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B
y the early 19th century
the effects of the Industrial
Revolution were spreading
from Britain to Europe and across
North America, transforming
agricultural nations into industrial
economies. The change had been
rapid and dramatic, bringing about
a fundamental shift in the structure
of economies. The focus had
shifted from the merchants who
traded in goods to the producers,
the owners of capital. As well as
a new way of thinking about
the economy, capitalism also
brought with it new social
and political issues.Distorting the market
Most noticeable of the social
changes was the emergence of a
new “ruling class” of industrialist
producers, and a steady growthin the number of firms producing
goods, many of which were offering
shares of their business for sale in
the stock markets. These provided
the competitive market that was
the focus of the “classical” view of
economics, in which the operations
of the market are central. However,
as market economies developed
and grew, new problems began
to emerge. For example, as Adam
Smith (p.61) had warned in 1776,
there was a danger that large
producers would dominate the
market and operate either as
monopolies or as cartels, fixing
prices at a high level and keeping
production low. Although regulation
could prevent such practices, in
instances where only a few
producers operated, they could
easily develop strategies to distort
the competitiveness of the market.Smith had assumed that men
behaved rationally in an economy,
but this also came into question as
investors rushed to buy shares in
companies whose worth had been
exaggerated. This caused bubbles,
contradicting the idea of a stable
economy based on reasoned
behavior. Despite this, some
economists, such as Léon Walras
(p.120) and Vilfredo Pareto (p.131),
argued that the market economy
would always tend toward
equilibrium, which would in turn
determine the levels of production
and prices. Their contemporary
Alfred Marshall (p.110) explained
supply and demand and how these
and prices interact in a system
of perfect competition.
The question of price was one
that concerned many economists
at the time because it affected bothINTRODUCTION
1838
1841
1848
1848 1871
1867 1871
1874
John Stuart Mill
advocates both trade
and social justice,
laying the foundation
for liberal economics.The phenomenon of
economic bubbles is
described in Charles
Mackay’s Extraordinary
Popular Delusions and the
Madness of Crowds.Léon Walras
sets out the basis
of the general
equilibrium theory,
claiming that free
markets are stable.Karl Marx and
Friedrich Engels
publish the
Communist
Manifesto.Antoine Cournot
introduces the roles of
function and probability
to economics and is the
first to express demand
and supply as a graph.
Karl Marx publishes
the first volume of
Capital; subsequent
volumes are published
posthumously
by Friedrich Engels.Carl Menger establishes
the Austrian School,
which defends free
market economics
against the ideas
of socialism.William Jevons
describes the marginal
utility theory of value,
which sees value as
coming from a product’s
value to its buyer.