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Scottish economist and philosopher Adam Smith wrote the book, An Inquiry into the Nature and Causes of the Wealth of Nations, advocating for a free and unhindered exchange of goods and services, both within countries and through international trade, which benefits buyers and sellers and increased incomes throughout the population.

this completely changes the way that economic activity was understood and became the backbone of economic theory for the classical school until later in the nineteenth century

major contributions to economic theory: identification of the benefits of specialization and the division of labor --> maximized labor productivity

Other major theories:

"labor theory of value": the value, or price of a good is the sum of the value of all the labor that was used in producing the good

the "invisible hand": Smith observed that when private producers are left alone to decide what to produce and how to produce, they are guided by an "invisible hand" (government or authority telling them what not to produce, consumer's demands telling them what to produce). He concluded that when producers supply the goods that give consumers the most utility, they create jobs and wealth for the nation as a whole --> allowing the economy to create maximum utility and productivity

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developed from Adam Smith's theories

Considered areas such as utility theory, based on the principle that individuals consume goods and services to maximize satisfaction from consumption

famous economists: David Ricardo, Thomas Malthus, John Stuart Mill and Jean-Baptiste Say

David Ricardo - international trade

Agreed with Smiths' theory that countries should specialize in the production of different goods and trade freely to increase global output

Developed a law of "comparative advantage", which became the basis of most international trade theories today

Jean-Baptiste Say - "Say's law of markets"

favor free markets and free trade (focuses on the supply side of the economy)

believes that the production of goods is the source of all demand in an economy: "supply created its own demand"

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German Karl Marx became increasingly influential as a critic of free market Capitalism (perspectives on the 'left' of the ideological spectrum)

Believed that workers would rise up to overthrow capitalism and replace it with socialism

Predicted that, eventually, society's ability to produce would grow faster than its ability to consume, causing growing unemployment. Thus, the free market could not be depended upon to serve the best interests of workers and there would be a need for the government to take over the means of production, in a system known as communism.

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key figures in the development of macroeconomics

Keynes saw a more influential role for governments in the economy than classical economists did

Keynes’ book, The General Theory of Employment, Interest, and Money was published in 1936. Keynes' work was very influential on macroeconomic policy-making by western governments in the second half of the 20th century.

"Demand-side" theory and "counter-cyclical" government policies : observing that economies typically pass through business cycles fluctuating between rapid rates of growth and recessions, thus governments should increase aggregate demand by using expansionary fiscal policy (increasing government spending and decreasing taxes) and contractionary monetary policy (increasing interest rated and decreasing the supply of money)

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Macroeconomic thought was dominated by Monetarism in the 1970s

The theory was based on the principle that the supply of money in the economy was the ky determinant of economic growth and inflation

Key economist: Nobel Prize winner, Milton Friedman --> advocated the use of interest rates by governments to control the money supply and the rate of inflation

Monetarists believed that by using monetary policy to maintain low inflation a country would achieve sustained economic prosperity

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gives increasing importance to psychology and human behavior in economic decision making

Richard Thaler, won the Nobel prize for his work on Nudge Theory, which looked at how indirect suggestion and architecture of consumption environment can make individuals act in a certain way

Behavioral economics allows for irrational behavior and tries to understand why consumers act in certain patterns