Book Review + Summary - New Ideas From Dead Economists

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.