ECONOMICS PROJECT

SUBMITTED TO – MS. JASMINE KAUR

(ASST. PROFESSOR OF ECONOMICS)

SUBMITTED BY – MADHAVI VYAS

1ST YEAR B.A. L.L.B (HONS.)
ROLL NO. – 19012
GROUP – 1

TOPIC
EVOLUTION OF ECONOMICS
IDEAS: A RETROSPECTIVE VIEW
ACKNOWLEDGEMENT

I would like to express my sincere gratitude to my Economics Professor, MS. Jasmine

Kaur, who provided me with the opportunity of making this project, through which I
have gained a lot of knowledge and information. Through this project I was able to
express my thoughts on paper and also learned to extract deeper meanings from
novels. I would also like to thank the library staff, members of the IT staff, my batch
mates, and my seniors who guided me in this project. I would also like to give credit
to my family who encouraged and motivated me to complete this project.

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CERTIFICATE

This is to certify that the project titled "Interdisciplinary Approach” is the bona fide
work, and has been successfully completed and researched on by student Madhavi
Vyas, 1st Year B.A. LL.B. (Hons.), Roll Number 19012, of Rajiv Gandhi National
University of Law, Patiala under the supervision and guidance of MS. Jasmine Kaur,
Assistant Professor of Economics.

_____________

MS. Jasmine Kaur

(Assistant Professor of Economics)

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RESEARCH METHODOLOGY
For making this project, I have used various online resources like websites, journals
and research papers. I did refer to few books for the project. This project is based on
my comprehension of these sources. My main focus out of all the resources complied
would be journal articles. All the sources through which I have picked up some parts
of this document, are either credited or footnoted.

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Table of Contents

ACKNOWLEDGEMENT......................................................................................................2

CERTIFICATE......................................................................................................................3

CHAPTER 1 – INTRODUCTION........................................................................................6

CHAPTER 2 – EVOLUTION OF ECONOMIC IDEAS.....................................................7

CHAPTER 3 – WHAT IS ECONOMICS?...........................................................................9

3.1 DEFINITIONS OF ECONOMICS..............................................................................9

CHAPTER 4 – KEYNESIAN SCHOOL OF THOUGHT.................................................11

CHAPTER 5 – THINKERS: KEYNESIAN SCHOOL.....................................................14

5.1 JHON MAYNARD KEYNES (1883 - 1946)..............................................................14

5.2 JOAN ROBINSON.....................................................................................................15

5.3 PAUL SAMUELSON.................................................................................................16

CHAPTER 6 – CONCLUSION...........................................................................................17

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CHAPTER 1 – INTRODUCTION

Economics is the study of patterns. Economists look for similarities of different

events and ask whether or not they support a particular economic theory or model.
The evolution of economic ideas seeks to try to understand the historical events which
helped in developing the concepts of Economics by appealing to our economic
processes.

The project undertaken would be focusing upon the historical aspects which led to the
development of the subject of economics and the concepts and ideas related to it. The
main focus of the project would be on the “Keynesian Economics”, how it came into
being, what are the concepts which are undertaken in the development of it, who was
the person who developed it, its rise and fall and how it helped in the contemporary
world.

To get a basic idea about different school of thoughts so that we have a clear
understanding about what are we studying. Since Keynesian school of thought is a
concept of ‘Macroeconomics’, we would look upon few of the school of thoughts
which developed macroeconomics.

Marx

Schools of thoughts in Keynes

Macroeconomics

Neoclassical

The Keynesian school of thought can further be divided into ‘Cambridge School’ and
the ‘Synthesis’ School.1

1
Engelbert Stockhammer, “Introduction to Keynesian theory and Keynesian Economic Policies”,
available at, https://www.postkeynesian.net/downloads/kingston13/ES110713.pdf 26.10.19

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CHAPTER 2 – EVOLUTION OF ECONOMIC IDEAS

The evolution of Economics can be broadly divided into six phases or we can say six
schools of thought. The first phase is ‘Mercantilism’, the second one is ‘Classical
school of thought’, third is ‘Historical-Institutionalist school’, fourth is ‘Neoclassical
School’, fifth is ‘Keynesian School’ and the sixth one is ‘Monetarist School’.

The subject matter of Economics is said to begin or originate with Adam Smith in
1776. Before that, nobody thought of economics, or markets, as an object of study.
The reason was not that they did not pay attention to economic matters, it was simply
that they did not think of it in any systematic or coherent manner. It was all just off-
the-cuff intuition and policy proposals by a myriad of merchants, government officials
& journalists, principally in Britain. It is common to denote the period before 1776 as
"Mercantilism". It was not a coherent school of thought, but a hodgepodge of varying
ideas about improving tax revenues, the value & movements of gold and how nations
competed for international commerce & colonies. Mostly protectionist, 'war-minded',
and all haphazardly argued.2

The Enlightenment era (mid-1700s) in Europe brought a new spirit of scientific

inquiry. Thinkers began looking to apply scientific principles not only to the physical
world, but also to human society. In the same spirit that Sir Isaac Newton 'discovered'
the "law of gravity" to explain the interaction of natural forces and decipher how the
physical world operates, Enlightenment thinkers began trying to discover the "laws"
of human interaction, to explain how human society operates. The economy -
exchange, prices, markets - are one area of human interaction that seemed amenable
to scientific inquiry, where there might be 'laws' to be discovered in how markets
operate. The first serious attempt to systematically study and look for "laws" in the
marketplace was the Scottish philosopher Adam Smith in his Wealth of Nations
(1776). The followers of Smith's original principles are commonly called the
"Classical School" of economics.

During the 19th C., the major challenge to the Classical school came from the
'Historical' school. The Historicists, principally centred in Germany, did not exactly

2
“Schools of economic thought”, available at,
http://www.hetwebsite.net/het/fonseca/notes/schoolsofthought.pdf 26.10.19

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dispute the Classical theories, but rather questioned whether any theory was possible
at all. They did not believe any economic theory could hold across time nor remain
true in different social and institutional contexts. So at large, the Historicists limited
themselves to explaining the historical and institutional details and facts of economic
arrangements and decoding patterns found in masses of economic data.3

The neo-classical school of economic thought is a wide-ranging school of ideas from

which modern economic theory developed. The method is clearly scientific, with
assumptions, and hypothesis and attempts to derive general rules or principles about
the behaviour of firms and consumers. For example, neo-classical economics assumes
that economic agents are rational in their behaviour, and that consumers look to
maximise utility and firms look to maximise profits. The contrasting objectives of
maximising utility and profits forms the basis of demand and supply theory. Another
important contribution of neo-classical economics was a focus on marginal values,
such as marginal cost and marginal utility. Neo-classical economics is associated with
the work of William Jevons, Carl Menger and Leon Walras.4

The world was caught in the grip of a Great Depression and they were at loss to
explain how that had come about or how to solve it. The only thing they suggested
was to let prices adjust. Prices were allowed to adjust. But unemployment only kept
rising. John Maynard Keynes, in his1936 treatise, The General Theory, proposed a
wholly new theory to explain aggregate phenomena in the economy as a whole, the
area in which Neoclassical theory had been having immense difficulty explaining.
Although the neo-classical theory was never fully discarded but rather viewed as
incomplete as it was fit for micro level but not for macro level. Thus, a more "general
theory" was needed (hence the title), one that preserved Neoclassicism at the micro
level, but proposed a new set of principles for the macro level.5

These schools of thought broadly explain that how economics as a subject matter
evolved.

3
Paola Tubaro, History of economic thought. Rhona C. Free. 21st Century Economics: A Reference
Handbook, 1, Sage, pp.3-11, 2010.
4
 M.L. Jhingan, M. Girija and L. Sasikala, History of Economic Thought, Vrinda Publication Pvt. Ltd.,
2011
5
“Schools of economic thought”, available at,
http://www.hetwebsite.net/het/fonseca/notes/schoolsofthought.pdf 26.10.19

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CHAPTER 3 – WHAT IS ECONOMICS?

Economics is the science that deals with production, exchange and consumption of
various commodities in economic systems. It shows how scarce resources can be used
to increase wealth and human welfare. The central focus of economics is on scarcity
of resources and choices among their alternative uses. The resources or inputs
available to produce goods are limited or scarce. This scarcity induces people to make
choices among alternatives, and the knowledge of economics is used to compare the
alternatives for choosing the best among them. Two major factors are responsible for
the emergence of economic problems. They are: i) the existence of unlimited human
wants and ii) the scarcity of available resources. The numerous human wants are to be
satisfied through the scarce resources available in nature. Economics deals with how
the numerous human wants are to be satisfied with limited resources. Thus, the
science of economics centres on want - effort - satisfaction.6

3.1 DEFINITIONS OF ECONOMICS7

I. Wealth Definition – Adam smith (1723 - 1790), in his book “An Inquiry into
Nature and Causes of Wealth of Nations” (1776) defined economics as the
science of wealth. He explained how a nation’s wealth is created. He
considered that the individual in the society wants to promote only his own
gain and in this, he is led by an “invisible hand” to promote the interests of the
society though he has no real intention to promote the society’s interests.

II. Welfare Definition – Alfred Marshall (1842 - 1924) wrote a book “Principles
of Economics” (1890) in which he defined “Political Economy” or Economics
is a study of mankind in the ordinary business of life; it examines that part of
individual and social action which is most closely connected with the
attainment and with the use of the material requisites of well-being”.

III. Scarcity Definition – Lionel Robbins published a book “An Essay on the
Nature and Significance of Economic Science” in 1932. According to him,
6
Economics – definition and nature & scope of economics – divisions of economics, available at,
http://elearn.luanar.ac.mw/repoz/AECO141/lec01.pdf 26.10.19
7
M.L. Jhingan, Microeconomics, Vrinda Publication Pvt. Ltd, 2016

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 “economics is a science which studies human behaviour as a relationship
between ends and scarce means which have alternative uses”. Ends refer to
human wants. Human beings have unlimited number of wants. Resources or
means, on the other hand, are limited or scarce in supply. There is scarcity of a
commodity, if its demand is greater than its supply. In other words, the
scarcity of a commodity is to be considered only in relation to its demand.

IV. Growth Definition – Prof. Paul Samuelson defined economics as “the study of
how men and society choose, with or without the use of money, to employ
scarce productive resources which could have alternative uses, to produce
various commodities over time, and distribute them for consumption, now and
in the future among various people and groups of society”. Samuelson has
made his definition dynamic by including the element of time in it. Therefore,
it covers the theory of economic growth.

Of all the definitions discussed above, the ‘growth’ definition stated by Samuelson
appears to be the most satisfactory. However, in modern economics, the subject
matter of economics is divided into main parts, viz., Micro Economics and Macro
Economics.

Economics is, therefore, rightly considered as the study of allocation of scarce

resources (in relation to unlimited ends) and of determinants of income, output,
employment and economic growth.

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CHAPTER 4 – KEYNESIAN SCHOOL OF THOUGHT

Keynesian economics gets its name, theories, and principles from British economist
John Maynard Keynes (1883–1946), who is regarded as the founder of modern
macroeconomics. The central notion or idea of this school of thought is that
‘government intervention can stabilize the economy’.

During the time of the Great Depression of the 1930s, the economic theories which
were already existing were unable either to explain the causes of the severe
worldwide economic collapse or to provide an adequate public policy solution to
jump-start production and employment.

British economist, John Maynard Keynes spearheaded a revolution in economic

thinking that overturned the then-prevailing idea that free markets would
automatically provide full employment—that is, that everyone who wanted a job
would have one as long as workers were flexible in their wage demands. The
fundamental point of Keynes’s theory, which has come to bear his name, is the
assertion that aggregate demand—measured as the sum of spending by households,
businesses, and the government—is the most important driving force in an economy.
Keynes further asserted that free markets have no self-balancing mechanisms that lead
to full employment. Keynesian economists justify government intervention through
public policies that aim to achieve full employment and price stability.8

Defining the nature of Keynesian economics is no easy task. It is a diverse and

continuing research effort, characterised at times more by its fragmentation and
internal division than by any unity of purpose. The characteristic Keynesian outcome
is persistent underemployment. Explaining the cause of such an outcome has been the
central theoretical task of Keynesian economics.9

The revolutionary idea – Keynes argued that inadequate overall demand could lead to
prolonged periods of high unemployment. An economy’s output of goods and
services is the sum of four components: consumption, investment, government
purchases, and net exports (the difference between what a country sells to and buys

8
Sarwat Jahan, Ahmed Saber Mahmud, and Chris Papageorgiou, What Is Keynesian Economics?,
available at, https://www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm , 26.10.19
9
Gerrard, Bill. “Keynes, The Keynesians and the Classics: A Suggested Interpretation.” The Economic
Journal, vol. 105, no. 429, 1995, pp. 445–458. JSTOR, www.jstor.org/stable/2235503.

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from foreign countries). Any increase in demand has to come from one of these four
components. But during a recession, strong forces often dampen demand as spending
goes down. For example, during economic downturns uncertainty often erodes
consumer confidence, causing them to reduce their spending, especially on
discretionary purchases like a house or a car. This reduction in spending by
consumers can result in less investment spending by businesses, as firms respond to
weakened demand for their products. This puts the task of increasing output on the
shoulders of the government. According to Keynesian economics, state intervention is
necessary to moderate the booms and busts in economic activity, otherwise known as
the business cycle. There are three principal tenets in the Keynesian description of
how the economy works:

• Aggregate demand is influenced by many economic decisions—public and private.

Private sector decisions can sometimes lead to adverse macroeconomic outcomes,
such as reduction in consumer spending during a recession. These market failures
sometimes call for active policies by the government, such as a fiscal stimulus
package (explained below). Therefore, Keynesian economics supports a mixed
economy guided mainly by the private sector but partly operated by the government.

• Prices, and especially wages, respond slowly to changes in supply and demand,
resulting in periodic shortages and surpluses, especially of labour.

• Changes in aggregate demand, whether anticipated or unanticipated, have their

greatest short-run effect on real output and employment, not on prices.10

Keynesian economics is the view that in the short run, output is influenced by
aggregate demand (total spending in the economy). In the Keynesian view, aggregate
demand does not necessarily equal the productive capacity of the economy. Keynes
contrasted his approach to the 'classical' economics that preceded his book. Keynesian
economists argue that private sector decisions sometimes lead to inefficient
macroeconomic outcomes. So, it requires active policy (fiscal policy) by the
government, in order to stabilize output over the business cycle. Keynesian economics
advocates a mixed economy – predominantly private sector, but with a role for

10
Sarwat Jahan, Ahmed Saber Mahmud, and Chris Papageorgiou, What Is Keynesian Economics?,
available at, https://www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm , 26.10.19

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government intervention during recessions. The advent of the global financial crisis in
2008 has caused resurgence in Keynesian thought

Prior to the publication of Keynes's General Theory, mainstream economic thought

was that the economy existed in a state of general equilibrium. This perception is
reflected in Say's Law. Keynes's theory was significant because it reversed the
mainstream thought of the time and brought about a greater awareness that problems
such as unemployment are not a product of laziness, but the result of a structural
inadequacy in the economic system. He argued that there was no guarantee that the
goods that individuals produce would be met with demand and unemployment was a
natural consequence. He saw the economy as unable to maintain itself at full
employment and believed that it was necessary for the government to step in and put
under-utilised savings to work through government spending. Keynesians therefore
advocate an active stabilization policy to reduce the amplitude of the business cycle.
According to the theory, government spending can be used to increase aggregate
demand, thus increasing economic activity, reducing unemployment and deflation.

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CHAPTER 5 – THINKERS: KEYNESIAN SCHOOL

The Keynesians school of thought can be roughly divided into two schools: the
‘Cambridge School’ and the ‘Synthesis’ School.

- Cambridge School Keynesians took a more fundamentalist view of Keynesian

theory, rejecting Neoclassicism altogether, although they also resurrected and
borrowed a lot from the old Classical theory (thus they are sometimes known as the
‘Neo-Ricardian’ school).

- the ‘Synthesis School’ tried to combine and merge elements of Neoclassical and
Keynesian theories. It is the better-known or ‘mainstream’ Keynesian school.

5.1 JHON MAYNARD KEYNES (1883 - 1946)

Keynes was a British economist and one of the most influential of the 20th century.

Keynes' best-known work, 'The General Theory of Employment, Interest and Money',
was published in 1936, and became a benchmark for future economic thought. It also
secured his position as Britain's most influential economist, and with the advent of
World War Two, he again worked for the treasury. In 1942, he was made a member
of the house of lords.

During the war years, Keynes played a decisive role in the negotiations that were to
shape the post-war international economic order. In 1944, he led the British
delegation to the Bretton Woods conference in the United States. At the conference he
played a significant part in the planning of the World Bank and the International
Monetary Fund. He died on 21 April 1946.11

The idea which he propagated was shown his theories. He established the ‘Keynesian
school of thought’ in which his notion was to introduce the role which a government
can play in building up the economy of a country. He propagated that hoe government
intervention in the economic fate of a country if necessary.

11
John Maynard Keynes (1883 - 1946), available at,
http://www.bbc.co.uk/history/historic_figures/keynes_john_maynard.shtml , 26.10.19

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As stated earlier that how the Keynesian school of thought has been divided into two
groups and there are a number of thinkers who supports either of the two sub-divided
school of thought.

Some names you might come across:

Cambridge Keynesians Synthesis Keynesians

Joan Robinson (English)
Nicholas Kaldor (Hungarian-English)
Roy Harrod (English)
Abba Lerner (Anglo-American)
Luigi Pasinetti (Italian)
John Hicks (English)
Franco Modigliani (Italian-American)
James Tobin (American)
Paul Samuelson (American)
Robert Mundell (American)

5.2 JOAN ROBINSON

Even before the outbreak of the Second World War, Joan Robinson had already made
such contributions to economic theory that guaranteed her a place in the history of
economic thought. Her book on imperfect competition and her work, in close
association with Keynes, on the theory of employment and output, were at the
forefront of economic thinking in these 'years of high theory' (Shackle, 1967). Her
work since then has covered most aspects of economic theory culminating in her
books on the analysis of growth and in her attack on the neoclassical theory of capital
and interest in the 1950s and 1960s. She was indeed a core Keynesian. In 1941 she
published her famous Essay on Marxian Economics, in which she rejected the labour
theory of value and basically supported redoing Marx along Keynesian and Sraffian
lines. The final, and maybe most important, influence of Joan Robinson today is on
Post Keynesian economics, or post-Keynesian economics.12

12
The Legacy of Joan Robinson, available at,
https://economistsview.typepad.com/economistsview/2016/05/the-legacy-of-joan-robinson-.html ,
26.10.19

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5.3 PAUL SAMUELSON

The economist who arguably dominated American economics in the 1950 and 1960s.
As far as many economists were concerned, Foundations of Economic
Analysis (Samuelson 1947) virtually defined how to do economic theory rigorously: it
presented the theory of constrained maximisation; it showed how to use methods of
linear algebra to derive comparative statics results from such models; it explained
how to formulate and analyse economic dynamics; and its appendices developed
many of the mathematical techniques that economists needed to know. 

Although Keynesian economics came into the US in fragments, Samuelson views it as

a unifying principle. One of Samuelson's first attempts in Keynesian economics is the
simple mathematical formulation expressed as GDP, in terms of consumption and
investment, consumption as dependent on income, and investment as fixed.13

13
Michael Szenberg, Lall Ramrattan, and Aron A. Gottesman, Samuelsonian Economics and the
Twenty-First Century, Oxford Scholarship Online, 2006

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CHAPTER 6 – CONCLUSION

Many schools of thought developed and helped in establishing the subject matter of
Economics. Different thinker supported different schools of thought and led to their
own contribution in the advancement of the subject.

The project was an attempt to throw light upon the evolution of different economic
thoughts in the retrospective view, taking Keynesian school of thought its main focus.

To conclude, it can be said that the discipline advances over time with the progressive
introduction of new tools, new approaches, and an improved understanding of key
concepts. Yet some questions are recurrent and constitute some of the great,
unresolved dilemmas of contemporary society. The answers provided at different
epochs, though based on different arguments and different sources of evidence, often
have elements in common—partly because these are issues that have major
philosophical and political implications. By accounting for the circumstances in
which a variety of responses have emerged in the past, history of economic thought
can contribute to today’s reflection on these issues. As Keynes once wrote,

“The ideas of economists and political philosophers, both when they are right and
when they are wrong, are more powerful than is commonly understood. Indeed, the
world is ruled by little else. Practical men, who believe themselves to be quite exempt
from any intellectual influences, are usually the slaves of some defunct economist”.

The history of economic thought investigates economic issues in long-run

perspective. A variety of approaches to the study evolution of economic thought have
coexisted in which Keynesian was a part.

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BIBLIOGRAPHY

- Paola Tubaro, History of economic thought. Rhona C. Free. 21st Century

Economics: A Reference Handbook

- M.L. Jhingan, M. Girija and L. Sasikala, History of Economic Thought, Vrinda

Publication Pvt. Ltd., 2011

- M.L. Jhingan, Microeconomics, Vrinda Publication Pvt. Ltd, 2016

- JSTOR

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