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History of economic thought
by Nick Gardner, João Prado Ribeiro Campos and Richard Jensen
Modern economic thought is generally considered to have originated in the late eighteenth century with the work of David Hume and Adam Smith, and the foundation of classical economics. (Earlier approaches are described in the article on the History of pre-classical economic thought.) The nineteenth and twentieth centuries saw major developments in the methodology and scope of economic theory.
Nineteenth- and early twentieth-century economists applied deductive reasoning to axioms considered to be self-evident and to simplifying assumptions which were thought to capture the essential features of economic activity. That methodology yielded concepts such as elasticity and utility, tools such as marginal analysis, and theorems such as the law of comparative advantage. An extension of the relationships governing transactions between consumers and producers was considered to provide all that was necessary to understand the behaviour of the national economy.
The development, in the later 20th century, of systems of economic statistics enabled economists to use inductive reasoning to test theoretical findings against observed economic behaviour and to develop new theories. By that time, the concept had emerged of the national economy as an open interactive system, and analysis of that concept provided explanations of recessions, unemployment and inflation that were not previously available. The application of empirical data and inductive reasoning enabled those theories to be refined and led to the development of forecasting models that could be used as tools of economic management.
The late 20th and early 21st centuries have seen further theoretical and empirical refinements and significant advances in the techniques of economic management.
Overview: categories of economic thought
Historians categorise economic thought into “periods” and “schools” and tend to attribute each innovation to one individual. This categorization is helpful for the purpose of exposition, although the reality has been a story of interwoven intellectual threads in which advances attributed to particular individuals or schools have often prompted the work of others. For example, the quantity theory of money, which achieved prominence in the twentieth century and is associated with Milton Friedman, was first formulated at least three centuries earlier. Many of those threads that have permeated the categories referred to as "Classical economics" and "Neoclassical economics"—such as the concept of value and the nature of economic growth—had an earlier origin in "Pre-classical economics" (see History of pre-classical economic thought). "Classical" in economics denotes the adoption in the late eighteenth century of an approach that was inspired by the enlightenment and the methodology of the physical sciences, and had abandoned previous examinations of economics in terms of ethics, religion and politics. Preoccupation with those threads was overshadowed in the twentieth century by the responses of Keynesianism and monetarism to the problems of unemployment and inflation, but the development of neoclassical economics started before that time and has continued thereafter. (The boundary between the "classical" and "neoclassical" categories is marked mainly by the rejuvenation of the value thread by the concept of utility and the associated explanation of price in terms of "supply and demand".) The introduction of new tools of exploration has since led to the vigorous development of that and other threads, and an expansion in the scope of economics into many new directions.
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