Upon learning that I was going to have to read and analyze New Ideas from Dead Economists, I was not the most thrilled. It does not sound like the type of book that I would usually want to pick up and read in my free time. As I read chapter by chapter, however, I was pleasantly surprised to find myself looking forward to learning about the thoughts and beliefs of each economist that were highlighted in the book. In the introduction, Todd Buchholz defined economics as the “study of choice.” He mentioned many major economists from Adam Smith to Karl Marx, talked about how they became interested in the study of economics, why they chose to study economics, and finally he laid out the basis of each of their beliefs. The remainder of this essay will be an analysis and explanation of the beliefs of each economist as were mentioned in Buchholz’s book, followed by a discussion of which ideas I find to be the most persuasive.
Regarded by many today as the ‘father of economics’, Adam Smith is highly known for his book A Wealth of Nations. The details of Smith’s beliefs can be read about in this text, but overall his beliefs can be summed up in one sentence. Adam Smith believes that government and the economy should not be controlled by a central system; to prosper, it should be a market system that seeks to promote the self-interest of each and every man. This view correlates directly with his views on human behavior; that self-interest is the primary motivator for exchange. People create, sell, give aid, etc. primarily for their own self-interest; in exchange for their work, they receive something back that gives them some sort of a benefit. Smith believes that this drives the economy forward more than any other factor, such as kindness or altruism, would. The free market controls how much one can prosper; it decides how much that wax candle is worth, how much that shirt is worth, how much that flat-screen tv is worth. How much do others want? How much do they value the good? All of these factors will determine the price of an item or service. This is one assumption of Smith’s involving the market regulation of pricing; that self-interest will be mutually beneficial. That it won’t cause the rise of one person or business, and the downfall of another, but instead allow both to prosper.
Smith also answered questions such as what increases the wealth of nations. Simply put, this can be done again by free trade and also by the division of labor. Free trade allows the market to expand because it gives each worker more skill in the task they are performing, and it saves time by eliminating the need to switch between tasks. Also, by specializing in one single task, the workers may be more likely to invent a piece of machinery to help expedite the production process. Free trade helps the market because it allows individuals and towns to hook up to trade routes, letting them each gain by buying products that other countries have the absolute advantage in producing (it will be cheaper getting the product from this place than if they were to produce it themselves). Although his arguments are logical, we must take into consideration the assumptions that there are no taxes or no trade restrictions being factored into these ideal situations. Smith tackles these challenges later on in his book.
Many of Smith’s ideas have carried through to the capitalist market system the US follows today. Much of our economy consists of privately-owned corporations and business, much to Smith’s delight. As citizens of the US, we are allowed to trade our materials and services for other items that we value more. For example, at the grocery store we often buy milk in exchange for money, which benefits not only us by giving us the milk, but also the workers and owner of the store and the owners of the cows who produced the milk by giving them money to buy other items with. The US also practices division of labor in many, if not most situations. For example, in a fast food restaurant, one worker may be in charge of taking orders, one may grill the food, one may get the drinks, and one may deliver the food at the drive through, allowing for efficiency and economic growth.
The next economist talked about in New Ideas from Dead Economists is David Ricardo. To sum up Ricardo’s economic views in one sentence, he believed in free trade and that one should specialize in those goods in which they have the comparative advantage in creating, or “whatever leads them to give up the least.” This would allow anyone, anywhere to consume more goods. So, like Smith, Ricardo believed in the notion of free trade; that there should be no restrictions on imports or exports, and that people have a desire to follow market signals and make necessary changes. However, Ricardo believed that trade should be based on comparative advantage, contrary to Smith’s view that it should be done based on absolute advantage. Again, this would assume that there are no trade restrictions, government regulation, or taxing affecting the situation in any way.
Ricardo also carried quite a depressing outlook on life in the future. As population grows, he said, prices (especially that of rent) would increase dramatically. He said that as more people came to exist, more land would need to be cultivated for farming meaning that not only the best land, but also second tier land would need to be farmed, allowing the landowners of the best land to charge rent, in turn depicting the cost of the crop produced. But what is economic rent, according to Ricardo? Economic rent is “any payment above that which keeps land, labor, or capital in a particular use,” the latter which would be considered transfer earnings.
Ricardo and Smith also varied in the way that they conducted their economic studies. Smith took more general principles and reasoned what the end result would probably be because of them, searching for a sort of cause and effect link. Ricardo on the other hand took a much more step-by-step approach also looking for the cause and effect of things but using multiple steps to do so; he “attempted long deductive chains of reasoning.” A negative consequence of this process is that often times he would make assumptions to fulfill a step in his method, sometimes even wrongly assuming things. This, however, did not usually affect the accuracy of his economics, and even with these wrong assumptions, he still gained a very favorable reputation for his knowledge in the subject. Many of the European nations today applied Ricardo’s ideas when they removed the many trade barriers that stood between them.
Unlike the strong views Smith and Ricardo carried for capitalism, Karl Marx strongly supported the idea of socialism. Overall, he believed that capitalism was crumbling, but that it (capitalism) was a necessary step to reach the ideal economic state of socialism. First, Marx believed that capitalism greatly exploits workers’ labor; that instead of receiving the full value of the work they did, they only receive a subsistence of it. The owner receives the rest as profit. Although the workers receive just enough to be able to survive, he thinks that it puts them in this position where if a worker demands more money, they would just be replaced, putting them in an even worse situation and the owners in a dominant position.
Like Smith, Marx saw the competitive side to capitalism; but instead of competition being seen as a thing that ultimately helps improve the economy, Marx saw it as something that will eventually cause the destruction of capitalism. He thought greed would get the best of capitalists and in order to stay competitive, they would stretch workers’ hours and speed up their work until they reach a breaking point until capitalism crashes. Marx also saw many things that would eventually lead to the destruction of capitalism and the rise of socialism, such as the rising of large firms as they expand and develop, the rising of unemployment and the deepening of crises and depressions, and the alienation of workers. He even developed a 10-point plan outlining the steps to create a socialist economy.
In creating some of his theories, Karl Marx seemed to have missed an important detail; he assumed that creating wealth only requires tangible inputs and doesn’t require any imagination or free enterprise. Really, the tangible inputs are only half of what goes into a new product; the idea must come first, and this is what separates successful people/firms/countries from unsuccessful ones. This creates at least some value for capitalism, something Marx said contained no value at all.
Although Marx’s ideas are not very prevalent in the US economy, they still have had an impact on certain groups in North America. Though many people don’t take him verbatim since he preached many extreme ideas, many people still vow for control under capitalism specifically in politics and in the workplace. They often think that modern capitalism aims to quiet workers’ demands so that they will not lead to the destruction of capitalism, and they also believe that this needs to be controlled so that workers’ voices aren’t being silenced and are being heard. Often times today, the views of Marx are used more to petition for things of social justice, protecting workers and certain populations, more than they are used for reasons of economics.
Alfred Marshall is known as a marginalist economist, meaning that he aimed to forget about the past and only worry about going forward. He liked to focus solely on if the benefits of doing something would outweigh the costs. If they do, then he believes you should go forward with said action or activity until the benefits of doing it decreases and equals the costs. Overall, inspired by Darwinian evolution, Marshall believed that economics took on a ‘survival of the fittest’ mentality; that the strongest firms survive, competitive pressure renders change between businesses and drives costs down, and that humanity is driven by the urge to change and progress.
Marshall looked up to Ricardo in the methodology that he took. Like Ricardo, he used complex models to explain his economics. Most of this methodology he left to the footnotes, however, focusing the main text on simple explanations that other people would easily be able to follow and understand. Marshall also didn’t rely solely on mathematics to explain how things worked, because he believed that often times using intense math would just become irrelevant and distract from reality; that the equations wouldn’t relate to what actually happens in real life. Instead, using real life examples makes it much easier to understand and influence others.
One way that Marshall has affected modern economics and modern-day life was by creating the ‘ceteris paribus’ factor, which literally means ‘all else being equal.’ What this does is allow students to focus solely on the issue at hand and not have to worry about the effect that other tendencies have on a particular problem. This phrase is found all over textbooks today and is used by all economists and mathematicians.
Although Marshall shared similarities in the methodology of Ricardo, Marshall differed from him in that he did not believe that the value of a product reflected the hours it took to produce it. He believed value derived from pleasure, or utility. This came to be known as the law of demand; that the more of something that is sold, the smaller the price must be because people receive less pleasure from each additional unit. He also realized that consumer tastes, consumer income, and the price of rival goods affected this as well. He held a similar but opposite belief concerning supply; that the higher the price consumers are willing to pay rises, the more of an object will be supplied. This means that, according to Marshall, both supply and demand are a contributing factor to determining the price of an object. Both of these ideas are also used throughout modern economics and are taught in economics classes throughout the world today.
Another concept of economics that Marshall helped clarify and redefine was the topic of elasticity, or how responsive people are to price changes. When an item is elastic, that means that a small change in price will influence people to change their purchasing behavior, either buying more if prices decrease, or buying less if prices increase. When an item is inelastic on the other hand, that means that a change in price won’t affect the amount that consumers purchase. There are multiple factors Marshall thinks that affects the elasticity of an object, including the number of substitutes available, the time we have to find substitutes, and finally the amount of household budget a product takes up. For example, toothpaste takes up a relatively small amount of a household budget, so if prices for it rose, people would be unlikely to cut back on purchasing it. His views on elasticity are also used throughout the world, in debates, in classrooms, and even in governmental decisions today.
Though Schumpeter did not have a whole chapter specifically dedicated to his views in New Ideas from Dead Economists, his beliefs and contributions were still mentioned, specifically pertaining to the future of capitalism. Overall, Schumpeter thought that capitalism itself would cause the eventual destruction of capitalism. He believed people would begin questioning its framework; is there economic equality in society? Justice? What is the country’s position concerning pollution? All of these factors would eventually lead to a shift from capitalism to socialism. Schumpeter showed this switch taking place by giving examples of third-world countries turning to socialism. Even today I see much of what Schumpeter predicted taking place; much political talk today is about trying to make sure there are less divisions within the economy between the upper class and lower class, and you can’t go a day without hearing about the effects of pollution, rules and regulations concerning pollution, and what needs to be done concerning it. Even our very capitalist economy is starting to question if there is a better way of doing things economically; the suggested answer is often socialism. In the 2016 presidential primaries, a socialist even ran for the democratic position and although he lost the race, he still had 43% of the popular vote.
Schumpeter compared to Karl Marx in his view about capitalism leading to socialism. Both believed that the current capitalist state of the country would eventually lead to a turn to socialism. But unlike Marx, I don’t think Schumpeter necessarily saw this as a good thing. Marx saw capitalism as a means to eventually reach capitalism, but Schumpeter saw socialism as a negative effect of the continuous development of capitalism and the development of a generation that questions the morals that capitalism was built upon.
The last economist in this book to talk about is Maynard Keynes. Keynes talked a lot about economic recessions. Based on what was talked about him in the book, Keynes’ overall economical view is that to have a healthy economy, consumers need to buy and businesses need to invest so that the sales of goods being sold equals the amount produced. When people save instead of buying and businesses don’t invest and just keep trying to sell, then excess output is produced and employees end up being laid off. This is where Keynes gained the idea of the multiplier; “…any change in spending by one person starts a snowball effect, and the ultimate change in national spending far surpasses the initial change.” This is how Keynes believes recessions are started and eventually develop further into a recession.
How does Keynes believe recessions should be solved? He believes there are two main ways the government could respond: either by cutting taxes or spending money directly. By letting a deficit in the budget occur and setting up government spending programs, the economy would be prodded, and the gap could close.
Unlike Ricardo and more like Smith, Keynes took a less step-by-step mathematical approach to his economics; he recognized that the state of long-term events is often steady, but at the same time realizes that calculations don’t exist for much of what happens in actual life, and much of it is up to something done on a whim or by chance. Like Ricardo’s depressing outlook on life, Keynes also carried a slightly depressing but different outlook on the future. Keynes believed that though we are going to evolve economically and gratify all of our material desires, we will then all be bored and will complain a lot. What will anyone do? Buchholz wrote that perhaps this was why Keynes seemed to tackle a little bit of everything at Cambridge: fencing, art collecting, mathematics, you name it. According to Buchholz, “Often joy comes in striving for goals, not achieving them.”
After reading this book I have developed a small list of the ideas that I find the most persuading. The first idea is Adam Smith’s, which states that self-interest is the primary motivator for exchange. People are selfish; they think about themselves the most upon making a transaction. Why does someone buy anything, or use a service? To make themselves feel good, or to benefit their own person. Why does one get a haircut? So that they look better than before, or so that they get cleaned up. Why does someone buy a pet? Because they will gain companionship. Why does someone pay for college? Because they will benefit later in life when they have that college degree and education. Even when people donate to charity they receive some sort of benefit, whether that be a tax break, a good reputation, or simply even if it makes them feel better about themselves. Pretty much whatever someone does or buys, it is to benefit them in some way, either now or in the future. Like Smith said, kindness could be a motivator but again I believe someone is kind because it makes them feel good; they know they are doing something to help others. In my opinion, there will always be a strive for self-fulfillment when making exchanges.
Another concept that I agree with is Karl Marx’s view on what will lead to the destruction of capitalism and the rise of socialism. He believed that as large firms expand and develop, unemployment rises, crises and depressions deepen, and workers become so alienated that socialism will begin to form. This all makes sense to me how they jointly would cause a shift from capitalism to socialism. As unemployment rises, the government will feel it is its duty to somehow change and try to fix the issue; they can’t just leave millions of people without jobs. The unemployment issue will cause the economic depression to deepen as it creates less economic growth and a drop in consumer spending, which then requires corporations to lay off more workers, worsening the depression. There will become an even larger gap between the upper and lower classes, causing the middle class to practically disappear. I believe all of this will eventually cause the majority lower class to say there is no economic equality which will cause the government to get more and more involved, leading to the start of socialism. It might not be that straightforward and there are probably many other factors that go into it, but I believe that these ones will play an important part in the transition.
The last key idea that I really resonated with was Alfred Marshall’s idea that value derives from pleasure. This coincides with the law of demand. People will only be willing to pay so much for an object, as long as the pleasure received from it is greater than or equal to the amount of money or whatever else they exchange it for. If a single piece of gum was priced at $500, probably no one would pay that much for it because the short amount of pleasure gained from it isn’t worth what else they could buy for that much money that would give them more pleasure than that piece of gum. Since no one wants that piece of $500 gum, the price for it would keep decreasing until it hit some dollar amount where at least one person would be willing to pay for it, perhaps at $5 or so. A good real-life example is if you look at name-brand clothing. A pair of Nike tennis shoes will easily cost around $100, but a pair of generic tennis shoes from Target might cost only around $30. Although they may be made out of the exact same material and products, people are willing to pay more for the Nike shoes because the pleasure they get from having the Nike logo on it creates a bigger demand for the product, and so can be successfully sold at a higher price.
From Smith to Marx, Marshall to Schumpeter, these economists all had very different ideas that can still be found being practiced in many different economies throughout the world today. Whether you believe solely in all the views of one economist, or in different ideas from many of the economists mentioned in this book, it is no dispute that their ideas had a great influence on the world of economics and still get debated and tested in our world today. Although these men might be dead, their ideas on economics surely are not.