Modern economics was founded sometime in the early 18th century, and since a vast and dramatic body of literature has developed around the subject - but not to develop in a unified pattern, a number of heretics quickly arose from the church of classical economics; from the Marxians to the Keynesians and everything in between, a beautifully impressive body of competitive works has defined, redefined and reredefined what economics is, and all of its basic tenets.

Before “modern” economics, which we say started sometime in the 1700s - often placed at the publication of Adam Smith’s canonical text; we had a number of movements that resembled economic thought, particularly European Mercantilism, and French Physiocraticism. Of which, neither fall in to the classification of formal economics, and both lack the structural and systematic processes required for formal knowledge creation.

Mercantilists - the dominant group of economists in Europe during the Pre-classical era starting after 1500. Mercantilism can be summed up quite simply: every available section of land should be used for agriculture, mining and manufacturing; all available workers should be employed; export of monetary items such as gold and silver should be prohibited, such that all currency or mechanisms of trade stay within the country; imports should be grossly frowned upon, and when necessary should be traded for other goods, rather than monetary goods. Mercantilism ended with Adam Smith’s publication of the Wealth of Nations, but in the interim had a strong effect on England and a number of other European economic giants. It’s interesting to note that Mercantilism brought the beginning of double-entry accounting, our primary form of bookkeeping for accountants today.

The Physiocrats, French Enlightenment thinkers of the 1760s including Mirabeau, Mercier de la Rivière, Nemours, and Trosne, believed in a rather radical (and even further misinformed) idea that the only process which yields a net product is agriculture, in that something is being produced that literally did not exist before. This on its premise, makes Physiocraticism a zero-sum game in modern game theory; where an input or modification in one place will only reallocate wealth, rather than build more. A total rejection of modern growth theory - if modern growth theory had existed at this point in time - the Physiocrats came up with a set of guidelines for political policy based on this premise. Namely, their suggestions to the political establishment were that all market interventions, if there were any at all (many Physiocrats took a laissez-faire approach to politics) should be directed at improving agriculture for any other induced distortions were guaranteed to be negative, since general commerce did not produce wealth in Physiocratic theory.

1776 marks the beginning of what most consider to be the birth of economics - the legendary Scottish Adam Smith publishes his laissez-faire-supporting¹-invisible-hand-equilibrium work, An Inquiry into The Nature and Causes of the Wealth of Nations - colloquially known simply as, The Wealth of Nations. The work is unquestionably canonical in economics, so much so that one economist we interviewed bravely claimed “it’s more important than the Bible; even to non-economists!”

Smith, in the Wealth of Nations proposed a disproportionate number of ideas about the organization and performance of markets that survive today - nearly 300 years later, and an economic revolution or two after the publication. The concept of an “invisible hand,” which Smith barely even mentioned in his book², is widely associated with the text and Adam Smith himself. The invisible hand referred to the market structure that simply appears to organize itself, and, furthermore the simple organization of a market, even after a catastrophic or unexpected economic crash - generally returning itself to pre-disasterous state with no intervention by a greater body, whatsoever.

The book can be a difficult read for modern economists, as such, much of the knowledge extracted from it is passed along to future economists through other, more modernized theories. At the time, there was no field of economics, there was no conception of “capitalism,” and feudalism was still a rampant force leftover from the middle ages in Europe. Much of what is discussed in the book makes very little sense in a modern context - but still, the concept of an equilibrium market, where various negative forces may be applied, generally from interventionism and negative economic situations, holds strong to this day.

Many economists question whether classical economics is truly the foundation for neoclassical economics based on a number of common rejections - particularly the development of Smithian value theory, where a distinction is made between market price and natural price. If, for example, neoclassical economics is the current development of classical economics - when did each start and end? Economic historians do clearly define these periods, focusing on the response to other rejections, as we do here.

Jeremy Bentham and John Stuart Mill were also publishing in this era; discussing their famous Utilitarianism a number of implications came to modern economics. The most obvious, being the Smithian and more-so neoclassical claim that rational agents maximize their returns in any market for their own utility. This, and this alone becomes the fundamental challenge of many economic philosophers - from both the maximizing perspective, and the rational perspective, a number of instances can be found in which this idea clearly fails.

Fast forwarding, after the period of classical economic thought set in and began to develop and refine it’s theories, a sociologist, Karl Marx, strongly rejected classical economics and the class-based distinctions it made (as opposed to the prior ruler-oriented distinction seen in Feudal times) with his Communist Manifesto in 1848, and the lecture Das Kapital in 1867.

Das Kapital, written by Marx and edited by philosopher Friedrich Engels outlined Marxian “exploitation of labour” as the driving force behind what was now finally referred to as “capitalism;” the market structure supported by classical economists after the Wealth of Nations’ publication. Marx claimed that the value-added to new products clearly defines what the wage of an employees work should be (that is, the sum of the parts should make the whole).

Marx described “commodities” as the building structure of modern capitalist society; any product which has value to someone else, but only trading value to its holder is a commodity in Marxian theory.

Das Kapital, unlike the Communist Manifesto, is not an appeal to emotion regarding the exploitation of particular classes, but rather a more academic analysis of “exploitation” in capitalist society.

A number of other rejections of classical economics occurred in this period - likely stabilized by the instability of economies and political establishments due to wars and vastly changing technological conditions in this period. These include Malthusian rejections (”gluts”, the foundation of Keynesian theory) and French rejections of classical economics - subjects that are too vast to address in this short article. This author recommends the modern pop culture work on economic history, The Worldly Philosophers by Robert L. Heilbroner, for a broader look at a number of less popular rejections.

The response to Marxian and other rejections of classical economics became the foundation of neoclassical economics - occurring at some point after 1871. The newly founded London School of Economics became a competitive, driving force against the U.S. based Chicago and Cambridge schools of economic thought, each providing its own new contribution to economics and dividing the field in to a number of diverse theories.

The contributions of Karl Marx are outlined in more detail in our more recent article in the Contributions to Economics series.

When modern neoclassical economics failed to identify causes of the Great Depression, John Maynard Keynes stepped up with his publication, The General Theory of Employment, Interest and Money, laying clear foundations for what modern economists refer to as the study of “macroeconomics.” Keynes supported a number of at the time exotic beliefs about what defined economics and how to properly analyze the Great Depression (the driving force behind Keynesian popularity) - much of Keynesian thought has been eliminated in the modern body of economic works, but, Keynesian philosophy still drives much of both neoclassical economics and political behavior internationally.

The famous Milton Friedman in his Monetary History of the United States 1867-1960 rose a further rejection of standard neoclassical economics, with regard to monetary policy and founded the creation of a new school - the Monetarist school, concerned mostly with the theories of money, supply, national income, and central banking. Monetarists advocate a central bank with policies which aim to keep supply and demand of money at equilibrium - that is, focus on price stability rather than using floating interest rates to inject and withdraw money at more arbitrary cycles. This is defended by the claim that inflation is directly correlated to the money supply, and that a creation of more money without an equal creation of productivity would reduce the (unmet) demand for money, and thus drive down its value.

Finally, the Austrian school, another branch of what is now Neoclassical in nature - advanced hugely by Ludwig von Mises in the early 20th century, and now mostly by public funding from the Mises Institute. The Austrian school is widely respected in the field of freedom-chasing politicians such as the Republican Ron Paul, and Libertarian candidates worldwide. Ludwig von Mises contributed the near-canonical text “Nation, State and Economy,” revolutionized the role of the nation in monetary - rather than fiscal - policy, re-explaining the roles of money, credit, recessions, depressions, and business cycles and how they fall in to the more neoclassical outlook of economics. Rejection of, what we currently see as a commonplace central banking system’s behavior, is Mises’ (and even the Austrian school itself) greatest contribution to the political community - a revisionary view mostly politically pioneered by Ron Paul, and a number of libertarian candidates worldwide.

Von Mises also widely criticized central planning and a lack of ownership - supporting, without a question, the need for private ownership of everything in a society. His work, Socialism (1920), addressed this topic suggesting that since a market without private ownership would be unable to accurately price things, the functionalities of price (that is primarily, rationing and signaling) are incalculable and impossible to reproduce. This accurately predicted the huge queuing and inability to provide seen by future-coming Marxian and socialist movements.

1. Actually, the term “laissez faire et laissez passe” was originated by the Pre-Classical Physiocrats, a term which means “let do and let pass” and suggests freedom of the market. A number of economists disagree whether Adam Smith did support a non-interventionist policy, though it’s mostly undeniable that his works lay the ground for a lot of non-interventionist thought. [↩]
2. A number of experts say once, a number say twice - I do have a copy of the book here, but I hardly feel like searching it. I believe the number is once. [↩]

1. Pre-Classical Economics (before 1776)
2. The Classical Era (1776 - 1870)
3. Karl Marx and Rejections of Classical Economics (1870s)
4. Neoclassical Economics and Beyond (1871 - today)
5. View all pages.

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