Economic History
Although the creation of economics as a separate field of study occurred in the late 18th century, economic theories have been used throughout history as a means of determining how people respond to price and endowment constraints. Here is a brief history of economics, from the mercantilist days of European hegemony to today’s market-based economies.
Mercantilism
Although not officially a school of economics, mercantilism was the doctrine which many governments followed prior to the 18th century. In essence, mercantilism is the idea that because the amount of wealth in the world was constant, the only way to gain prosperity was for a country to accumulate greater and greater amounts of wealth.
In more technical terms, economic prosperity in a world of zero-sum games will only happen by obtaining and holding greater amounts of capital. In terms of effects, mercantilism manifested itself into many policies which differ from today’s understanding of economics. For example, mercantilism drove the idea that countries should all promote exports and avoid imports.
Furthermore, countries were given incentives to plunder the wealth of other countries as a means of gaining valuable metals. Both forms of policy were ways in which countries were able to accumulate greater amounts of wealth.
Classical Economics
The shift from mercantilist economics to classical economics is commonly attributed to Adam Smith’s ideas of political economy. In his groundbreaking book, The Wealth of Nations, published in 1776, Adam Smith defied all economic history accumulated from history by stating that the world was not, as previous philosophers and politicians had believed a zero - sum game.
His idea of absolute advantage, in which two parties may gain from trade if each party were more efficient at producing a certain good or service, fundamentally changed the way governments and individuals acted. Since then, governments had shifted from a plunder-and-hoard mentality towards a trade-and-cooperate mentality.
Neoclassical Economics
While classical economics was known as “political economy” during its time, neoclassical economics marked the shift of economics from an application to political theory to its own branch of science. As the name suggests, neoclassical economics builds upon the basic assumptions made by classical economics. It does so by analyzing effects of changes at the margin.
For example, a starved person might enjoy a slice of pizza a great deal, while he may detest the 10th slice offered to him. Furthermore, neoclassical economics began making the distinction between microeconomics and macroeconomics by focusing on the consumer in addition to the state.