PART II

Unit 1. ECONOMICS

Text A. Modern Economic Thought

Modern economic thought began with Adam Smith in the late 18th century, although earlier thinkers such as the Spanish scholastics and the physiocrats made important contributions. Modern economics began with J. S. Mill focusing on what was called "political economy" which he defined exclusively in relation to the exchange value of objects, or what would now be called price.

Today it is customary to consider Adam Smith the founder of economic theory. The central idea promoted by Smith was that the competition between various suppliers and buyers would produce the best possible distribution of goods and services, because it would encourage individuals to specialize and improve their capital, so as to produce more value with the same labour. Smith's thesis rests on the belief that large systems can be self-regulating by the activity of their parts. Smith's formulation is called the "invisible hand" and is still the main idea of market economics.

In the 19th century, Karl Marx synthesized a variety of schools of thought involving the social distribution of resources, including the work of Adam Smith, as well as socialism and egalitarianism. He used the systematic approach to logic taken from philosopher Hegel to produce "Das Kapital". The Marxist paradigm of economics is not generally considered by market economists, though some concepts from his work are occasionally used in labour economics and in political economy.

In the early 20th century, economics became increasingly statistical, and the study of econometrics became important. Statistical treatment of price, unemployment, money supply and other variables became more and more central to economic disputes.

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Macroeconomics appeared from microeconomics with Keynes in the 1920s. It grew in popularity as a reaction to the Great Depression. Keynes promoted the ideas of the importance of the central banking and government involvement in economic affairs, as well as a critic of the political economy of the post World War I period. His "General Theory" includes both criticisms of classical theory that had been levelled by Thorstein Veblen and others, as well a method for economic management of aggregate demand.

Many economists use a combination of Neoclassical microeconomics and Keynesian macroeconomics. This combination, sometimes known as the Neoclassical synthesis, was dominant in Western teaching and public policy in the years following World War II and up to the late 1970s. The Neoclassical school was challenged by monetarism, formulated in the late 1940s and early 1950s by Milton Friedman and associated with the University of Chicago.

In principle, economics can be applied to any type of economic organization. However, the majority of economic theories describes systems where goods are exchanged in the market — where buyers and sellers seek to maximize their results by trading. The dominant form of market economics focuses on societies where property is owned by individuals, money has a rational basis, and profit comes from utilizing labour and capital to produce goods to be sold in the market. Economic theory is also applied to markets where the control of capital is in the hands of the state or society, which include socialism and mercantilism, and to societies where the allocation of resources is not through the market, but through political mechanisms, generally referred to as command economies, which includes communism and forms of totalitarianism.

In the late 20th century, three of the areas of study which are producing change in economic thinking are: risk based rather than price based models, imperfect economic actors, and treating economics as a

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biological science based on evolutionary norms rather than abstract exchange.

Questions to the Text

1.When did modern economic thought begin?

2.Who made earlier important contributions to the study of

economics?

3.Who started modern economics?

4.What is the central idea promoted by Adam Smith?

5.What quality of large systems did Smith describe in his work?

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6.What schools of thought did Marx synthesize in his work?

7.What approach to logic did Marx use in his work?

8.Is Marxist paradigm of economics respected by market economists today?

9.What school of thought changed the basic economic reasoning in the late 19th century?

10.What ideas did Carl Menger promote?

11.How did economics change in the early 20th century?

12.What variables became central to economic dispute in the early 20th century?

13.How did macroeconomics appear?

14.What ideas did Keynes promote in his works?

15.Who formulated the ideas of monetarism and when?

16.What systems does the majority of economic theory describe?

17.What does the dominant form of market economics focus on?

18.Can economic theories be applied to socialist and mercantilist

states?

19.What areas of study are producing change in economic thinking in the late 20th century?

Text B. The Nobel Memorial Prize in Economics

In 1896, Alfred Nobel, the Swedish industrialist and inventor of dynamite, left his fortune to a foundation to create an annual prize for person "who, during the preceding year, shall have conferred the greatest benefit on mankind." Nobel's will specified prizes in physics, chemistry, physiology and medicine, literature and peace. These were first awarded in 1901.

In 1969, the Swedish central bank established a prize known as the "Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel", which is commonly shortened to the Nobel Memorial Prize. The Nobel Memorial Prize has a similar procedure of award selection as the

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original Nobel prizes. It also disburses the same monetary amounts and takes part in the formal ceremony.

The Nobel Memorial Prize has been controversial and numerous objections have been raised against it. The first objection is that economics is neither "scientific" enough nor contribute to "human advancement" enough to merit the prestige of an award with the Nobel name. The sentiment, often mentioned in the popular press, is shared by many economists themselves. Indeed, Gunnar Myrdal after having helped the Riksbank set it up in 1968 and receiving the award himself in 1974, eventually publicly admitted this.

The second objection is that the Bank of Sweden's decision to use the prestigious "Nobel" name has pushed economics into a kind of race, pitting nations, universities and individual economists against each other. All this leads to a lot of unnecessary competition that distracts serious economics research.

The third objection is that there is an insufficient number of truly outstanding economists that deserve it. After the initial boom of glorious names in the 1970s and early 1980s, many people argue that the awards made during the 1990s are more disputable.

The fourth objection is that the Nobel awards committee has its own agenda and gives the awards to encourage the profession to move in a particular direction. Some critics have claimed that it has a "Chicago School" bias, given the number of economists associated with the University of Chicago that have won the awards.

The Bank of Sweden's Nobel Memorial Prize in Economics is announced around October 12th of every year, while the actual ceremony is on December 8th.

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Questions to the Text

1.Who was Alfred Nobel ?

2.What prizes did the Nobel's will specify?

3.When were the first prizes awarded?

4.When was the "Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel" established?

5.What is the "Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel" commonly shortened to?

6.How much money does the Prize disburse?

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