New Ideas From Dead Economists
Humans are the variable of constantly
changing Economic maze. Economics is the study of choice. What choices can the
consumer, and the producer take in their given situation. Therefore the main
job of the economists is to analyze the consequences that each choice can bring
and try to simplify it in order to help other citizens to understand the exact
outcome. However to analyze the exact outcome all economists have to take the
factor called 'human' into consideration. And this is the reason why so many
economists have been so hampered and attacked by so many people, even from
fellow economists. However these accusations seems a bit odd to the economists
who have tried their best to analyze 'human' factor, and think of themselves as
a mere messengers not the cause of bad news.
Of course not every Economists remain only
to be the messenger, the great economists have setup their own models and have
introduce them to the society, showing more clearly which path to take. However
every models have their differences from their different point of view at
looking at the 'human' factor. And this maze will continue to change until at
last we find the perfect way to analyze the human being.
<Alfred Marshall and the Marginalist
Mind>
In the field of Economics there are mainly
two fields; Micro and Macro. And it is no exaggeration to say the Marshall was
the one who created the fundamental base of Micro-economics.
Marshall was not as out of box thinkers as
did John Stuart Mill and Karl Marx. Marshall was like a turtle gradually and
slowly reaching to his conclusions. And this is shown clearly in his approach
to his studies. Whereas the Classical economists followed the way of Newton,
Marshall turned to the way of evolution by Darwin. During this approach of his
studies he founds an concept of marginalism, and this discovery paves a way for
the development of the microeconomics today.
So to start from the roots how did Marshall
happened to stumble across the concept of marginalism? Well it was no accident.
First Marshall defined a term called ' ceteris paribus' meaning, "other things
being equal" Through this he was able to exclude many variable factors out
of this way and begin to focus on two types of factors; demand and supply.
Another thing that is unique about Marshall
is that unlike the previous economists he approached the analyze of economics
from the demand part, not the supply. In this he enunciated the law of demand.
The law of demand is cause by the so called 'marginalist Consumer" As the
consumer continues to buy the same object the pleasure caused by each buy reduces
until the marginal price meets the marginal benefit deciding the amount of the
objet to produce. To put this theory into a nutshell we could draw a graph with
demand curve and supply curve, and marking the crossing point as the price and
the quantity for the certain object.
Another factor that is mentions is about
the elasticity of each society. Elasticity is measured by the amount of the
demand
change due to the change price level. If the elasticity is lower than 1
that group is considered inelastic, on the other hand if the elasticity is over
1 it is classified as a elastic group. So what factors affect the elasticity?
First there is the number of the substitutes available. If there is a abundant
amount of substitutes around the consumer the elasticity would be high and the
vice versa. Second there is the time needed for the consumer to find the
substitutes. The more time given the more elastic the group will become.
Thirdly, Marshall argued that products unimportant to household budget would be
inelastic such as the price of the toothpick, etc..
Marshall's gradual approach and his
patience will be continuously tried by the future generations of economists. He
did not wait for the answers he searched for them, he did not wait for their
adoption he campaigned for them. But he never embraced an idea even if it was
his, without careful consideration. And it was this careful consideration which
enabled the combination of classical and marginalist economics. I highly
respect him for this and would like to follow his path.
<Keynes & Monetarist>
As we move up to the 20th centaury the
economists divide into three different groups. Neo-classical, Keynes, and
Monetarists. At which in 1929 the Great Depression dooms
over the whole World these three groups each brings up with a different
solution to solve this depression.
The
Classical Economists was against the idea of the economy losing its
independence due to the interference of the Government. For they believed that
the economy will reach an equilibrium by itself in the long run by the
Invisible Hand. However due to this Great Depression it was proven that their
policy wasn’t reliable; for longer this depression continued the worse it got.
The
Monetarists believed that the monetary policy was the key to overcome the
depression which showed no sign of recovering. To understand this Monetery
Policy fully we have to start with a simple equation
MV=PQ
Here the M
stands for the money supply and V as the velocity of the money flow. P for the
Price level and Q meaning the real GDP . The monetarists believed that the V
and Q remains somewhat constant meaning that they were not fixed as the
Classical believed. So if the FRB increases the money supply by selling bonds
etc, both price level and the real GDP will increase. And it was this increase
in the GDP which the monetarists took interest, thinking that this was the key
to spike up the rumbling economy.
Finally
there is the perspective of the Keynes. While the monetarists and classicalists
only took the supply as a variable factor Keynes took the demand as the
variable factor. In the graph of Aggregate Supply and Demand Keynes believed
that the Government has to increase the amount of their purchase for them to
shift the demand curve to the right resulting in the increase of GDP and the
decline in the unemployment rate.
In the end
it was the Keynes' way that scooped the US economy out of the depression. By
the increase of the demand curve due to the World War 2 and the sudden need of
military supply.
Keynes and
the Monetarists' both left a significant marks to the modern Macro economics
but it the competition between these two groups that really motivated this
great development. As the result the Government nowadays have 4 pedals to
control the economy of the country mixing both Fiscal and Monetary Policy.
There is a
saying "Dark clouds have silver linings." Harsh may situation such as
the Great Depression may be it is needed for the greater development in the
fields of economics. So instead of just moaning over the harsh situation we
should look at it from the bright side and think of it as a chance to take one
more big steps towards the optimal solution.