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At the end of the 19th century, Alfred Marshal (1842-1924) an English professor of economics developed the Theory of Price.

Marshal, a marginalist economist, believed strongly that the best of all economic worlds is one in which the forces of supply and demand are able to operate in a free competitive market with a minimum of government interference.

Marshal borrowed from Smith and Ricardo the concept of the importance of cost on the supply of goods, From the marginalists, Walras, Jevons, and Menger he borrowed the concept of demand.

He combined these two ideas into a new process to determine the price of goods.

We will have a further discussion of these items in later lessons.

Perhaps Marshal's greatest contribution was the recognition that the time element is extremely important in determining supply.

For the short run, a business can alter its quantity of goods by using its current production facilities.

In the long run, a business is able to change its production facilities, for example, by adding new plant and equipment.

Marshal was not only an original thinker, but he was also a great teacher. His most famous pupil was John Maynard Keynes, the most influential economist of the 20th Century.

The three national schools of the marginalists came together between 1890 and 1930 to focus on the new problems facing the world in the early 20th century.

These neoclassical economists had proven through the development of various theories that interference from governments had been harmful to the growth of economies during the 19th century.

On the other hand, a few of the neoclassical economists supported Adam Smith's concept of laissez-faire economics.

Since the Industrial Revolution, the leading economists were very critical of the inequalities that capitalism had created among the people.

The workers had suffered under the working conditions in the factories and the governments had to pass laws to protect the safety of the employees.

Around the time of World War I, A. C. Pigou, emphasized the case against laissez-faire and in favor of government action. He argued that government is necessary to address the problem of economic inequality.

Pigou created the basis of warfare theory as a separate branch of economic inquiry.

In 1917, a momentous event the economic history of the world occurred in Russia. Beginning in October of that year, the Russian people revolted against the government of Czar Nicholas II. The violent and bloody revolution of the workers against the capitalists predicted by Karl Marx had been fulfilled.

The second stage of communism is characterized by the establishment of a centralized authority, a dictatorship of the proletariat" (people).

A centralized authority is necessary because the majority of workers are not capable of ruling and direction by a small group of intelligent people.

Under this dictatorship, the destruction of the capitalist class is completed, and society is reorganized along socialist lines. Private ownership and profit for the workers is abolished.

The state or government now owns and operates the means of production.

The man who directed the communist revolution in Russia was Vladimir Lenin.

The attempt to replace the existing economic system in Russia with Communism was not successful.

Lenin in 1921, realizing the need for compromise launched the New Economic Policy (NEP), which combined the elements of both communism and capitalism.

For the next seven years, limited private ownership and the profit motive were allowed to exist side by side with collective ownership.

Gradually, central planning and collective ownership were increased, and by 1928, Stalin had restored strict Communist principles.

In the years following World War I, economists made great progress in describing and analyzing the economic world of developed and developing regions.

There was still one problem that had not been resolved by the great economists of the world.

Economists had made great strides in describing the business cycle and how it affected all of the elements of an economy, including households, businesses and government levels.

What was needed was a model to accurately measure or analyze the total economy, a macroeconomics model.

The Stock Market crash of 1929 would change forever the way America looked at politics and economics.

Politically, the change in our economic policy is associated with the New Deal and Franklin Roosevelt in 1933. In economics it is associated with an English economist, John Maynard Keynes (pronounced canes).

As the originator of a new model, Keynes was responsible for bringing about a revolution in economic thinking.

Many economists turned away from classical theories so popular before World War I to the "new economics" based on Keynes' theories.

John Maynard Keynes (1883-1946), more than any other economist in the 20th century, is responsible for modifying classical thinking among the industrial nations of Western Europe and North and South America.

During the 1930s, the United States and the nations of western Europe were mired in the Great Depression.

It became apparent early in the Great Depression that the classical economics model did not have any mechanism to correct the problems of the economy.

Recall the "Take the Wheel" statement when you were asked to give advice to President Roosevelt. Under the philosophy of laissez-faire, or hands off, the government would not become involved in the economy.

Keynes emphasized in his writings the relationship between national income and employment.

He showed that consumption, investment, and government spending determined income.

The consumption of goods by people and businesses changes with income (as savings do), but income is mainly influenced by the amount of investment by people and businesses.

Investment is the least stable of the three items (consumption, investment, and government spending). Because it may not be adequate to maintain national income sufficient to achieve full employment, the government should become involved in the problems of the people to promote full employment.

This involvement would be accomplished through appropriate monetary and fiscal policies. We will study these policy making boards such as the Federal Reserve Board in later lessons.

Economists today recognize that Keynes's approach had certain weaknesses.

It was designed for the short run, and the model did not give significant attention to economic growth.

Furthermore, Keynes did not recognize that in the long run people's spending habits change, adapting to the higher levels of income.

Nevertheless, most economists regard Keynes's contributions to economic theory as the most significant of the 20th century.

Modern mainstream economics were not without critics who range from those who dissent from this or that particular theory to groups that completely reject the entire approach.

The Chicago School of Economists, led by Milton Friedman and others, is considered to be the home of modern apostles of laissez-faire. These writers remind us what market pricing accomplishes, and what the penalties are that our society will suffer from rejecting the market's hand.

The Chicago School's view concentrated on microeconomics, or the individual examination of all parts of the economy.

The Rational-Expectations School, founded by Robert Lucas and Thomas Sargent at the University of Chicago and the University of Minnesota, took a macroeconomics view, or a look at the whole economy.

These macroeconomists share the view that government policies may be ineffective or harmful.

We have seen both ends of the economic spectrum represented in our studies.

The laissez-faire economists are located on one end of the economic spectrum and the Marxist socialists on the other.

Are there any economists who would propose a combination of both ends of the spectrum, a change to a mixed economy?

John Kenneth Galbraith, writing in the middle of the 20th century, proposed the elements needed for a mixed economy.

Galbraith challenged the current views of his day concerning the behavior of consumers and business firms with the ideas that follow.

Large corporations are not necessarily bad for the economy, as they are the source of much of the technical advancements that we enjoy today.

Consumers are not masters of their own mind and Galbraith believed that advertisers shape our choices. (Do you remember in lesson one when you were asked why you had purchased your clothes?)

Our economy focuses more on the needs of the private sector, individuals and businesses, instead of the public sector. Public sector goods like parks are neglected; roads crumble and bridges collapse because the resources for their repair is diverted to the private sector.

This concludes our discussion of the Modern Theorists.

The Great Depression created a dramatic change in our political and economic systems, as the government became more and more involved in the formulation of legislation and policies in these areas.