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Great Accomplishments in Economics

You have probably seen an interesting reversal in the fortunes of what goods and services are produced, how they are produced and how they are distributed globally in recent years.

Societies are always very concerned about price elasticity, recession and depression, so pillars who masterminded the entire economic system still dominate the center stage.

Who are the pillars of the modern economic system and what are their contributions? Let’s have a look.

Adam Smith

Adam Smith advanced the idea of ‘Absolute Advantage Theory’, which refers to the ability of a party to produce a particular good at a lower absolute cost.

Smith’s system had two requirements: the market must be free from government intervention and competition must be in full range.

He believed that producers provide the right goods and services as a consequence of market forces. And—without government intervention—a laissez faire environment is possible, where competition exists to cater for organized production to suit the public.

Hence, an increase in public wellbeing is inevitable. He introduced the basis of the free market economy, where: “the competition would benefit both the producers and consumers”. He concluded that the greater the competition, the greater the producers’ profit. According to him, where there is competition, the prices of commodity tend to decrease, which results in more demand, and more profit.

David Ricardo

David Ricardo is most remembered for his ‘Theory of Comparative Advantage’, which explains how trade can create value for two parties even when one can produce all goods with fewer resources than the other.

Ricardo termed the net benefit of such an outcome as a ‘gain from trade’. His basic definition of comparative advantage is the ability of an individual, a firm or a country to produce a particular good or service at a lower marginal cost and opportunity cost than another.

Ricardo contributed the ‘doctrine of fiscal equivalence´, an economic theory that suggests that the government’s initiative to increase debt-financed government spending for the purpose of stimulating demand does not actually affect the demand due to the public’s consciousness to save excess money for the payment of future tax increases in lieu of the debt settlement.

Ricardo established the ‘Theory of Rent’, which is directly tied to the marginal productivity of the land. The basis of this theory is his analogy that population growth equals more mouths to feed, which leads to the need for more grain therefore land.

This led to the view that an increase in food cost, salary and profit is an advantage for land owners. The ‘Theory of Value’, which is tied directly to labor cost, is another Ricardian principle. He claimed that labor, like all other goods, is purchased and sold, may increase or decrease in quantity, and has its natural price and market price.

The natural price of labor is the price that is necessary to enable constant subsistence and perpetuation. Finally, he postulated the ‘Theory of Distribution’, which is inextricably linked to the theories of rent and value. He pointed out that the return of the land is not constant like the amount of capital available. It does not equate to similar growth rate: land suffers from diminishing returns. The maximum level of economic rent results from the marginal cultivation of the land.

Leon Walras

Leon Walras’ biggest contribution to economics is his ‘General Equilibrium Theory’. He is also one of the founders of the ‘marginal revolution’, postulating the idea of marginal utility.

The general equilibrium theory has the objective of proving that all prices are at equilibrium. This theory analyzes the mechanism by which the choices of economic agents are coordinated across markets and attempts to look at several markets simultaneously, rather than any single market in isolation.

On the other hand, marginal utility is defined as the additional satisfaction or benefit that a consumer derives from buying an additional unit of a commodity or service.

The concept implies that the utility or benefit to a consumer of an additional unit of a product is inversely related to the number of units of that product she already owns.

Alfred Marshall

Alfred Marshall’s main argument is that the economy is an evolutionary process in which technology, market institutions and people’s preferences evolve alongsdie people’s behavior.

He introduced the idea of three periods: namely Market Period, Short Period and Long Period, in order to understand how markets adjust to changes in supply or demand over time.

The Market Period is the amount of time the stock or commodity is fixed. Meanwhile, the time in which the supply can be increased by adding labor and other inputs but not capital is known as Short Period. The Long Period is the amount of time taken for capital to be increased.

Marshall’s basic approach to welfare economics still stands today; in his most important work, ‘Principles of Economics’, he was able to quantify the buyers’ sensitivity to price.

Marshall emphasized that supply and demand determines the price output of a good: the two curves are like scissor blades that intersect at an equilibrium. This concept is otherwise known as Price Elasticity of Demand; Marshall proposed that the price is basically parallel for each unit of commodity that a consumer buys, but the value to the consumer of each additional unit declines.

In line with this, he illustrated the benefits of the consumer from market surplus, and termed these benefits “Consumer Surplus”: the size of the benefit equals the difference between the consumer’s value of all the units and the amount paid for the units.

In other words, consumers pay less than the value of the good to themselves. Marshall also introduced the concept of “Producer Surplus”: the amount the producer is actually paid, minus the amount that he would willingly accept.

Economics has many pioneering characters within it, and there is certainly space for more talented ones. Will you go into this field? How can we help you on your way up?

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