Famous Economists

Jean Baptiste Say. Supply creates its own demand.” This was the fa-

mous Law of Markets expounded by the French economist Jean Bap-

tiste Say in his Treatise on Political Economy (1803). This work was the

first popular and systematic presentation of Adam Smith’s ideas. As a

result, it established Say as one of the leading economists of the early

nineteenth century. Say’s Law became central to classical economic

thinking. In modern language the Law meant that the level of aggregate

output (GNP) always equaled the level of aggregate income (GNI). This

income enabled society to buy the output produced. Therefore, general

overproduction of goods (due to a deficiency in aggregate spending) was

impossible.

But what if businesses misjudged the markets for their goods? In that

case, the classicists contended, unprofitable overproduction of specific

commodities could and would occur. But such errors would be tempo-

rary and would be corrected as entrepreneurs strove to fulfill consumers’

preferences by shifting resources out of the production of unprofitable

goods and into the production of profitable ones.

Say’s law is central to the Classical vision of the economy. It says

that there can never be a general glut of goods on the market; aggre-

gate demand will always be sufficient to buy what is supplied. Not all

Classical economists initially accepted Say’s law. The most spirited ar-

gument against it was put forward by Thomas Malthus, a preacher. Mal-

thus argued that when people saved, part of their income would be lost

to the economy and that there wouldn’t be as much aggregate demand

out there as aggregate supply. According to Malthus, Say’s law did not

necessarily hold true.

Say and Ricardo rejected Malthus’s argument. They argued that

people’s savings were not lost to the economy. When people saved, they

did it by lending their savings to other individuals. The people who bor-

rowed the savings would spend what they borrowed on investments.

Classical economists argued that the interest rate would fluctuate to

equate savings and investment. If people’s desire to save increased, the

interest rate would fall and the quantity of investment would increase.

So any savings seemingly lost to the system would be actually translated

into investment, making aggregate demand (total buying power in the

economy) equal to aggregate supply (total production), through either

a direct route (consumption) or an indirect route (investment by way

of savings). Aggregate demand (investment plus consumption) always

equaled aggregate supply.

Thomas Malthus. As the eighteenth century drew to a close, England

found itself facing grave social problems. Among them were widespread

poverty, the growth of urban slums, and severe unemployment. These

social problems resulted from economic dislocations caused by years of

war with France. In addition, the factory system of production had be-

gun and was displacing numerous workers. It fell to a hitherto unknown

English clergyman, Thomas Robert Malthus, to explain these problems.

In his famous Essay on Population, (1803), he expounded the belief that

population tended to outrun the food supply. The result would be bare

subsistence for the laboring class. This prophecy has become a stark re-

ality in many of the overcrowded poor countries of the world.

Malthus also contributed significantly to economic thought, an-

ticipating certain concepts that became important in twentieth-century

thinking. In his Principles of Political Economy (1820), he developed the

concept of “effective demand,” which he defined as the level of demand

necessary to maintain full production. If effective demand fell short, he

said, overproduction would result. Malthus thus disagreed with Say on

the Law of Markets.

David Ricardo. Generally considered to be the greatest of the classi-

cal economists, David Ricardo was the first to view the r economy as an

analytical model. That is, he saw the economic system as an elaborate

mechanism with interrelated parts. His task was to study the system and

to discover the mechanisms that determine its behavior. In so doing, Ri-

cardo formulated theories of value, wages, rent, and profit. These theo-

ries, although not entirely original, were for the first time stated com-

pletely, authoritatively, and systematically. Portions of them became the

basis of many subsequent writings by later scholars. Some of Ricardo’s

ideas still remain pillars of economics.

Ricardo, an English businessman rather than an academician, wrote

a number of brilliant papers. His ideas were largely incorporated in his

work Principles of Political Economy and Taxation (1817). The book was

an immediate success, and it attracted many disciples. As a result, Ri-

cardo’s influence became pervasive and lasting. Indeed, Ricardian eco-

nomics became a synonym for classical political economy (or “classi-

cal economics,” as we call it today). Like his predecessors, Ricardo was

mainly concerned with the forces that determine the production of an

economy’s wealth and its distribution among the various classes of so-

ciety. He also made major policy recommendations to Parliament con-

cerning the dominant social and economic problems of his day.

John Stuart Mill. Known equally well as a political philosopher and

as an economist, the Englishman John Stuart Mill was the last of the

major “mainstream” classical economists. His great two-volume trea-

tise Principles of Political Economy (1848) was a masterful synthesis of

classical ideas. The book became a standard text in economics for sev-

eral decades. Numerous students in Europe and America learned about

economics from this basic work. So, too, did a number of American

presidents—including Abraham Lincoln—although they did not always

correctly apply the principles they learned.

Mill’s major objective was economic reform. Although he believed

in laissez-faire, he went beyond the “natural law of political economy.”

He did so by advocating worker education, democratic producer coop-

eratives, taxation of unearned gains from land, redistribution of wealth,

shorter working days, improvements in working conditions, and gov-

ernment control of monopoly. These measures, Mill felt, would ensure

workers the benefits of their contributions to production without violat-

ing the “immortal principles” of economics. It is easy to see why con-

temporaries of Mill often labeled him a socialist. But he believed too

strongly in individual freedom to advocate major government involve-

ment in the economy. By today’s standards, Mill probably would be clas-

sified as a moderate conservative.

Irving Fisher. Irving Fisher, professor of economics at Yale Univer-

sity, was one of America’s foremost economists prior to World War II.

A mathematician and inventor as well as an economist, he was a pro-

found scholar and a prolific writer. In addition to twenty eight published

books, he wrote dozens of articles in professional journals. Because of

their high quality and enduring value, some of Fisher’s publications are

frequently referred to by scholars today. Fisher’s major interests were the

study of money and prices. In a book entitled The Purchasing of Money

(1911), he stated the equation of exchange—which subsequently became

known as the Fisher equation. A modernized version of the equation is

expressed in this way, the equation encompasses transactions for jinal

goods, and thus uses readily available GNP data. (Such data did not

exist in Fisher’s time, causing him to use a less practical equation.) The

equation explains a cause-and-effect relationship between the quantity

of money and the price level.

Milton Friedman. A Nobel laureate (1976) and professor emeritus

at the University of Chicago, Milton Friedman is perhaps best known

for his approach to money and his unique position as America’s leading

monetarist. Using carefully documented research going back to the late

nineteenth century, he argues that the crucial factor affecting economic

trends has been the quantity of money, not government fiscal policy. Ac-

cordingly, he opposes the use of discretionary monetary policy by the

Federal Reserve (Fed) to achieve economic stability. Friedman advo-

cates instead a money-supply rule —an expansion of the nation’s money

supply at a steady rate in accordance with the economy’s growth and

capacity to produce.

Friedman cites the past performance of the Fed as one of the major

reasons for this view. Throughout its history, he says, the Fed has pro-

claimed that it was using its monetary powers to promote economic sta-

bility. But the record often shows the opposite. Despite the Fed’s well-

intentioned efforts, it has been a major cause of instability by causing

the monetary growth rate to expand and contract erratically. Therefore,

the urgent need is to prevent the Fed from being a source of economic

disturbance.

Is the adoption of a money-supply rule technically feasible? Fried-

man claims that it is. Although he admits that the Fed could not achieve

a precise rate of growth in the money supply from day to day or from

week to week, it could come very close from month to month and from

quarter to quarter. If and when it does, he says, it will provide a monetary

climate favorable to economic stability and orderly growth. And that,

Friedman concludes, is the most we can ask from monetary policy at our

present state of knowledge.

Alfred Marshall. In the last quarter of the nineteenth century, there

arose in Europe and America a system of ideas known as neoclassical

economics. One of the leaders of neoclassicism was Alfred Marshall, a

British scholar whose landmark treatise, Principles of Economics (1890),

will forever be regarded as a masterwork. The book, which went through

eight editions, was a leading text in economics for over forty years.

Among the major contributions of this and other works by Marshall were

the distinction between the short run and the long run, the extensive use

of diagrams and models to describe economic behavior, and the equi-

librium of price and output resulting from the interaction of supply and

demand. Marshall also systematized the use of elasticity, the distinction

between money cost and real cost, and many other ideas.

In short, almost everything we read today pertaining to supply and

demand analysis, equilibrium, and related notions was originally for-

mulated precisely and definitively by Marshall. Few students today real-

ize or appreciate the significant role that Marshall’s ideas play in their

economics education. By the time he retired from his professorship at

England’s Cambridge University, Marshall had trained several genera-

tions of eminent economists. These disciples went on to assume major

positions in universities and government service. One of them was the

famous British economist John Maynard Keynes whose ideas are stud-

ied in macroeconomics. Keynes referred to his former teacher as “a sci-

entist... who, within his own field, was the greatest in the world in more

than a hundred years.”

Paul Anthony Samuelson. Paul Samuelson is probably the world’s most

widely known economist. Several generations of college students in the

U.S. and abroad took their first course in economics using his introduc-

tory textbook. Millions of readers of American and foreign newspapers

and magazines have seen his articles on current economic policies. Pro-

fessional economists throughout the world have studied, and have been

stimulated toward further research by the extraordinary range of his

scientific work. This includes hundreds of profound papers and several

books dealing with theoretical topics in many areas of economics.

In his Foundations of Economic Analysis (1947), which immediately

established Samuelson’s reputation as a highly creative economist, he

presented a systematic analysis of static and dynamic economic theory.

He described, in mathematical form, the “state” of an economic system

in equilibrium and the process or path of adjustment from one state to

another. He then linked statics and dynamics by what he called the cor-

respondence principle. This is one of the most fundamental concepts in

the Foundations. The proposition demonstrates that, before comparative

statics (the comparison of equilibrium positions in static states) can be

meaningful, it is first necessary to develop a dynamic analysis of stability.

In general, Paul Samuelson’s scientific contributions – developed in

precise mathematical rather than literary form—have greatly deepened

our understanding of how the economic system works. He has shown

the general applicability of the concept of maximization, subject to con-

straints, to many branches of economics. In recognition of his extraordi-

nary contributions to economics, he became, in 1970, the first American

to receive the Nobel Prize in Economic Science.

Leon Walras, Vilfredo Pareto, Gerard Debreu. Leon Walras’s fame

rests on his formulation of the theory of general equilibrium, which he

developed rigorously through the use of mathematics. He thus became

one of the founders of mathematical economics, which has flourished

to this day. While serving as a professor at the University of Lausanne,

Switzerland, Leon Walras published his great work, Elements of Pure

Economics (1874). In this book he showed how a system of simultaneous

equations could be used to describe an economy in general equilibrium.

The “description,” however, is given in a formal theoretical sense only.

The necessary data cannot be obtained, and the number of simultaneous

equations that would have to be solved is virtually infinite. Nevertheless,

this does not destroy the value of general-equilibrium theory. The virtue

of the concept lies in the precise way in which it demonstrates the mu-

tual interdependence of economic phenomena.

Walras was succeeded at Lausanne by Vilfredo Pareto, an Italian

scholar. In his major work, Manual of Political Economy (1909), Pareto,

like Walras, formulated concepts of general equilibrium under static

conditions. However, Pareto was also concerned with the problem of

how to maximize total satisfactions in an economy. He developed the

concept now commonly referred to as Pareto optimality – a notion that

is fundamental to modern welfare economics. It should be noted that

Pareto also made notable contributions to sociology. In fact, his reputa-

tion in that field is as strong as his reputation in economics. Together,

Walras and Pareto constitute what is known as the “Lausanne School” of

economic thought. The influence of this school on subsequent writers –

especially in mathematical economics, general-equilibrium theory, and

welfare economics—has been enormous.

Gerard Debreu is a contemporary scholar following in the Lausanne

tradition. A mathematician and economist at the University of Cali-

fornia, he was awarded the 1984 Nobel Prize in Economic Science for

helping to “prove” the theory of general equilibrium.

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