highly popular "The Road to Serfdom," published in 1944, was a defense of laissez faire economics, and theorized the immense problems of a socialist system. Interest in Hayek's work was revived after he received the Nobel Prize, and received even more attention with the fall of communism in Eastern Europe.

 

Milton Friedman (1912-)
Occupation: Economist, University of Chicago
Major contribution: Premier spokesman for monetarist school of economics

Friedman led the Chicago School of economics, which emphasized the importance of money and free markets. Friedman, who won a Nobel Prize in 1976 for his work in monetarism, argued that changes in the money supply precede, instead of follow, changes in overall economic conditions. Friedman has been the leading opponent of Keynesian interventionist theory since the 1950s. He has argued that all social-welfare programs should be replaced with a negative income tax, believing that minimum-wage laws and union monopoly laws do nothing but exploit the poor. Friedman argues that discretionary fiscal and monetary policies are more likely to interfere with -- rather than improve -- economic functioning. At any given time in the economy, he contends, a number of forces -- such as labor-market structure and unemployment-insurance laws -- lead to a natural rate of unemployment.

 

Paul A. Samuelson (1915-)
Occupation: Economist, Massachusetts Institute of Technology
Major contribution: Demonstrating the mathematical structure of economic theory

In an effort to make sense of the contradictions he found in the classical language of economics, Samuelson turned to mathematics. His Harvard doctoral thesis and most famous work, "Foundations of Economic Analysis" (1947), raised the level of economic analysis and put it on a firmer, mathematical base. He believed that mathematics was necessary to understand what economics was about. His "Economics: An Introductory Analysis," published in 1948, is one of history's best-selling economics textbooks. Samuelson also made significant contributions to areas including the theory of consumer behavior, welfare economics, capital and interest, and public finance. He was at the center of "neoclassical synthesis," a movement that melded classical and modern economic findings.

* * * * *
Ms. Dunham, a news assistant in The Wall Street Journal's New York bureau, was a researcher for this report.

Copyright c 1999 Dow Jones & Company, Inc. All Rights Reserved.

 

See, in PDF, Murray Rothbard's critique of Schumpeter and Walras

See in text Peter Klein on F.A. Hayek and Greg Ransom's Hayek's Scholars Page.

See, in PDF, Joseph Salerno on Mises as a Social Rationalist.

See, in PDF, Salerno on Keynes's Millennialism.

See, in PDF, Rothbard on Marx.

Finally, for an overall response by an Austrian to the neoclassical tradition, see (in text) the article by Michael Prowse in the Austrian Economics Newsletter.

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