Essay Example: Alfred Marshall's Contribution to Modern Economics

Alfred Marshall’s Principles of Economics, which was first published in 1860, has greatly contributed to modern economic literature (Groenewegen, 2019). The development of vital economic concepts ranging from consumer surplus to elasticity of demand is attributed to Marshall’s book. According to Marshall, economics deals majorly with human’s economic aspect, which encompasses earning and spending money. Notably, through his book, Marshall popularized aspects of induction and deduction and their complementary nature. Undeniably, these two economic aspects have greatly influenced the development of partial equilibrium that is used in modern economics. Modern economics is hinged on the fact that all economic activities begin and end with consumption. Further, the Marshallian theory of demand has been used to analyze contemporary consumer behavior. From a modern economic standpoint, prices of the commodity are determined by both supply and demand curves, an idea derived from Marshall’s Principles of Economics (Mankiw, 2014).

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More fundamentally, Marshall contributed the concept of elasticity of demand to modern economics (Mankiw, 2014). He highlighted that the rise and fall of prices significantly influence the amount of commodity demanded, and hence the elasticity of demand. Understandably, five degrees of elasticity such as highly elastic, absolutely elastic, elastic, less elastic, and inelastic are widely used in modern economics. Marshall also made major insight into marginal cost just as much as he did about marginal utility. He asserted that the commodity’s marginal cost increases as its production expands (Groenewegen, 2019). Additionally, modern economics is rooted in the foundation that the division of labor is as a result of increased demand for commodities. Undoubtedly, this concept of division of labor was largely demonstrated in Marshall’s book (Mankiw, 2014). More imperatively, Marshal developed the Law of Diminishing Returns, which has been widely applied by economies regarding the right combination of important factors of production such as capital and labor.

Ties to History of Economic Thought

Marshall’s Principles of Economics has a strong connection to the history of economic thought, where he embraces most of Adam Smith’s concepts and takes a critical view of some of David Ricardo’s economic ideas (Mankiw, 2014). Equally important, Marshall lauded Germans for creating an overriding foundation for economic theory and fostering the evolution of critical institutions. He championed for interpretation of economic laws before their practical application to various economic problems. The old political economy emphasized on the working of the market mechanism anchored on economic growth, capital accumulation and technical progress. Being a mathematician, Marshall embedded different mathematical models to economics, thus lending the scientific discipline status (Groenewegen, 2019). Marshall’s Principles link to the history of economic thought is depicted by his expansion of knowledge concerning the world of industry and the general operation of businesses.

John Maynard Keynes’ Contribution to Modern Economics

Notably, Keynes’ The General Theory has greatly revolutionized modern economics. It has expanded knowledge about aggregate demand that comprises of consumption, investment and government spending. Keynes has reshaped government involvement in the modern economy to influence unemployment rates (Keynes, 2018). The General Theory dictates that full employment can be maintained with reduced spending during recessions. Contemporary economists have embraced most of Keynes’ macroeconomic models and ideas in determining the functionality of markets. Keynes’ assertion that the price mechanism could not bring the much-needed adjustments significantly influenced governments to play a key role in enhancing people’s welfare (Wong, 2016). It should be noted that Keynes’ economic ideas relating to planned saving have been instrumental in defining modern economies. Still, development of structural adjustment policies that seek to address some underlying economic rigidities has been attributed to the works of Keynes. Equally important, Keynes played an integral role in creating a statistical framework that has been adopted by modern economists for economic planning (Keynes, 2018).

Moreover, Keynes’ emphasis on the importance of analyzing the aggregate demand and supply has been instrumental in understanding contemporary market operations (Wong, 2016). Further, his idea of price adjustment has been embraced in the labor market to address unemployment. It is worth noting that Keynes’ theoretical revolution has been extensively used by modern economists to gain deeper knowledge about development economics (Keynes, 2018). More critically, he developed welfare implications of differential population model that has become in explaining the influence of population on contemporary economic development. Understandably, Keynes’ interventionist policies such as adjustment of tax rates to influence the money supply, control of labor supply, and changing monetary policy have emerged as critical components used in modern economics (Keynes, 2018). Undeniably, The General Theory has birthed vital economic policies and macroeconomic concepts that are integral in making investment decisions in the modern economic environment.

Ties to History of Economic Thought

Regarding its connection to the history of economic thought, Keynes’ The General Theory provided an outlook of the economic system and its inherent aggregative behavior. Keynes’ work was built on the primary issues relating to underlying causes of economic fluctuations, employment and national income of different industrial economies. Older schools of economic thought such as classicists were focused on achieving long-term economic progress (Keynes, 2018). Keynes’ work was premised on addressing short-term instability of the economic system. More significantly, The General Theory outlined the inadequacies of the free market to address complexities that characterized industrialized societies (Wong, 2016). Keynes observed that economic stability and full employment could not be achieved if unregulated capitalism is maintained. Besides, the reconstruction of economic analysis brought the organization to capitalism, hence the creation of an elaborate framework that defines economic operations (Keynes, 2018). Worth noting is that Keynes’ objection on Say’s Law was hinged on the analysis of money. He argues that money should be analyzed based on how it is held.

Part II

Short Essay 1

Alfred Marshall believed that the economy could achieve the condition of full employment. In his theory of employment, Marshall maintained that the lassiez-faire approach is effective in determining employment in the economy. More importantly, Marshall observed that economic factors like price mechanism, profit maximization, and perfect competition play a role in influencing full employment (Groenewegen, 2019). Marshall, together with other classical economists, observed that price adjustments of products and wages flexibility always facilitate the level of full employment. For instance, in the event of over-production, there will be decreased prices which further stimulate demand and consumption. The increased demand will, in effect, curtain unemployment in the economy. Marshall assumed that the economy is self-adjusted by market forces, which in turn influences the level of employment (Mankiw, 2014). Furthermore, Marshall concluded that the economy would never have the condition of unemployment. He expounded that wages will always fall as the unemployment levels rise. Undoubtedly, this situation will motivate organizations to hire more employees, which ultimately will curb unemployment. Marshall believed that market forces of demand and supply are capable of managing economic fluctuations and sets the economy into the position of equilibrium (Groenewegen, 2019).

Regarding Keynes theory of employment, he observed that employment is determined in the short-run. Keynes asserted that factors of production like labor supply, technology, capital goods, and efficiency of labor are critical in influencing the level of employment (Keynes, 2018). Additionally, Keynes highlighted that national income determines the level of employment in the economy. Notably, the principle of effective demand forms the primary component of the Keynes theory of employment. According to Keynes, an increase in aggregate demand would trigger an increase in employment (Keynes, 2018). The principle of effective demand is premised on the foundation that national output contributes to changes in employment levels. Keynes maintained that the concepts of aggregate demand price and aggregate supply price are always used in deriving effective demand, which in turn influences the level of employment (Wong, 2016). Understandably, aggregate supply price is dependent on the number of employees hired by an organization, where its increase will induce a high level of employment. Further, Keynes theory of employment dictates that increase in employment level will spur aggregate demand price in the short-run.

It should be noted that Keynes’ theory of employment is more relevant in the contemporary labor market. The key reason lies in the fact that factors of production that encompasses technology, capital goods, and supply of labor have emerged to be instrumental in determining the level of employment. Evidence has revealed that countries that have low national output have shown trends of unemployment (Keynes, 2018). Therefore, Keynes’ theory of employment is important in evaluating a country’s national income. Understandably, in the contemporary economic environment, effective demand always influences the national output, which in turn determines the level of employment in the economy. More importantly, the relevance of Keynes’ theory of employment is attributed to the modern interplay between aggregate demand price and aggregate supply price in determining the level of employment.

References

Groenewegen, P. (2019). Alfred Marshall. In The Elgar Companion to John Maynard Keynes. Edward Elgar Publishing.

https://www.elgaronline.com/view/edcoll/9781847200082/9781847200082.00023.xml

Keynes, J. M. (2018). The General Theory. In The General Theory of Employment, Interest, and Money (pp. 3-3). Palgrave Macmillan, Cham.

https://link.springer.com/content/pdf/10.1007/978-3-319-70344-2_1.pdfMankiw, N. G. (2014). Principles of economics. Cengage Learning.

https://books.google.co.ke/books?hl=en&lr=&id=ziwaCgAAQBAJ&oi=fnd&pg=PR7&dq

Wong, H. P. C. (2016). From the Treatise on Money to the General Theory: John Maynard Keynes's Departure from the Doctrine of Forced Saving. History of Political Economy, 48(3), 515-544.

https://read.dukeupress.edu/hope/article-abstract/48/3/515/12704