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In this lesson we will see how some of the historical economic theories were applied to real life economic problems.

You will also be introduced to some new personalities who contributed to the development of economic thought and theory.

In America in 1776, the politicians and forefathers were concerned with signing the Declaration of Independence; however, in another part of the world, something very significant was also happening.

Adam Smith was a professor of economics at the University of Glasgow, Scotland.

He was very small in size and to some was regarded as rather "strange."

This was because he had a habit of sleep-walking around town in his nightshirt.

The people of Glasgow regarded him as a genius and because of this, guarded him to preserve his safety.

One day when he was visiting a factory which made straight pins, Smith noted that each person at the factory would perform the entire task of making the pins.

One person would pour the raw metal into the vats, melt it, pour it into molds, take the pins from the molds, plate, sort, and pack the pins for selling.

Adam Smith wondered what would happen if the tasks were divided among the workers, each becoming a specialist at one task.

By convincing the factory owner to try his idea, Smith proved it to be successful.

The factory owner found that many more pins could be made for sale with this method.

This was the beginning of the concept of SPECIALIZATION or DIVISION OF LABOR.

The concept of division of labor will be discussed later in this lesson in regard to the assembly line developed by Henry Ford.

Adam Smith also wrote and published a book which is still read today.

It is required reading for many university students.

This book is titled

An Inquiry into the Causes and Wealth of Nations.

Adam Smith, considered to be the "father" of modern economics, promoted the concept of laissez-faire economics.

Adam Smith's theory of laissez-faire economics simply meant that what is produced and how much is produced should be decided by what people wanted to buy.

This meant that government would not have any input or control over production.

In other words, laissez-faire means "hands off," or no government intervention in the economy.

Karl Marx represented the other end of the economic spectrum.

Marx believed the government should completely control production and people should not have any choice in economic decisions.

Marx further proposed that the only way supply and demand could work was if there was complete governmental control over the supply and production of goods.

Please refer to lessons two and three for a further discussion of Karl Marx and the socialist and communist economic theories.

In the late 1700s, Thomas Malthus was already concerned about the population growth rate.

He theorized that if the growth rate continued at the same rate, the day would come when the world food supply could not provide enough to feed the people.

He proved his theory by using a formula of GEOMETRIC PROGRESSION.

Malthus theorized that the population would grow geometrically, and the ability to provide food would expand arithmetically.

In geometric progression, there is a constant for each step.

The constant usually doubles with each step.

In arithmetic progression, each step usually increases by 1.

The constant is usually doubled; therefore, if one began with a number of 2, the progression would continue like this:

2 x 2 = 4

4 x 2 = 8

8 x 2 = 16

16 x 2 = 32...

At this rate, by the fourth generation, two people would have produced thirty-two.

In ARITHMETIC PROGRESSION, there is a constant with each step. This constant is usually the addition of 1:

1 + 1 = 2

2 + 1 = 3

3 + 1 = 4

4 + 1 = 5...

Malthus felt that the food supply would expand at an arithmetic progression rate and that the population would expand at a geometric rate.

After four steps, food will have multiplied to 5, while population would have multiplied to 32.

If you were offered your choice of five $20 bills or 1 penny doubled every day for 30 days, what would you choose?

(Example: on the 1st day you would have 1 penny, on the 2nd day 2 pennies, 3rd day 4 pennies, and so on).

Make your choice before you go to the next screen.

1 cent doubled every day for 30 days = $5,368,709.12!

Isn't that hard to believe?

If you are skeptical, click on this calculator and try it for yourself!

This is an excellent example of geometric progression!

At the time Thomas Malthus devised the theory that the population rate would exceed the rate of food production, people thought he was not thinking rationally.

However, in our modern world the Malthus Theory has gained new attention.

We are, and will be in the future, very concerned about the over-population of the earth and the ability to feed all of the people on earth.

Henry Ford, a pioneer in the automobile industry, conceived and implemented the concept of ASSEMBLY LINE PRODUCTION that was first discovered by Adam Smith.

It was very successful and is still used world-wide in the production of goods and services.

In an assembly line, workers stay at the same station and a moving belt transports a good to the worker so that the worker can add certain parts or perform a certain job.

The line is timed so that after the workers have performed their assigned task, another piece is moving to their station.

Francois Quesnay (1694 - 1774) was a physician to Louis XV and also was a noted economist. He was classified as a PHYSIOCRAT, the term for early-day economists.

Quesnay established a society of physiocrats whose main function was to research and study the problems of agriculture and mercantilism.

Thornstein Veblen (1857 - 1927) was an economist and philosopher, born to Norwegian immigrant parents.

He studied and wrote about the accumulation and problems associated with wealth and ostentatious spending. His book was called The Theory of the Leisure Class.

John Maynard Keynes, a most respected economist of the 20th century, developed numerous theories about money and banking.

The earliest applications of his theories was to try to cure the problems of the Great Depression of the 1930s.