II. Modern Economic Thought

Task 1. Read and translate the text

M odern economic thought began with Adam Smith in the late 18^th century. He wrote a famous book The Wealth of Nations, which gave him the title “the father of economics”.

Adam Smith believed the efficiency of production depended on the combination of labour with other factors of production. The more efficient the combination, the greater the nation’s wealth.

The heart of Smith’s economic philosophy was his idea that the economy would work best if it functioned without government regulation. In this case self-interested businesses would produce only those products that consumers wanted and produce them at the lowest cost. All this self-interest would benefit society as a whole by providing it with more and better goods and services, at the lowest prices. Smith called this principle of free regulation in the economy the “invisible hand”. It was also Smith’s name for the economic forces, known today as supply and demand.

I n the 19^th century, Karl Marx combined a number of schools of thought to produce his greatest work Capital. Here are some ideas of Marx:

1. The economic interpretation of history. It means that you should forget about things like great men and women, religion, patriotism, and the like. Look only at the economic events of the time to understand the real reasons of things (for example, the history itself was called a series of struggles between economic classes).

2. The exploitation of labour. According to Marx, workers are paid enough to stay alive, that’s why profits should belong not to the factory owner – the capitalist, but to those, who really deserve it: the workers.

3. Capitalism’s collapse. Under this system, the rich would get richer and the poor, poorer. If poor workers were not able to buy goods and services they produced one day, it would be the last day of the class struggle. In this, the capitalists who had been exploiting the workers would fail.

Some ideas from Marx’s works are still used in labour economics and in political economy.

In the early 20^th century economics became mainly statistical, and the study of econometrics became important. But still new ideas were formulated.

J ohn Maynard Keynes stands with Adam Smith and Karl Marx as one of the world’s most influential economists.

In October 1929 the collapse in the American market led to the Great Depression: people lost their savings and job, factories were closed. In this situation the idea of the “invisible hand” could be dangerous. And new concepts appeared from the “Keynesian Revolution”. In 1936 John Keynes published The General Theory of employment, Interest, and Money, which greatly changed economic thinking in the 20^th century. He saw the main problem of economic society in “its failure to provide for full employment” and unequal “distribution of wealth and incomes”. Keynes made economic stability at full employment a function of politics. On the whole, Keynes promoted the ideas of the importance of the central banking and government regulation of the economy.

N owadays, whenever a nation enters a period of recession or inflation, economists and others immediately think of steps the government might take to overcome it.

Many economists use a combination of Neoclassical microeconomics and macroeconomics. This combination, known as Neoclassical synthesis, was dominant in Western teaching after World War II. The Neoclassical school appeared on the basis of monetarism, formulated in the late 1940s and early 1950s by Milton Friedman.

In principle, economics can be described as any type of economic organization. However, the majority of economic theories describe systems where goods are exchanged in the market – where buyers and sellers seek to maximize their results by trading.

In the late 20^th century, there were also some theories that produced change in economic thinking. For example, risk based rather than price based models and dealing with economics as a biological science based on evolutionary norms rather than abstract exchange.