Economic Thought

In this sub-chapter, a brief history of economics is outlined by the IB syllabus.

18th century

• Adam Smith, often called the father of modern economics, wrote a book called The Wealth of Nations, which introduced the concept of laissez-faire, which means "let it be," advocating for minimal government intervention in the economy as private markets solve themselves. 

• He believed that individuals pursuing their self-interest would naturally lead to economic prosperity through the "invisible hand" of the market. 

  • • For example, the bread you buy from the supermarket comes from a baker which used ingredients from a farmer. Neither the farmer nor baker cares about serving you bread, but rather about making their own profit. This profit-motivation then leads to bread being easily available for you to buy.
      
      

19th century

• Classical Economics: This theory advocated for minimal government interference, believing that free markets naturally allocate resources efficiently (building upon Adam Smith's theories). 

  • • Example: If there's a high demand for bricks, companies will produce more, which balances supply and demand without the need for government controls.

• Utility Theory: This is a theory first introduced in the 19th century but still very relevant today in modern economics. It was developed by Alfred Marshall, and suggests that the largest factor in consumers' decision-making is to choose things that maximize their own personal utility (satisfaction). 

  • • Example: A person choosing between pizza and a soft drink will buy the one that brings more pleasure, hence influencing the demand and price of each product.

• The Concept of the Margin: Marginal utility was also a concept introduced, and refers to the extra satisfaction from consuming an additional unit of a good. 

  • • Example: Let's say you like pizza better than curry. Eating the first slice of pizza might be very satisfying, but the third or fourth slice may be less enjoyable, illustrating the law of diminishing marginal utility, where satisfaction decreases with each extra slice. At some point, you get more utility from curry instead of another slice of pizza.

• Classical macroeconomics (Say's Law): Jean-Baptiste Say argued that the production of goods creates its own demand ("Supply creates its own demand").

  • • Example: Factory workers earn wages by producing cars, which they then use to purchase other products, like groceries or clothing, thus creating more demand in the economy.

    • Say argued 

• Marxist Critique: Karl Marx was a German philosopher who criticized capitalism, saying it exploits workers for profit. 

  • • Example: In a shoe factory, Marx would argue that the owner benefits from selling shoes at a price much higher than the workers’ wages, keeping the surplus value as profit.

20th century