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Economics 101

A Short History of Economics

It is easy to assume that the way we understand the economy today is the way it has always been understood. However, the ideas of economics have evolved over time. Let's meet some of the people whose ideas about how the economy should work have dominated economic thinking. Be sure to stay with us until the end when we will (finally) meet a female economist.

Jump ahead to:

Adam Smith
In his book The Wealth of Nations, published in 1776 just as the industrial revolution was getting underway, economist Adam Smith laid the groundwork for what is termed laissez-faire economics. Laissez-faire is simply French for 'let it be,' which is what Smith wanted the government to do. His ideas are often referred to as classical economics.

Smith asked one central question: How, in an increasingly complex and global society, in which people are increasingly dependent on the actions of others for their survival, can the economic activities of independent producers, shippers, merchants and consumers be best coordinated? His answer was simple. He said there was no need for coordination. Left to themselves, competitive markets would create order, not disorder. Trouble would only arise if a market was monopolized. He went on to argue that if every member of society simply pursued his or her economic self-interest, all of society would benefit. As Smith put it, "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner but from their regard to their self-interest."

Smith's ideas ruled economic thinking in Canada up until the 1940s.

Karl Marx
Karl Marx, who lived in Europe in the middle of the nineteenth century, identified the existence of conflict in economic life. He pointed out that just because two parties reach agreement, they are not both benefiting equally. In other words, the amount of power you have going into a negotiation influences its outcome.

Marx believed that western societies were made up of classes which act to defend and advance their interests. The two central classes in a modern economy he argued were the workers and the employers, who were in conflict with one another. He thought that economic systems were constantly evolving as a result of this conflict. Marx encourages us to ask who is on top and who benefits from economic policy. Marx's ideas have never dominated Canadian economic thinking, but they provide a useful set of questions to ask about economic activities, since he reminds us to ask who gains and who loses. Perhaps the most important thing for us to remember about Marx is that he argued that the goal of intellectual work such as his was to change the world. This focus has led to a rich political legacy.

John Maynard Keynes
John Maynard Keynes, a British economist of the middle twentieth century, attacked then prevailing ideas about unemployment. Laissez-faire economists had argued that unemployment was largely voluntary. If the unemployed dropped their wage demands to a low enough level they would be able to find work. Keynes argued that unemployment is often caused because there is not enough demand for goods. In other words, the way to reduce unemployment might be to raise wages, allowing workers to buy more goods. There is a radical conclusion to this idea: Keynes was arguing that the invisible hand could not cure unemployment, instead it would take the visible hand of government to raise wages. Keynes' ideas formed the basis of government economic policies from the 1940s to the 1970s. The visible hand could spend money on a wide range of goods: it could simply cut corporate taxes, it could build nuclear bombs and bombers, or it could invest in social programs. Keynesianism is associated with the practice of governments running deficits in lean times to balance the economy.

Milton Friedman
Milton Friedman is a neo-classical (the name simply means they are giving a slightly new twist to Adam Smith's classic ideas) economist who favoured a return to laissez-faire economics. His idea, that unregulated markets - on a global scale - will produce benefits for all, has come to dominate government thinking since the early 1980s. In the 1960s he began calling for an end to government regulation and intervention in the economy (including the end of minimum wage laws and most forms of social security). Neo-classical economists rejected government deficit spending and believed that high rates of unemployment were needed to control wages and inflation. Once the deficit was eliminated and social programs reduced, wages and prices would decline and the economy would grow. The neo-conservatives (or neo-classicals) also believed that government spending was the result of pressure by special interest groups, particularly unions, and therefore it was necessary to curb their power.

Marilyn Waring - Counting for NothingMarilyn Waring
Marilyn Waring is a lecturer, writer and development consultant. She is also a farmer and she says herself that it is this calling that has had the most profound influence on the way she understands the economy. Unfortunately, Waring's ideas have never seriously influenced the way our Canadian economic system works. However, Marilyn Waring has been a great inspiration to many people, especially women, who feel that the current economic system excludes much of life.

Waring says that when economy includes only activities which involve monetary transactions, much of women's productive and reproductive work is excluded. Bearing children, mothering, tending a garden, feeding one's family, milking a family cow, raising sheep for wool you use yourself, all of these are excluded as economic activities and do not find their way into any country's System of National Accounts. In other words, through a traditional understanding of the economy, much of the work of half of the population becomes invisible. (See Julie's story.)

According to Waring, mainstream economics has also not found a way of counting the resources on which valued production is based, namely the earth. For example, activities which involve monetary transactions count as production even when they involve the degradation of the earth's resources, such as strip-mining. A sunset has no value, nor a mountain, and trees only count when they have been chopped down and sold. At the same time, Waring criticizes traditional economics for not finding a way to value community well-being. By current thinking, war and disaster are 'good for the economy' because they create jobs such as arms production and clean-up.

Waring's video Who's Counting? is available at public libraries and universities across Canada as are her books, Counting for Nothing: What Men Value and What Women are Worth and Three Masquerades: Politics, Work, and Human Rights.

Material in this section including "Adam Smith", "Karl Marx", "John Maynard Keynes", and "Milton Friedman" has been used with permission from Show Us the Money: The Politics and Process of Alternative Budgets published by CHO!CES: A Coalition for Social Justice and the Canadian Centre for Policy Alternatives (Arbeiter Ring Publishing). Available at Mondragon Bookstore and Coffeehouse in Winnipeg.

  • Economics Glossary

    "Economic progress is almost exclusively masculine."

    Charlotte Perkins Gilman, 1898

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