GERRIT GORTER
The present study of economics did not, of course, come out of thin air. Although thinkers in classical Greece already reflected on what we now call economics, it was largely in the eighteenth century that systematic thought on the subject began.
Two conceptual tools—the economic cycle and the idea of the invisible hand—date from that century and are still in use today, both in academic research and in education.
This site contains twenty-five portraits of important economists. Each offers a biographical sketch together with an indication of his (and, in one case, her) significance for the development of economic thought. They claim no more than to provide a first introduction to the lives and works of these pioneers.
These articles originally appeared in Dutch in the Tijdschrift voor het Economisch Onderwijs and were published on the website of Gerrit Gorter. The English translations are by Folkert Gorter.
Index
François Quesnay
Adam Smith
Thomas Robert Malthus
Jean-Baptiste Say
David Ricardo
Antoine Augustin Cournot
John Stuart Mill
Karl Marx
Walras
Carl Menger
Alfred Marshall
Vilfredo Pareto Eugen von Böhm-Bawerk
Knut Wicksell
Max Weber
Irving Fisher
Sam de Wolff
John Maynard Keynes
Joseph Alois Schumpeter
Joan Robinson
Jan Tinbergen
John Hicks
John Kenneth Galbraith
Milton Friedman
Paul Samuelson
François Quesnay
France 1694–1774
The name François Quesnay (say: keh-nay) is inextricably linked to the concept of the economic cycle. The cycle is one of the oldest and most venerable tools in economic science, and its originator cannot be overlooked. That said, Quesnay’s version of the cycle looked a bit different from the one we know today. Instead of the sectors we find in our textbooks — businesses, households, government, and foreign trade — the earliest version of the cycle reflects the class-based society of the eighteenth century. It features farmers, large landowners, and the class of artisans and merchants.
Although you wouldn’t guess it from the accompanying portrait, François Quesnay came from humble origins. He was born in 1694 into a farming family. As the story goes, he taught himself to read at the age of eleven using a book on agriculture. At seventeen, he moved to Paris to study medicine. He married a daughter from a wealthy family and established himself as a physician. In 1745, he advanced his social standing further by becoming the personal doctor to Madame de Pompadour, mistress of the French king Louis XV. A few years later, the king himself appointed him as his physician. In 1752, Quesnay was ennobled and purchased an estate near Nevers. In short: Quesnay had made it.
By then a renowned physician, Quesnay had broader interests than medicine alone. He became acquainted with prominent philosophers such as Diderot and d’Alembert, and began to take an interest in economics as well. He wrote on topics including agricultural economics, but it wasn’t until the advanced age of 64 that he produced the first version of his famous Tableau Économique — the first circular flow model in history. As a physician, Quesnay had studied the human circulatory system in depth, which had been discovered in the seventeenth century by the Englishman Harvey. It has often been noted that Quesnay’s economic cycle bears a strong resemblance to the circulation of blood in the human body.
Another notion of Quesnay’s — which to us feels rather peculiar — was his belief that value could be created only by farmers. In this view, what we now call gross domestic product consisted entirely of agricultural production. On closer inspection, though, that idea may not be so strange in the context of the eighteenth century, when most people worked in agriculture. And besides, the production process has to begin somewhere — what we would now call the primary producer. The fact that products are later transformed or traded is of lesser importance.
Around the somewhat eccentric Quesnay a circle of admirers began to form, gathering regularly in the apartments of the great master at the Palace of Versailles. They discussed philosophy and economics, and Quesnay’s literary fruits were read and debated. This circle — sometimes referred to as the Physiocrats (“the rule of nature”) — had only a brief existence, roughly from 1760 to 1770. The Physiocrats believed in a natural order that should be left to its own devices. The laws of nature know what is best for us, and we should not stand in their way. Adam Smith’s Invisible Hand can be traced directly back to the Physiocrats.
From 1764 onward, Quesnay’s influence began to wane. Madame de Pompadour, his advocate at court, died that year. Quesnay continued to publish, but lost many of his allies at court. The entire Physiocratic school, moreover, faced growing resistance due to the liberal ideas it promoted. The Physiocrats’ journal was banned from publication, and when Louis XV died in 1774, that was it for the Physiocrats. Quesnay died that same year. There is every reason to honor him as one of the founding fathers of economics. Not only the concept of the circular flow, but also the idea of a natural order, can be traced back to him and his Physiocrats.
Adam Smith
Scotland 1723–1790
Adam Smith is often seen as the high priest of the free market economy. Just let supply and demand do their thing, and everything will work out. A one-sided view, as we’ll see shortly.
Adam Smith was born in 1723 in the Scottish town of Kirkcaldy. He was raised by his mother, who had been widowed early on. At the age of four, he is said to have been kidnapped by gypsies, but, pursued as they fled, the villains left little Adam behind. Economics nearly lost one of its greatest practitioners. At seventeen, he enrolled at the University of Oxford, and at the age of twenty-eight, he was offered a professorship in logic at the University of Glasgow. He was later appointed professor of moral philosophy — a kind of social philosophy.
Smith was the classic absent-minded professor. There are countless anecdotes of wandering the city in pajamas or smiling vaguely at church services. Meanwhile, he made the acquaintance of the wealthy Charles Townshend, who had grown interested in Smith’s work. Smith had published The Theory of Moral Sentiments in 1759, a book that made him famous overnight. Townshend was planning to send his son on a Grand Tour of Europe to complete his education, and asked Smith to accompany the young duke.
It was a very attractive offer financially, and Smith accepted it. This journey, which began in 1764, proved to be of major significance to the field of economics. First of all, Smith met the Physiocrats in France, including the court physician Quesnay, with whom he had many conversations. In many respects, they agreed — particularly on the laissez-faire principle. But the idea that only agriculture could create value didn’t fly with Smith. Secondly, interesting conversation partners were not always easy to find (the young duke is said to have been a rather dull character), and boredom often crept in. To stave this off, Smith began writing what would later become An Inquiry into the Nature and Causes of the Wealth of Nations — the book that marked the beginning of economics as an independent discipline.
In The Wealth of Nations, as Smith’s best-known work is usually referred to, he lays out, among other things, his famous theory of the Invisible Hand. If everyone pursues their own self-interest, all efforts will, as if guided by an invisible hand, ultimately benefit society as a whole. It may seem like a license for unrestrained liberalism. But it wasn’t. Earlier, in The Theory of Moral Sentiments, Smith had shown that he was aware of the fragmenting effects of self-interest inherent in the invisible hand. Fortunately, there is a counterbalance. Everyone possesses certain moral sentiments, which Smith called sympathy: the ability to put yourself in someone else’s shoes and to take an interest in others outside of personal gain. A message that seems to have been forgotten in today’s revival of capitalism.
In 1766 the Grand Tour ended abruptly. The younger brother of Smith’s pupil, who had since joined the party, died suddenly. Even the urgently summoned Quesnay could do nothing. Smith returned to Scotland and moved in with his mother to finish his book, which was eventually published in 1776.
Although Smith lived as a reclusive bachelor until his death in 1790, he became even more famous than he already was. Many statesmen and scholars came to seek his advice. According to one anecdote, his guests stood up at the beginning of one such meeting when Smith entered the room. When the elderly philosopher asked them to sit down, one of them replied: “No, we will remain standing until you are seated, for we are all your pupils.”
Thomas Robert Malthus
England 1766–1834
Thomas Robert Malthus (1766–1834) came from a well-to-do and intellectually stimulating environment. His father, Daniel Malthus, was a friend of the well-known philosopher David Hume, and even the French thinker Rousseau was known to stop by the house.
The young Thomas Robert pursued theological studies at Cambridge and became a clergyman. Father and son regularly engaged in discussions, including about a then-famous work by one William Godwin, which painted an extremely rosy picture of the future — a world without hunger, marked by justice and abundant leisure. The elder Malthus saw some merit in such ideas, but his son was skeptical. To convince his father, Malthus wrote, in 1798, his now-famous An Essay on the Principle of Population as It Affects the Future Improvement of Society, with Remarks on the Speculations of Mr. Godwin, M. Condorcet, and Other Writers. The book was initially published anonymously; later editions included his name. The second edition contained significantly more factual material than the first, thanks to a number of study trips he made to France, Switzerland, Sweden, Finland, Norway, and Russia.
The harmonious world elaborated by some eighteenth-century thinkers was replaced by a grim Malthusian reality, in which humanity fought an unequal battle against hunger, wars, and other miseries. It was after reading Malthus’ bleak publication that the English historian Carlyle referred to economics as a “dismal science.”
Malthus’ theory can be summarized very simply:
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The size of the population is limited by the available supply of food.
- An increase in food production triggers population growth that outpaces the growth of subsistence resources.
- To prevent the outbreak of famines, checks must act to limit population growth.
The second proposition contains the famous law of diminishing returns. Food production could never increase faster than in an arithmetic progression, since the best land was already in use. The population, however, tended to grow geometrically, making the resulting misery predictable. The third proposition had two sides. Alongside a somewhat cynical aspect — famines and epidemics would naturally restore balance — it also included the famous moral restraint: a call to reduce the birth rate, primarily by marrying at a later age. Against this background, a remark made by an acquaintance about Malthus makes sense: “He’s a pleasant fellow and polite to the ladies — as long as there are no signs of impending fertility.”
Malthus became professor of history and economics at Haileybury College, an institution affiliated with the East India Company. Because of his lectures in economics, he is sometimes referred to as the first professional economist. His friendship with David Ricardo was of great importance. They maintained an extensive correspondence, which reveals that they disagreed on nearly every point. Yet they had a profound influence on one another. Population growth and diminishing returns, for instance, are also key pillars of Ricardo’s theory.
Malthus’ name is associated — perhaps excessively — with the principle of overpopulation. The major shortcoming in his theory, at least in hindsight, is the absence of any notion of progress, particularly in agricultural technology. Agriculture has proven capable of feeding far more people than Malthus ever thought possible. That does not change the fact that the principle of a finite world, one that can support only a finite population, still holds. The famous 1972 report by the Club of Rome is based on that very idea.
Jean-Baptiste Say
France 1767–1832
In Steven Pressman’s Fifty Major Economists (recommended, by the way), the name of the French economist Jean-Baptiste Say is missing. He is generally credited with little originality, said to have mainly popularized the work of Adam Smith. In any case, his Traité d’économie politique, published in 1803, was a great success and was regarded as a much more systematic work than Smith’s The Wealth of Nations.
Jean-Baptiste Say was born in 1767 in the French city of Lyon, into a family of merchants, and was destined for a career in commerce. He spent part of his youth in Geneva and London. As a child of the Enlightenment, he welcomed the French Revolution and even served for several years as a volunteer in the French army. After a conflict with Napoleon, he left Paris to become an entrepreneur: he started a cotton-spinning mill in Auchy-les-Hesdins, which turned out to be no small success. After selling his shares, he was able to live as a man of independent means in Paris. After the Napoleonic Wars, he became professor of political economy, first at the Conservatoire des Arts et Métiers, and later at the Collège de France.
It was the English economist John Maynard Keynes who secured Say’s place in the economics textbooks. Keynes was not a strong proponent of the free market economy and believed that imbalances could be persistent. He used Say’s law as a convenient target to strengthen his argument, because Say had argued, in his loi des débouchés (law of markets), that a general overproduction was not possible.
Say wondered whether the market system could continue to grow indefinitely without encountering problems on the demand side. Might there not be a leak in the economic cycle, as the French Physiocrats, for instance, had considered possible? According to Say, however, demand would not pose a problem. The income paid to the factors of production would always be sufficient to absorb the output. As a frequently quoted phrase puts it — though it comes not from Say but from Keynes: “Supply creates its own demand.” It is not difficult to see that aggregate production and aggregate income are equal. That is simply a matter of accounting; after all, production and income are two sides of the same coin.
But what would happen if consumers held back and decided to save their income? Would the economic cycle not be disrupted? Would overproduction not occur, leading to a downward spiral? Say, however, was not concerned about that. Those who do not consume their income contribute to savings. The increased supply of capital leads to a decline in interest rates, which in turn stimulates investment. Although various temporary disruptions can have unpleasant short-term effects, in the end, things end up sorting themselves out.
In addition to his law of markets, one can also point to his, for the time, rather original view on value. According to the classical economists, such as Adam Smith and David Ricardo, value arose from the costs — particularly labor — that had been expended on a product. There were, however, dissenting voices, such as the French thinker Étienne Condillac (1714–1780), who saw value as arising primarily from the usefulness a product provided to the consumer. In that sense, Condillac was a forerunner of the Austrian School. Say attempted to combine the views of the classical economists on the one hand and those of Condillac on the other. In doing so, he sought to create a synthesis between the objective and the subjective theories of value. The first to attempt this after him was Alfred Marshall in 1890. It has remained the standard view ever since.
In addition to being an entrepreneur and a theorist, Say was also a dedicated teacher. For example, he wrote an economic catechism — naturally structured in question-and-answer form.
First question: “Que nous enseigne l’économie politique?” (“What does political economy teach us?”) Answer: “Elle nous enseigne comment les richesses sont produites, distribuées et consommées dans la société.” (“It teaches us how wealth is produced, distributed, and consumed in society.”)
After the fall of Napoleon, Say’s star rose quickly. He was offered various honors and prestigious academic appointments. His professorship at the Collège de France — the institution’s first chair in economics — was awarded to him in 1831. He died the following year.
David Ricardo
England 1772–1823
David Ricardo (1772–1823) came from a Portuguese-Jewish family that, via Holland, eventually settled in England. His non-English-sounding name reflects that background. Ricardo’s father was a wealthy merchant-banker. Ricardo never received a thorough theoretical education: at just fourteen, he joined his father’s business. He quickly grasped how the stock exchange worked, and by the age of 26, he was financially independent. By the time he was 42, he had made so much money that he was able to retire from business as a very wealthy man. Meanwhile, he had married a Quaker girl — a decision that was not well received by his Jewish family.
In 1799, during a rather dull holiday, he got his hands on a copy of Adam Smith’s The Wealth of Nations, and his interest was sparked. As a self-made man in every respect, he derived his ideas directly from practical experience. It was James Mill, father of the soon-to-be-famous John Stuart Mill, who saw potential in those ideas and encouraged him to develop his theories further. His first publications often dealt — unsurprisingly — with monetary and banking matters, such as his 1810 work The High Price of Bullion, a Proof of the Depreciation of Bank Notes. Or the article The Price of Gold, published a year earlier, which sparked considerable controversy and drew James Mill’s attention to Ricardo.
In modern textbooks, Ricardo’s work lives on, among other things, in the theory of comparative cost differences, which explains international trade. In doing so, Ricardo positioned himself against Adam Smith’s theory of absolute cost differences, arguing that it is not the absolute but the relative differences in cost that matter. In a now-famous example, he illustrates that although England is more expensive in absolute terms than Portugal, it will nevertheless export clothing to Portugal. Incidentally, while this theory is generally attributed to Ricardo, its earliest traces can already be found in the work of one Robert Torrens in 1808.
But perhaps even more important than this theory was Ricardo’s method. Adam Smith’s ornate language was replaced by Ricardo’s bare and straightforward mode of argument. Whereas Smith frequently wanders into side paths filled with practical examples, Ricardo’s writing goes straight to the point. In other words, Smith’s work had a strong empirical bent, whereas Ricardo was strictly deductive. In that respect, he set the course for all of mainstream economics that followed.
Ricardo became a member of the British House of Commons, where his speeches were renowned. Apparently, they resembled lectures more than political addresses, but they certainly made an impression. Not everyone appreciated the substance of his arguments, by the way. The large landowners were not particularly fond of his views on rent. Ricardo regarded rent as a rather easily earned form of income. With a growing population, rising grain prices would naturally bring in more rent. His proposal to liberalize grain imports—which would cause grain prices, and with them rents, to fall—was poorly received by the English aristocracy. The fact that Ricardo himself owned land and thus collected rent only made his argument more convincing.
Legendary is his friendship with fellow economist Thomas Robert Malthus, whom he met around 1810. They corresponded regularly. They often disagreed, including on the stability of the market system and the so-called Law of Say, but in his final and now-famous letter to Malthus, Ricardo wrote: “And now, my dear Malthus, I have done. Like other disputants, after much discussion, we each retain our own opinions. These discussions, however, never influenced our friendship. I should not like you more than I do if you agreed in opinion with me.”
Antoine Augustin Cournot
France 1801–1877
You may know the French economist Cournot from the point named after him — the point on a monopolist’s demand curve that indicates the price-quantity combination at which maximum profit is achieved. But he was also the first economist to draw a demand curve and to provide an analysis of price formation under duopoly. In addition, when it came to the application of mathematics in economics, he was well ahead of his time.
Antoine Augustin Cournot was born near Dijon in 1801. He attended the best French schools, including the École Nationale Supérieure in Paris, studied astronomy, mechanics, and mathematics, and was appointed professor in the latter two subjects at the University of Lyon. It was only later that he developed an interest in economics. All of this culminated in his main work, Recherches sur les Principes Mathématiques de la Théorie des Richesses. Published in 1838, the book was remarkably progressive for its time in its application of mathematical techniques. It is filled with algebra and does not shy away from differential and integral calculus. Unsurprisingly, it went entirely unnoticed. According to some caustic remarks, this was because economists at the time had little grasp of mathematics and simply didn’t understand the book.
Cournot is one of the most underrated figures in the history of economic thought. Later luminaries such as Léon Walras, Stanley Jevons, and Alfred Marshall thankfully fully acknowledged this — though, for Cournot himself, it came rather too late. Many concepts that would later be widely used — and reinvented — can already be found in Cournot’s work. For example, he was the first to distinguish between fixed and variable costs. In making decisions, a French wine producer must take into account the fact that costs differ in nature. For example, when expanding wine production on a given plot of land, the rent will remain constant, while the amount of labor required will increase.
Another concept — only later to become widely adopted — can already be found in Cournot’s work: the idea that producers are guided by the additional costs and additional revenues associated with expanding production. A small increase in output leads to certain marginal costs and, upon sale, to certain marginal revenues. A wine producer will continue to expand production and sales until marginal costs and marginal revenues are equal. It was only with the emergence of the Austrian School (after 1870) that marginal analysis became common practice.
Cournot also made contributions in other areas. His now-famous analysis of decision-making under duopoly has already been mentioned. He showed how the decisions of one producer influence the behavior of the other, and how an equilibrium ultimately emerges. Finally, he also concerned himself with the theory of exchange rates. But he kept returning to his main work from 1838, unable to believe that it had gone unnoticed. He made several attempts (in 1863 and 1877) to present his theory in a simplified form — that is, without mathematics — but to no avail. His bitterness over this was somewhat alleviated by Walras, who in 1877 finally gave Cournot the recognition he deserved. Cournot died that same year.
John Stuart Mill
England 1806–1873
The upbringing of John Stuart Mill, born in 1806, was remarkable. Father James must have been convinced that his son was a prodigy; otherwise, the program to which young John Stuart was subjected is almost impossible to comprehend. At the age of six, he began studying Greek; a year later, Latin. Before his twelfth birthday, he had completed a thorough education in mathematics and history. Then it was time for logic, political philosophy, and economics.
At seventeen, he took a job with the East India Company, which left him ample time for the writing of books. And write them he did. His System of Logic (1843), the essay On Liberty (1859), and of course several works on economics, became widely known. No wonder he remained loyal to his employer for thirty-five years. In the meantime, at the age of twenty-five, he managed to fall in love with Harriet Taylor. The love was mutual — but unfortunately, there was also a Mr. Taylor. Not that it made much difference. Allegedly, the two (that is, John Stuart and Harriet) travelled together and lived under the same roof. Only twenty years later did Mr. Taylor pass away, allowing the marriage to be formally concluded. Harriet Taylor influenced Mill above all in matters of women’s emancipation and human rights. His strong liberal views on these issues were, at least in part, owed to his companion/wife.
In 1848, his Principles of Political Economy with some of their Applications to Social Philosophy (to give the full title) appeared — a book written in just six weeks, which must be called a remarkable achievement for a work of such scope. Mill himself regarded it as an eclectic work, a book that did little more than summarize the ideas of others. Then again, the same has been said of nearly every major work in economics, so Mill needn’t have worried.
The Principles became a true textbook — the successor to Adam Smith’s The Wealth of Nations. For decades, it served generations of students well, until it was succeeded in 1890 by Alfred Marshall’s Principles of Economics. Although the book was primarily a brilliant summary — and conclusion — of the ideas of the so-called Classical School in economics, it also contained original contributions of its own. Best known is his distinction between the Laws of Production and the Laws of Distribution. In the Classical School, it was common to conceive of society as governed by strict forces resembling natural laws. Mill went along with those ideas roughly halfway. He believed that production was indeed governed by classically rigid principles such as population growth and diminishing returns (borrowed from Malthus and Ricardo). But income distribution, he argued, depends much more on the mores and habits of a given era — and can therefore be influenced.
During Mill’s lifetime, seven editions of the Principles appeared, and he personally financed a low-cost edition to make it accessible to those of modest means.
In 1865, he was elected to the British Parliament, but lost his seat again in the very next election. He was unable to put his ideas — women’s suffrage, compulsory primary education, land reform — into practice. After a brief tenure as rector of St Andrews University, he withdrew to France. He died in 1873.
Karl Marx
Prussia 1818–1883
Karl Marx’s life was no bed of roses. It was a long sequence of resistance, expulsions, and above all, financial hardship. He was born in 1818 in the German town of Trier. His father was a well-off Jewish lawyer. Karl studied philosophy at the universities of Bonn and Berlin. In the latter city, he joined a group of left-leaning academics, which made him rather suspect in the eyes of conservative Prussia.
He began writing for the Rheinische Zeitung, a liberal newspaper published in Cologne. When the paper was banned from publication, Marx moved to Paris, accompanied by his wife, Jenny von Westphalen. There he met (for the second time, incidentally) Friedrich Engels, with whom he formed a lifelong friendship.
In Paris, Marx’s pen did not rest, and it wasn’t long before he was no longer welcome in France either. He ended up in Brussels, where in 1848, together with Engels, he brought the famed Manifest der Kommunistischen Partei into the world. The Belgian government was not particularly pleased, and promptly expelled Marx. He began a period of wandering that took him back to Paris and then to Germany, where he published the Neue Rheinische Zeitung for nearly a year. Expelled once again, he returned to Paris, and eventually, at the age of thirty-one, traveled on to London as an exile — the city where he would remain for the rest of his life.
The influence of the wealthy industrialist Engels on Marx was far-reaching. It was likely Engels who first drew Marx’s attention to economic problems. And without Engels’ financial support, Marx would never have made it in London. Many of Marx’s writings came about in collaboration with Engels, although the latter always credited Marx with having provided most of the ideas.
In London, Marx worked in the reading room of the British Museum on a major three-volume work, which would later be titled Das Kapital. Kritik der Politischen Oekonomie. Of these, Marx lived to see only the first volume published, in 1867. Engels edited and published the remaining two volumes, in 1885 and 1894 respectively.
Marx’s work can be characterized as an analysis of capitalism. A central concept in his theory is exploitation, which can be defined — roughly — as the appropriation of surplus value by the owners of capital. Surplus value is the difference between the revenues and the cost of labor as a factor of production. Marx sought to show that the formation of surplus value would ultimately lead to a falling rate of profit (in line with Ricardo’s theory), and eventually to the complete collapse of the capitalist system.
So far, few of Marx’s predictions have come to pass. Capitalism is very much alive, the working class has not been impoverished but is wealthier than ever, and is more interested in a football match than in a revolution. Still, there has probably never been an economist who exerted greater influence on the course of history. The former Soviet Union, in particular, spent seventy years in the grip of what was ultimately a failed experiment with a planned economy. Incidentally, Marx never explained what a planned economy should actually look like. He merely predicted the collapse of capitalism and was convinced that a communist society would rise from its ruins. But how that was supposed to happen — Marx was happy to leave that to others.
It’s worth noting the role Marx played in the First International Workingmen’s Association. This “International” was made up of delegates from workers’ and communist movements from various countries, with the goal of coordinating their activities. The first International began in 1864 and collapsed in 1876 due to internal conflicts.
From 1873 onward, Marx’s health began to deteriorate. The death of his wife in 1881 affected him deeply. He did not outlive her by much: he died in 1883. You can visit his grave at London’s Highgate Cemetery.
Walras
France 1834–1910
Marie Esprit Léon Walras was born in 1834 in Normandy. At first, it did not seem likely that he would go on to become a renowned economist. He trained as a mining engineer and then tried his hand at writing — producing an unsuccessful novel and a few short stories. His father, Antoine Auguste, was, incidentally, a reasonably well-known economist at the time and had once been a student of the later well-known economist Augustin Cournot.
It was his son Léon who fully grasped the significance of Cournot’s work. As early as 1838, long before leading economists were ready for it, Cournot had understood that mathematics could serve as an important tool for representing economic relationships. He also already understood that the field needed to move in the direction of general equilibrium analysis, but he was unable to carry out that task himself. It would become Walras’ life’s work.
The classical economists made use of so-called partial equilibrium analysis — that is, they studied equilibrium in a single market. An economist like Marshall, however, understood very well that in economics, everything is interconnected. An increase in demand in one market affects not only the price of the product in question but also the prices of other products. But Marshall was a practical man and believed that you simply couldn’t do everything at once. That’s why he introduced the ceteris paribus clause, allowing the surrounding conditions of a given market to be temporarily bracketed off.
Walras believed it was possible to do everything at once and developed a theory that linked all markets together. The underlying question was whether a general equilibrium was possible. Walras used the metaphor of the auctioneer — Smith’s Invisible Hand in another guise. At an auction where n goods are traded, the auctioneer would continue announcing price vectors until a “set” of prices was found at which all n markets were in equilibrium. All in all, a general equilibrium was indeed possible according to Walras — fortunately so, for otherwise the free market economy would be in a state of perpetual chaos.
After working for a railway company and a few banks, he succeeded in securing a professorship in Lausanne, Switzerland, in 1870. There he developed his mathematically inclined theories, which were not particularly well received. He nevertheless persisted, and it was not until 1892 that he was forced to resign. It wasn’t just the mathematical form in which he cast his theories that provoked resistance; his subjective theory of value and political ideas such as land nationalization likewise met with little approval.
In his personal life, Walras suffered the loss of his wife. In 1884, he remarried a wealthy widow, which made him financially independent. In Lausanne, Walras had to teach law students, who showed little interest in his admittedly rather abstract theories. It was clear that Walras couldn’t fully express himself in his teaching. That may well be the reason he corresponded with virtually every economist of note. He also had many others read his unpublished work. Through this extensive network of long-distance contacts, he nevertheless succeeded in making his ideas widely known. He would continue to do so until his death in 1910.
Walras seems to have been somewhat embittered by the limited success of his theories — especially that of his main work, Éléments d’économie politique pure ou théorie de la richesse sociale, published in 1874. In a biographical essay, Joseph Schumpeter — who, incidentally, considered Walras the greatest economist of all time — wrote about “… the shadow which the indifference to his written work threw on the last thirty years of his life. It is an old story. The fate of truth as well as that of beauty is a sad one on this earth.” Walras knew the feeling all too well.
Carl Menger
Austrian Empire 1840–1921
Carl Menger’s life can hardly be called spectacular. He was born in 1840 in Galicia — now southern Poland, but at the time part of the Austro-Hungarian Dual Monarchy. He studied law in Kraków (which is located in Galicia), Prague, and Vienna. At the age of 27, he began to immerse himself in economics, perhaps because he was reporting on the ups and downs of the stock markets for a Viennese newspaper.
True to family tradition, he accepted a position as a civil servant. Meanwhile, he continued his studies in economics, and at the age of 31, published his Grundsätze der Volkswirtschaftslehre, which laid the foundation for what would become known as the Austrian School.
This new direction turned classical value theory on its head and was, to say the least, revolutionary. For the classical economists — Adam Smith, Thomas Robert Malthus, David Ricardo, and in this respect also Karl Marx — a product had value because labor had been expended on it. It was an approach to the concept of value from the supply side. Menger turned the matter around and approached value from the demand side. A product has value solely because people believe they need it. No matter how much labor has gone into producing something — if no one wants it, it is worthless in the literal sense.
To Menger, value was subjective — it existed in the human mind — whereas for the classical economists, value was an objective fact, determined by the amount of labor that had gone into producing a good.
Menger’s Grundsätze was by no means an immediate success. Still, it opened the door to a Privatdozent position in Vienna, where he succeeded in generating interest in his theories among a few people — notably Eugen von Böhm-Bawerk and Friedrich von Wieser, who, together with Menger himself, are counted among the Austrian School.
Little by little, Menger began to make a name for himself. A more or less official form of recognition came in 1876 with his appointment as private tutor to Crown Prince Rudolf. In 1883, Menger published Untersuchungen über die Methode der Sozialwissenschaften und der politischen Oekonomie insbesondere. In it, he drew a sharp distinction between economics as a theoretical science on the one hand, and economic history and statistics on the other. In short, he made a clear distinction between theory and empiricism. This did not sit well with the German economist Gustav Schmoller, who saw economics primarily as a historical phenomenon. Thus began the so-called Methodenstreit — a methodological dispute that at times took on rather heated proportions.
For us, the sharp contrast between theory (or deduction) and history (or induction) is not always easy to grasp. We tend to recognize the value of both. An institution like the Netherlands Bureau for Economic Policy Analysis, for example, fills its theoretical models with empirically obtained data.
The Methodenstreit grew increasingly personal. It ended with members of the Historical School — the movement to which Schmoller belonged — beginning to exclude Austrian economists from German universities. German academic life probably suffered more from this than that of Austria.
Menger continued to write on monetary issues into the 1890s. He died in 1921.
Alfred Marshall
England 1842–1924
Alfred Marshall (1842–1924) received a strict upbringing. His authoritarian father, a cashier at the Bank of England, demanded the utmost from his son when it came to schoolwork, while hobbies such as mathematics and chess were forbidden. Since Alfred’s father could not afford a university education, a wealthy uncle stepped in. At Cambridge, Marshall studied philosophy and mathematics.
A friend advised him to take an interest in economics, which led him to the leading textbook of the time: Principles of Political Economy by John Stuart Mill. He “was much excited about it,” as he later wrote. A second reason for turning to the study of economics was his encounter with the impoverished conditions in the major English industrial cities of the time.
In 1877, he married Mary Paley, an economist, with whom he co-authored The Economics of Industry. Marshall spent several years at the University of Bristol, where he taught evening classes to young businessmen. According to his biographers, it was here that he developed his ability to explain complex issues in a clear and accessible manner. After a few years, the Marshalls returned to Cambridge in 1884 — and never left again.
Marshall was not particularly pleased with the first edition of his most famous work, Principles of Economics (1890). He had it withdrawn from circulation, making it a fairly rare book — only about 150 copies remained in circulation — that would later fetch astronomical sums on the antiquarian market. Marshall devoted a great deal of time to continually revising the book. During his lifetime, a total of nine editions appeared — the second as early as 1891, and the last in 1920.
The most visible influence of Marshall on modern economic methods is the so-called “Marshallian Cross” — the well-known graph in which the demand and supply curves jointly determine the equilibrium price and quantity. It represents a neat synthesis between the classical view and that of the “utility” economists, of whom Carl Menger was a leading figure.
The curious thing about this graph, incidentally, is that the independent variable — price — is placed on the vertical axis, while the dependent variables — quantity demanded and quantity supplied — appear on the horizontal. Economics teachers have to explain time and again that things work differently in economics than in mathematics. Still, Marshall was not mistaken. He genuinely meant that price changes result from changes in the quantities demanded and/or supplied. In his view, buyers are willing to pay less as quantities increase, and sellers can only bring larger quantities to market at a higher price. These days, we do tend to treat price as the independent variable — but Marshall’s graph remains firmly entrenched in the textbooks.
Marshall was a careful writer who never rushed things. To illustrate this: the so-called subjectivist revolution of around 1870 is usually associated with the names of Menger, Walras, and Jevons. But according to information from his students, Marshall had been thinking along the same lines at a very early stage — perhaps also already around 1870. He simply felt his ideas were not yet mature enough to publish.
Marshall’s influence was considerable. Not only was his Principles the dominant textbook for many years, he also taught many famous students — including Joan Robinson and John Maynard Keynes. The fact that Marshall’s work was so quickly accepted in England may have had something to do with his sense of tradition. “It’s all in Ricardo,” he said of his own work, to show that he was by no means a revolutionary. Since then, the phrase has become: “It’s all in Marshall.”
Vilfredo Pareto
France 1848–1923
Vilfredo Pareto was born in Paris in 1848. He was the son of an Italian father, who lived in exile due to his critical stance, and a French mother. Ten years after Pareto’s birth, the family returned to Italy. Pareto graduated as an engineer and went to work for the railways, a job he held for more than twenty years. In 1892, after what we would now call a career switch, he appears in Lausanne, Switzerland, succeeding Léon Walras as professor of economics. This, of course, had been preceded by a thorough (self-directed) education. Fascinated by the success of the British laissez-faire economy, Pareto joined the Adam Smith Society and was an active member throughout the 1870s and 1880s, during which he published regularly.
In 1889, he married a moderately well-off Russian countess — who, however, left him for a young servant. Fortunately, that same year he inherited a fortune from an uncle, with which he bought a villa on Lake Geneva. By then, the countess had been replaced by a youthful Frenchwoman.
Pareto’s name still appears in contemporary economics textbooks. Best known is probably the Pareto optimum: a situation that is, in a sense, optima. Given the resources available to a society, a Pareto optimum is a distribution such that any reallocation would make someone worse off. A capitalist society under conditions of perfect competition would, on its own, give rise to such an optimum — a view entirely in keeping with his admiration for Adam Smith. The problem with the Pareto optimum, however, is that there is a whole range (in principle, an infinite number) of optima. If one starts from a particular income distribution and then starts redistributing, one will eventually arrive at a Pareto optimum. But someone starting from a different distribution will end up at a different one.
Pareto also studied income distribution. He examined the distribution in several countries and concluded that as income increases, the disparities grow relatively larger as well. In other words, if you’re rich, you’re very rich. His research resulted in the so-called 80/20 rule: 80 percent of households lived on just 20 percent of national income. This 80/20 rule, often referred to as the Pareto Principle, has since been applied to just about every imaginable subject. You’re said to wear only 20 percent of your wardrobe 80 percent of the time, 20 percent of customers account for 80 percent of sales, and so on.
Pareto was among those who developed an interest in economics coming from the exact sciences. Our own Jan Tinbergen started out as a physicist, as did John Maynard Keynes, while Alfred Marshall and Paul Samuelson were trained as mathematicians. As you can see, Pareto is in good company. It’s no surprise, then, that Pareto was a proponent of using mathematical techniques in economics. Modern economists — not infrequently quasi-mathematicians themselves — are fond of recalling this version of Pareto.
All the more interesting, then, is the fact that Pareto later in life said farewell to the mathematical approach to economic problems. He now leaned toward the view that economics should not be studied in isolation, but always placed in its historical and social context. Anyone opening a sociology textbook will encounter Pareto there as well, where he is likewise regarded as one of the major figures in the field. Among other things, he developed an important theory of social elites.
After retiring in 1911, he withdrew, with a large number of cats, to his villa on Lake Geneva. He was generally regarded as something of a reclusive eccentric — but not so eccentric that he turned down Mussolini’s offer to take a seat in the Italian Senate. He died in 1923.
Eugen von Böhm-Bawerk
Austrian Empire 1851–1914
In the second half of the nineteenth century, Vienna — the capital of the Austro-Hungarian Dual Monarchy — grew into the political and cultural center of Eastern Europe, comparable to metropolises such as Paris and London. Composers such as Schubert, Strauss, and Mahler spent time there; the founder of psychoanalysis, Freud, walked its streets, as did the philosopher Wittgenstein. Against the backdrop of all that cultural ferment, the rise of the Austrian School of economics (around 1870) appears somewhat pale. The founder of this school was Carl Menger. Here we turn our attention to one of his successors: Eugen von Böhm-Bawerk.
Böhm — to use this shortened form going forward — was born in 1851 in Brünn, then part of the vast Habsburg Empire, now Brno in today’s Czech Republic. His father was a high-ranking civil servant and envisioned a similar career in public service for his son. But things turned out differently. Böhm initially studied law in Vienna, but his coursework included some economics — Böhm’s interest was sparked. After lecturing at several German universities (Heidelberg, Leipzig, Jena), he was appointed professor at the University of Innsbruck in 1880. That same year, he married the sister of his best friend, fellow economist Friedrich Wieser, with whom he shared, among other things, a passion for mountaineering.
In 1884, his major work Kapital und Kapitalzins appeared — usually referred to in the literature by its English title, Capital and Interest. One of the most well-known elements of this book is the theory of roundabout production. You can try to catch a fish with your bare hands, but it’s quicker with a net. The problem is that you don’t have a net and will need to invest time in making this useful tool. In the meantime, however, you won’t be able to catch any fish. In short, you have to invest time and forego present income (fish) in order to secure higher future income (more fish).
In Böhm’s time, industrialization was gathering pace across the European countries. Enterprises increasingly relied on capital equipment, making the Produktionsumweg (roundabout production) ever longer. Böhm thus introduced the element of time into economics. It took increasingly longer for a product to be brought into existence. In effect, there was a trade-off: current production and consumption versus greater production and consumption in the future. The element linking the present and the future was interest.
Karl Marx had argued that the capitalists exploited the workers. The factor of production labor, he claimed, was entitled to the full product. If it received anything less, exploitation was taking place. Interest and profit were thus seen as part of the exploitation of the working class by the capitalists. Böhm left little of this view intact. Rather than consuming their wealth directly, capital owners made it available to enterprises for investment. As the production process became increasingly roundabout, it also took longer for these investments to yield returns. Capital owners could only be persuaded to forgo certain present consumption in favor of relatively uncertain future consumption if they were offered compensation for waiting — that is, interest. Nor could profit reasonably be called exploitation, as it constituted a reward for entrepreneurial risk.
With his theory of roundabout production, Böhm developed a fairly optimistic account of economic growth. He emphasized saving and investment as the means to achieve higher future output — albeit by taking the longer route. After all the gloom of economists like Malthus, Ricardo, and Marx — who envisioned all manner of doomsday scenarios — economics had returned to the optimism of its founding father, the ever-cheerful Adam Smith.
Böhm was not always a professor. During an interlude from 1889 to 1904, he worked at the Ministry of Finance — even serving as minister. Little is known about his personal life. He is said to have played the cello, had no children, and enjoyed cycling. Before Austria adopted the euro, Böhm’s portrait adorned the 100 Schilling banknote. Should you ever find yourself in Vienna with time on your hands, you can visit his grave at the Zentralfriedhof, where he was buried in 1914.
Knut Wicksell
Sweden 1851–1926
Even among fellow economists, their Swedish colleague Knut Wicksell remains relatively unknown. And often, his rather bizarre life story is better known than his economic ideas. Economists are generally quiet and respectable people. The English economist John Stuart Mill may have had a long-running affair with a married woman, but you’d be hard-pressed to find anything more scandalous than that. In that respect, Wicksell was certainly a colorful character.
Wicksell was born in 1851 in Stockholm as the youngest of six children. He was orphaned at an early age and raised by an uncle and aunt in an environment steeped in religion. The story goes that he knew the church hymnal by heart, as well as many passages from the Bible, including the Sermon on the Mount. He went on to study at the University of Uppsala, initially focusing on mathematics and natural sciences. However, his interests quickly broadened to include a wide range of other subjects, such as Malthusianism, feminism, and politics; he even published a volume of poetry.
Meanwhile, he traveled around Sweden trying to convince his compatriots that the Swedish population needed to be cut in half, refused to marry his partner (and the mother of his two children), developed radical ideas about women’s emancipation, became a fierce opponent of the Christian religion, and ended up spending two months in jail after publicly mocking the Virgin Mary’s Immaculate Conception. In short, never a dull moment with Knut Wicksell. One might almost forget that he also made some significant contributions to economic theory.
His critical views on society eventually led him to economics. We’ll confine ourselves here to his monetary theory, though he contributed to many other areas as well. In 1898, he published Geldzins und Güterpreise (in German — no one read Swedish), usually referred to by its later English title, Interest and Prices. In it, as his contribution to business cycle theory, he distinguished between the natural rate of interest and the market rate. The natural rate refers to processes in the real economy. The demand for financial capital arises from the desire to invest; the supply of capital corresponds to savings — that is, the portion of a society’s income not consumed during a given period. The natural rate of interest adjusts in such a way that the demand for and supply of capital are in equilibrium.
The market rate of interest, however, is set by the banking system. Banks are able to create money — and do so regularly. Through money creation, additional funds become available for investment, over and above the capital made available by savers. The result is that the market rate falls below the natural rate, encouraging firms to invest more than the available savings would warrant. A process of general price increases will now set in. After all, the creation of money generates additional effective demand — to use Keynes’s term — but there is, for the time being, no additional production capacity to match it. Wicksell also saw no mechanism capable of putting an end to the inflation. As long as money creation continued, prices would keep rising.
These ideas shed entirely new light on the so-called Law of Say, also known as the law of markets. According to the French economist Jean-Baptiste Say (1767–1832), the income generated through production is exactly sufficient to purchase that same production. But once you take money creation into account, there is more purchasing power than there are goods to match it. The famous classical dichotomy was also, in passing, undermined. The classical dichotomy concerned the separation between the real and the monetary world. Monetary phenomena were not believed to exert an independent influence and were seen as a kind of veil — one that needed to be lifted in order to perceive the real world. Wicksell made it clear that money matters — as Milton Friedman would later assert as well.
Finally, a quote from The Making of Modern Economics by Mark Skousen: “Throughout his life, Wicksell rejected all academic and legal formalities, including official marriage and baptism ceremonies and accepting honorary degrees. He must have been turning over in his grave when his wife arranged an elaborate funeral following his death in 1926.”