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Adam Smith(1723-1790)

Adam Smith is often regarded as the founder of moderneconomic thought. He wrote Te Wealth of Nations in1776, which was the first comprehensive attempt to

explain the process of economic growth and the reasons forthe differences in economic development between nations.

The Wealth of Nations

Adam Smith founded the Classical School of economicswhich dominated for the next one hundred years. Hewrote Te Wealth of Nationsduring the early stages of theIndustrial Revolution in Britain where he observed thecapitalist system in operation. echnological advanceshad allowed the development of small and large factorieswhich saw the emergence of two new social classes:industrialists (manufacturers) and employed labourers.

Classical economics was concerned mainly with explainingthe causes of economic growth and identifying theeconomic system which would maximise growth. LaterClassicists (such as Ricardo) studied the distribution ofincome between social classes. Tere were a number ofideas that were central to Classical economic thought:

Wealth was accumulated by society through theprocess of economic growth.

Markets and individual self interest promoted theeconomic wellbeing of society.

Economic growth was best promoted by minimalinterference by the government in markets.

Free trade was benecial to consumers because it ledto more choice and lower prices.

Smiths belief that the combined forces of self interestand competition perform a co-ordinating role in marketsby matching resource allocation with consumer demandremains a central idea of economics. Tis view is arationale for present day microeconomic reform policies.

Smiths emphasis on the key roles played by labourproductivity, capital accumulation and free internationaltrade in promoting economic growth is also shared by

modern economists.

Alfred Marshall

(1842-1924)

The Theory of Demand

Alfred Marshalls Principles of Economics (1890) used

the methodology of abstraction and partial equilibriumanalysis to develop a comprehensive theory ofmicroeconomics. He translated the law of diminishingmarginal utility into terms of price. Tis led to thederivation of demand curves and the law of demand:the amount demanded increases with a fall in price anddiminishes with a rise in price. Marshall also developedthe idea of consumer surplus, where a fall in price couldlead to a rise in a consumers real income.

The Theory of Production

Marshalls theory of production analysed the behaviourof costs, supply, the pricing of productive inputs, andthe determination of factor income returns. In the longrun production period, Marshall envisaged industrieswhich could experience either constant, increasing ordecreasing returns to scale, as all factors of productioncould be varied. Marshalls analysis of market behaviourassumed competitive conditions where industry supplycurves could be either upward sloping, downwardsloping or horizontal, depending on whether internal andexternal economies or diseconomies of scale were beingexperienced by the firm.

The Theory of Price DeterminationTe most important contribution Marshall made toeconomics was his view that the interaction of costs ofproduction and marginal utility determined market prices.He constructed demand and supply curves to illustrateprice determination and used short and long run costcurves to depict price and output in competitive industriesand for competitive firms as well as for monopolies.

Marshalls great contribution to political economy washis synthesis of microeconomic theory using partialequilibrium analysis. He believed in a free market system

of the allocation of resources like Smith and Ricardo.

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