MODULE.

III

MAJOR SCHOOL OF ECONOMIC THOUGHT

A school of thought can be thought of as a belief or system of beliefs held by some group of economists. Schools
of Economic thought describe the variety of approaches in the history of Economic theory. Economic thought may
be roughly divided into premodern, early modern and modern. While Premodern thought was shaped by Greece-
Roman, Indian, Persian, Arab and Chinese, the thoughts of Mercantilist and Physiocrats come under early modern.
Modern thought begins with Adam Smith and other Classical economists in the late 18th century. It must be noted
that each school of thought differs by the set of economic phenomena they wish to explain, the economic
methodology used and the assumptions used in order to explain those economic phenomena.

MERCANTILISM
Mercantilism is an economic that dominated Western European economic thought and policies from the sixteenth
to the late eighteenth centuries. The goal of these policies was to achieve a “favorable” balance of trade that would
bring gold and silver into the country and also to maintain domestic employment.
Mercantilism proposed that a country should try to export more than its imports, in order to receive gold. For this
they advocated strict controls on trade in the form of tariffs and quotas. Mercantilist believed that world wealth was
limited and that countries could increase their share only at the expense of other countries.
It held that money was wealth, accumulation of gold and silver was the key to prosperity, and one nation's gain was
another's loss. Supported by economists such as Gerard de Malynes (1586-1641), Edward Misselden (1608-54),
and Sir Thomas Mun (1571-1641) in the UK, Jean Baptiste Colbert (1619-83) in France, and Antonio Serra in Italy
(1570), it exhorted governments to maintain surplus of exports over imports through tariffs (duties), colonialism,
and other such measures.
Mercantilism says that government should control the economy and that nation should increase its
wealth by selling more than it buys from other nations. The mercantilist writers were essentially practical
businessmen, merchants and administrators in various European countries like England, France, Italy, Germany,
Scotland, Spain etc. They left behind numerous works regarding contemporary national economic problems. They
do not form a school of economists. So the ideas and policies which dominated the economic scene of England 'and
a part of Europe between the close of the 16th century and the middle of the 18th century can rightly be called as
mercantilism.
The following ideas, and the underlying principles, may be called mercantilism:
1. The economic health or wealth of a nation can be measured by the amount of precious metal, gold, or silver

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2. A favorable balance of trade is essential.
3. Each nation should strive for economic self-sufficiency, increasing domestic production, and founding new
home industries.
4. Agriculture should be encouraged, reducing the need to import food.
5. Tariffs should be high on imported manufactured goods and low on imported raw material.
6. Colonies should provide markets for manufactured goods and sources of raw material.
7. A large population is important to provide a domestic labor force
8. The crown or state should be heavily involved in regulating the economy

The contributions of mercantilists to the economic theory.

(1) Concept of Nationalism :
The mercantilist emphasized on national strength and prosperity. The building up of a nation state was put in the
fore front. Monetary and other economic devices were regarded merely as instruments to make the state strong.
State interventions was an essential part of mercantilist doctrine.
(2) Importance of Treasure: To the mercantilists the most important concern was the strength of the country. To
the mercantilists the strength of his country depends upon the stock of wealth which the nation possesses. By wealth
they mean the stock of precious metals.
(3) Foreign Trade and Balance of Trade: The mercantilist considered foreign trade as the only source for
acquiring gold and silver. They believed that treasure gained by the balance of our foreign trade remained in the
kingdom. In respect of its exports a country must receive payments in the form of silver or gold. On the other hand
what it buys in the form of imports will have to be paid for. Export represent money coming into the country and
import represents money going out. In order to increase the supply of Bullion in a country, it is necessary that there
be a “favourable balance of trade” represented by excess of export, over import.
(4) Industrial and Commercial Regulations: The mercantilists followed a number of policies in order to
maximize the net gain from foreign trade. The main strategy is to increase the production of exportable commodities
in the domestic economy and to reduce the import of articles from foreign countries.
(5) Role of Government
In order to execute all their schemes and programmes, the mercantilists attached great importance to state as the
centre of all economic activities. The control and regulation of the govt. are essential for the attainment of favourable
balance of trade.
Important Mercantilist Writers
Thomas Mun (1571-1641)
He was born in England in 1571. He was a merchant by profession. Mun was responsible for shaping the trade
policies of England during his time. He advocated the fundamental rule of International Trade. To him the rule of

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international trade should be “to sell more to strangers yearly than we consume of their in volume.” He was an
ardent believer of nationalism and a strong government. This according to him would be realized only by
accumulation of treasure. He suggested imposition of heavy import duties on goods meant for domestic
consumption and moderate duties on export. He also recognized the importance of taxation.
Mun can be regarded as the representative of the English mercantilists who wanted to regulate foreign trade of the
country to secure a favourable balance of trade. His most important book was “England’s Treasure by Foreign
Trade” (1630). In his book, he has suggested a programme for accumulation of treasure. The main points of this
programme were:

1-Waste lands should be cultivated

2-England should supply products to neighboring countries at high rates

3-Commodities should be supplied by our own ships. It would naturally develop our shipping industry.

4. Natural Wealth should be spent economically. 5. The Poor should be employed.

6-England should be developed into a distributing centre. It should develop shipping and trade relations with far-
off countries

Sir William Petty (1623-1685)

Petty is regarded as the founder of political economy. He is remembered for his contribution in the field of statistical
methods and economic theory. He had a quantitative bend of mind. He was the first to develop a fact finding
approach on economic enquiry. As a statistician Petty confined himself only to the employment of quantitative data
and used simple average as the statistical technology. His most famous work was the Treatise of taxes and
contributions (1662).
Petty’s theory of natural par has three variations:

1-Natural par between land and labour: Petty believed that land and labour were the original factors of production
capable of generating value. He related the value of land and labour by equating a piece of land producing a ‘day’s
food of an average man to the day’s labour of the same man. Thus the common measure of value that Petty singled
out was ‘day’s food. It is through this measure that he converted the value of land into the value of labour and thus
to make a par between the two.

2-Natural par between Rent and Money: Petty realized that the commonly accepted measure of value was not
‘days’s food ’but money. He wanted to determine the money value of the surplus product, which he called rent.
Rent is the difference between the total production of land and the cost of producing it.

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3-Natural par between Rent and Interest: Ntural interest will be equal to the rent of so much land as the money lent
will buy.

PHYSIOCRACY
The Physiocrats were a group of economists who believed that the wealth of nations was derived solely from
agriculture. Their theories originated in France and were most popular during the second half of the 18th century.
Physiocracy was perhaps the first well developed theory of economics. They called themselves économistes
(economists) but are generally referred to as Physiocrats in order to distinguish them from the many schools of
economic thought that followed them.
Physiocrat is derived from the Greek for “Government of Nature”. The principles of Physiocracy were first put
forward by Richard Cantillon, an Irish banker living in France, in his 1756 publication. The ideas were later
developed by thinkers such as François Quesnay and Jean Claude Marie Vincent de Gournay into a more systematic
body of thought held by a united group of thinkers. The Physiocrats saw the true wealth of a nation as determined
by the surplus of agricultural production over and above that needed to support agriculture (by feeding farm labours
and so forth). Other forms of economic activity, such as manufacturing, were viewed as taking this surplus
agricultural production and transforming it into new products, by using the surplus agricultural production to feed
the workers who produced the extra goods. While these manufacturers and other non agricultural workers may be
useful, they were seen as 'sterile' in that their income derives ultimately not from their own work, but from the
surplus production of the agricultural sector.
Physiocracy is a school of thought founded by François Quesnay (1694-1774), a court physician to King Louis the
15th. The term is of course a combination of “physio” (nature) and “cracy” (rule), thus meaning the “rule of nature.”
This expresses the school’s fundamental idea that there is a natural order, as opposed to artificial systems, and that
the mission of scholarship and politics being to understand this natural order and bring it into existence, thereby
bringing about this rule of nature
The Basic Principles of Physiocracy: The following are the fundamental principles and policies of physiocracy.

1. Agriculture is the only productive occupation.

3. Agriculture alone produces net product.
4. There is a natural order which makes life happy and meaningful.
5. There is harmony among all classes of people.
6. The individual should get maximum liberty.
7. State action should be limited to the minimum.

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8. Trade is a necessary evil, and there should be free trade.
9. Value depends on utility. Wealth has value. Value and price are the same things.
10. The wage level is at the subsistence level.
11. There is interdependence in the economic system.
12. Real wealth lies in tangible and consumable goods.
13. Private initiative must be encouraged.
14. Distribution of products is very essential.
15. Money is a medium of exchange.
16. All that is bought is sold and all that is sold is bought.
17. Rent is a perfectly legitimate income of the landlords.
18. There should be a single and direct tax on land, as it is the only productive source.
19. Private property is essential.
Physiocratic Doctrines:

The Economic Doctrines of the physiocrats can be conveniently classified under the following four heads

(1) Natural order or Natural philosophy : Natural order is the symbol of physiocratic system. Dupontde-
Nemours defined physiocracy as “the science of natural order”. Natural order, according to physiocrats, was an
ideal order of things guided by the laws of nature, which has been ordained by god for the happiness of mankind.
'It was really the providential order. It was eternal and unchangeable. The' physiocrats conceived of an ideal order
of things and a perfect arrangement of institutions guided by the laws of nature.

(2) The Net Product

To the physiocrats the only productive wealth was agriculture. To them the other occupations, other than agriculture
were unproductive and sterile. By the gift of nature (fertility) agriculture produces more than what the farmers
consumes. This surplus production in the agriculture sector is called as “Net product”.

(3) Individualism and Laissez Faire

The Physiocrats, especially Turgot, believed that self-interest was the motivating reason for each segment of the
economy to play its role. Each individual was best suited to determine what goods he wanted and what work would
provide him with what he wanted out of life. While a person might labour for the benefit of others, he will work
harder for the benefit of himself; however, each person’s needs are being supplied by many other people. The

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system works best when there is a complementary relationship between one person’s needs and another person’s
desires, and trade restrictions place an unnatural barrier to achieving one’s goals.

(4)Functions of the state

The physiocrats were not anarchist. They suggested a state with minimum of civil laws which place no hurdles in
the way of the realization of the natural order. To them the best state was the one in which there were the least
number of laws. They advocated a state with minimum of legislation and maximum of authority. The function of
the physiocratic sovereign were (a) to preserve natural order (b) To defend private property (c) To spread universal
education (d) To undertake a programme of public work.

François Quesnay's Tableau Économique

The founder, leader of physiocracy was Dr. François Quesnay (1694–1774). Quesnay served as the consulting
physician to King Louis XV at Versailles. Late in life he developed an interest in economics, publishing his first
book on the subject in his 60s. Quesnay’s system of political economy was summed up in Tableau économique
(1758), which diagrammed the relationship between the different economic classes and sectors of society and the
flow of payments between them. In his Tableau Quesnay developed the notion of economic equilibrium, a concept
frequently used as a point of departure for subsequent economic analysis. Of explicit importance was his
identification of capital as advances—that is, as a stock of wealth that had to be accumulated in advance of
production. His classification of these advances distinguished between fixed and circulating capital.

Quesnay wanted Louis XV, the king from 1715 to 1774, to deregulate trade and to slash taxes so that France could
start to emulate wealthier Britain. The methodology of Quesnay’s physiocratic system and his principles of policy
sprang from an extreme form of the doctrine of natural law, which he believed represented the divinely appointed
economic order. He was, indeed, one of the originators of the 19th- century doctrine of the harmony of class interests
and of the related doctrine that maximum social satisfaction occurs under free competition.

The foundation of the Physiocrats’ economic theories was first described in François Quesnay's Tableau
Économique, which was published in 1759. The model Quesnay created consisted of three economic movers:

 The Productive class consisted of all agricultural laborers.

 The Proprietary class consisted of only landowners.
The Sterile class is made up of artisans and merchants.

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Robert Jaquis Turgot
Turgot after Quesnay was the most important member of the physiocratic school. He was the finance minister of
Louis XIV. His important contribution - Reflections on the formations and Distribution of wealth published in 1766
was a treatise containing about 100 paragraphs wherein the superiority of agriculture was in full glory.

Turgot was the French Adam Smith. His Reflections on the Production and Distribution of Wealth, which predated
Smith’s The Wealth of Nations by ten years, argues against government intervention in the economic sector. Turgot
recognized the function of the division of labor, investigated how prices were determined, and analyzed the origins
of Economic Growth. Like François Quesnay, Turgot was a leading Physiocrat who attempted to reform the most
stifling of his government’s economic policies.

Probably Turgot’s most important contribution to economics was to point out that capital is necessary for economic
growth, and that the only way to accumulate capital is for people not to consume all they produce. Most capital, he
believed, was accumulated by landowners who saved the surplus product after paying the cost of materials and of
labor. Turgot agreed with Quesnay’s notion of the circular flow of Savings and Investment, where savings in one
period become investment in the next.

In Reflections, Turgot analyzed the interdependence of different rates of return and interest among different
investments, noting that interest is determined by the Supply and Demand for capital. Although the rates of return
on each investment may vary, he argued, in a competitive free-market economy with capital mobility, rates of return
on all investments will tend toward equality.

CLASSICAL SCHOOL

Classical economics is widely regarded as the first modern school of economic thought. It is also called classical
political economy. Classical Economics refers to work done by a group of economists in the eighteenth and
nineteenth centuries. . It is associated with the idea that free markets can regulate themselves. Adam Smith's
famous book ‘ The Wealth of Nations in 1776 is usually considered to mark the beginning of classical economics.
Its main contributors are Adam Smith, J B Say, David Ricardo, Thomas Robert Malthus and J S Mill. The term
“Classical Economics” was coined by Karl Marx to distinguish the greatness of economic theory by Smith, Ricardo
and some earlier economists from their successors.

Many of the fundamental concepts and principles of classical economics were set forth in Smith’s An Inquiry into
the Nature and Causes of the Wealth of Nations (1776). The main idea of the Classical school was that markets
work best when they are left alone, and that there is nothing but the smallest role for government. The approach is
firmly one of laissez-faire and a strong belief in the efficiency of free markets to generate economic development.
Markets should be left to work because the price mechanism acts as a powerful 'invisible hand' to allocate resources
to where they are best employed.

In terms of explaining value, the focus of classical thinking was that it was determined mainly by scarcity and costs
of production. In terms of the macro-economy, the Classical economists assumed that the economy would
always return to the full-employment level of real output through an automatic self-adjustment mechanism.
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Brief discussion about their main ideas may be helpful to understand classical school.

ADAM SMITH

The publication of the “wealth of nations” by Adam smith in 1776 was considered as the beginning of classical
economics and hence he is regarded as the leader of classical economics. He is considered the founding father of
modern economics. Adam smith propagated his ideas on economics through the book “wealth of nations”

Adam smith guided by one universal principle, namely Self-Interest. Every individual has the desire to better his
own lot. He was a great champion of the principle of economic liberty. He advocated the policy of “Laissez-Faire”,
through which he favoured free market. Free trade assumes a high role for market.

He introduced the notion of “Invisible Hand” to explain this. The Invisible hand of free market will ensure the best
outcome for all concerned because the invisible hand would organize market and ensure the optimum outcome. In
line with the free trade , smith proposed an international trade too.

He developed the ‘Absolute Advantage Theory’ of international trade. He argued that the countries should export
those goods in which they enjoy absolute advantage and import those goods in which they have absolute
disadvantage. Both countries would gain by trading.

Smith was against state interference in economic activities. According to him, the main functions of the government
should be:

(a)Protection against foreign countries

(b)Administration of law and justice and

©Establishment and maintenance of public works like roads, harbours, schools etc.

He assigned a high role for Labour in his economic thought. To Smith, labour is the most important factor which
increases the wealth of nations. One of his paths breaking contribution is the concept of ‘Division of Labour’ or
‘Specialisation’. When the production of a commodity is divided into different process and sub process and each
process and sub process is carried out by a set of people, it is called Division of Labour or Specialization .Smith’s
division of labour”is a system of social cooperation” by which production is carried in particular activities. His
example of pin making which involves 18 distinct operations has become a classic one. He showed that an
individual pin maker, working alone, could not make more than 20 pins a day. But under proper division of labour,
he could produce 4800 pins a day. It means that division of labour will increase the productivity of labour and
thereby wealth of a nation. At the same time, smith pointed out that capital has a greater role to play in production
because division of labour itself is governed by capital. To Smith capital formation is the result of the interaction
of self interest of individuals.

Public finance-the income and expenditure activities of the government-was also his concern. He developed certain
Canons of Taxation in respect of imposing taxes on the people by government. Canon of equity, canon of certainty,
canon of convenience and canon of economy are the four principles of taxation developed by him.
Canon of Equity-It states that people of a country should be taxed in proportion to their respective abilities.
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Canon of Certainity-It implies that the tax which each individual is bound to pay should be certain, not arbitrary.
Canon of Convenience-It states that tax should be levied at the time or manner in which it is most likely convenient
to the tax payer.
Canon of Economy-It implies that taxes should be collected at minimum cost to the government
To sum up, excessive individualism and restricting the activities of the state are the main pillars of Smith’s economic
philosophy. No doubt, he was the first economist who dealt economic problems in a systematic manner. That is
why Alexander Gray remarked like this:”Adam Smith’s name is incomparably the greatest in the history of
Economic Thought”.
DAVID RICARDO
David Ricardo is the most successful and influential classical economist. Ricardo is the supreme example of abstract
reasoning. His chief work is “principles of political economy” published in 1817. In Principles of Political Economy
and Taxation (1817), Ricardo analyzed the laws determining the distribution of everything that could be produced
by the “three classes of the community”—namely, the landlords, the workers, and the owners of capital.
IMPORTANT CONTRIBUTIONS
1-Definition of Political Economy
According to Ricardo, the scope of political economy was to determine the laws which regulate the distribution of
wealth into rent, profit and wages. In this distribution, the underlying question is that of justice
2-THEORY OF VALUE
According to the theory the value of a commodity or the quantity of any other commodity for which it will exchange,
depends on the relative quantity of labour which is necessary for its production. Like Adam smith, Ricardo
distinguished between value in use and the value in exchange; to have exchangeable value a commodity must have
utility, though utility cannot be the measure of exchangeable value. Value-in-use or ‘utility’ is neither the measure
nor the determinant of value in exchange, though it is essential to it.
3-THEORY OF RENT
According to Ricardo. "Rent is that portion of the produce of the earth which is paid to the landlord for the use of
the original and indestructible powers of the soil". Ricardo applied the term rent to describe the payment for the use
of land only. It was assumed that land as a whole was fixed. It has no supply price. Whatever be the price, the same
amount of land is available. He believed that rent arose on account of the differences in the fertility of land. Some
lands have advan- tage over others because of superior fertility. Land with high fertility alone can command rent.
Rent is, therefore, a differential surplus. It is the surplus left after meeting the expenses of cultivation.
4-DOCTRINE OF WAGES
Ricardo’s theory of wages was a subsistence theory of wages. Later on, it was called “Iron Law of Wages”. He
distinguished between natural and market price of labour. He defined the natural price of labour as "that price which

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is necessary to enable the labourers, one with another, to subsist and to perpetuate their race without either increase
or diminution." The natural price of labour depends on the price of the food, necessaries, and conveniences for the
support of the labourer and his family, says Ricardo. He further laid down that the natural price tends to rise with a
rise in the price of the means of subsistence (food necessaries) and vice versa. The market price of labour is the
wage rate which is actually paid to the worker and which is determined by its relation to the demand and supply of
labour.
5-THEORY OF PROFITS
Ricardo regarded profit as a residual surplus. It is the excess of the produce (or income) over the advances made to
labourers. His idea about profit follows from his theory of value, where he maintained that the value of a product
is composed of wages plus profit. Thus, profit = Total value produced - wages. In this sense, profit is a surplus in
the Ricardian system. It is a residual income of the capitalist after wage payments. He said in his Essay on Profits,”
Profits depend on high or low wages, wages on the price of necessaries and the price of necessaries chiefly on the
price of food”
6-THEORY OF FOREIGN TRADE
Ricardo was a perfect free trader. He laid the foundation stone of the theory of comparative costs. Ricardo argued
that the comparative cost difference is the sole basis of international trade and thus his theory became known as the
principle of comparative advantage. Comparative advantage is the ability of a firm or individual to produce goods
and/or services at a lower opportunity cost than other firms or individuals.

JEAN BAPTIST SAY (J.B Say)

Jean Baptist say was a follower of the classical tradition. He was the founder of French Classical School .He
published his “Treatise on Political Economy” in 1803.According to him,

Political economy is a study of the laws which govern wealth. He regarded political economy as a purely theoretical
and Descriptive science. He was in favour of inductive method. Say developed a theory of value .He was not
convinced about labour theory of value. He developed a psychological theory of value based on utility. To him, it
is the utility that determines value. The Law of Market is considered to be the greatest contribution to Say in
economics. J B Say enunciated the proposition that “Supply creates its own demand”.

In the Say’s own words,” It is production which creates markets for goods. A product is no sooner created than it,
from that instant, affords a market for other products to the full extent of its own value”. Say substantiates this law

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as follows: any increase in the production of goods and services will bring in an equal amount of income in the
household sector. This is so because production is carried out with the help of factors supplied by the household
sector. The income so earned by the household sector is, in turn, used for purchasing the commodities produced by
the firms.

IMPLICATIONS OF SAY’S LAW:

1-According to say’s law of market there is automatic adjustment in the economy as whatever is produced is
consumed
2-Since supply creates its own demand, hence general unemployment and over production are impossible in a free
enterprise, competitive economy.
3-When the unemployed resources are used, they lead to more production so as to cover their own costs.
4-Another important implication is the mechanism of flexibility of the rate of interest which brings about equality
between saving and investment.
THOMAS ROBERT MALTHUS
Malthus is famous for his theory of population. Another significant contribution of Malthus to economics is the
Theory of market glut. It discusses the problems relating to inadequacy of aggregate demand. Though a classical
economist, Malthus differed from the other members of the classical school on some of the important economic
problems. The main works of Malthus are: 1-An Essay on the principle of population, and. 2-Principles of political
economy

THE MALTHUSIAN THEORY OF POPULATION

The Malthusian theory of population is one of the well known theories about the growth of population. Malthus
published his Essay on population in 1798.His ideas presented in the book came to be known as the Malthusian
Law of population. It discusses the relationship between population and food supply. It is based on the law of
diminishing returns. In a plain language it tells that population increases at a faster rate than food supply
According to Malthus, population increases in a geometric ratio (2, 4, 6, 8…).Malthus believed that population of
a country, if unchecked, will double itself in every twenty-five years.
Malthus has spoken two kinds of checks to population growth (1) Preventive checks, and (2) Positive checks
Preventive checks are in the form of moral restraint, postponement of marriage and so on. The preventive checks
cause the birth rate fall. Malthus suggested that those could not afford children should either postpone marriage or
should not marry. The Positive checks are imposed by war, famine and diseases

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They increase the death rate. If the two methods do not check population, then there will be shortage of food.
Famine, starvation and the resultant death will be the result. This is the essence of the Malthusian theory of
population. Thus, Malthus has drawn a gloomy picture about the future of mankind. The Malthusian theory was
popular for nearly a century. It formed the basis of action for many governments. It influenced the thinking of many
statesmen.
THEORY OF MARKET GLUT
His other views on economics are theory of Market Glut and under consumption. It was generally believed that
there might be over production or under production in the short run but over production in the long run was not
possible. But Malthus pointed that there would be lack of effective demand due to low wages. Thus, he is the
forerunner of under consumption theory. This would lead to over production i.e.glut in the market and stagnation.
Market glut is situation in which there is an excess of supply over demand.
JOHN STUART MILL

John Stuart Mill (1806-1873) was the dominant figure of political economic thought of his time, as well as being a
Member of Parliament for the seat of Westminster, and a leading political philosopher. Mill's textbook, first
published in 1848 and titled Principles of Political Economy was essentially a summary of the economic wisdom
of the mid nineteenth century. On the question of economic growth Mill tried to find a middle ground between
Adam Smith's view of ever expanding opportunities for trade and technological innovation and Thomas Malthus'
view of the inherent limits of population.

In his fourth book Mill set out a number of possible future outcomes, rather than predicting one in particular. The
first followed the Malthusian line that population grew quicker than supplies, leading to falling wages and rising
profits. The second, per Smith, said if capital accumulated faster than population grew then real wages would rise.
Third, echoing David Ricardo, should capital accumulate and population increase at the same rate, yet technology
stay stable, there would be no change in real wages because supply and demand for labour would be the same.
However growing populations would require more land use, increasing food production costs and therefore
decreasing profits. The fourth alternative was that technology advanced faster than population and capital stock
increased. The result would be a prospering economy. Mill felt the third scenario most likely, and he assumed
technology advanced would have to end at some point. But on the prospect of continuing economic growth, Mill
was more ambivalent. Mill is also credited with being the first person to speak of supply and demand as a
relationship rather than mere quantities of goods on markets, the concept of opportunity cost and the rejection of
the wage fund doctrine.

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 NEO-CLASSICAL SCHOOL
The classical school was active into the mid 19th century and was followed by neo-classical economics in Britain
beginning around 1870. The Neo-classical school of economic thought is a wide ranging school of ideas from which
modern economic theory evolved. Neo classical economic has the highest amount of adherents among economists.
It is often referred to by its critics as orthodox economics. The term was originally introduced by Thorstein Veblen
in 1900, in his “Preconceptions of Economic Science”, to distinguish Marginalists in the tradition of Alfred
Marshall from those in the Austrian school.
Neo-classical economics differs from classical economics primarily in being utilitarian in its value theory and using
marginal theory as the basis of its models and equations. The emphasis of neoclassical economics is on
microeconomics. Neo classical economics is characterized by several assumptions common to many schools of
economic thought.
ALFRED MARSHALL
Alfred Marshall was the founder of neoclassical school. His masterly exposition, “Principles of Economics”, was
published in 1890.He was the first economist to rename Political Economy as Economics. Marshall developed the
branch of microeconomics. Marshall considered both deductive and inductive method as useful for economics. He
is of the opinion that both are complementary to each other. His analysis was partial equilibrium, not general
equilibrium. Partial equilibrium analysis studies the relationship between one or two variables, keeping all other
constant.
His contributions are utility, laws of demand, consumer’s surplus, value, internal and external economics
etc. To Marshall, demand is based on the law of diminishing marginal utility. He stated this law thus: ‘the additional
benefit which a person derives from a given increase of the stock of a thing, diminishes with every increase of the
stock of a thing, diminishes with every increase in the stock that he already as”. He has developed the law of
substitution on the basis of diminishing marginal utility. This law explains the equilibrium of the consumer. The
rational consumer substitutes one commodity for another till he maximizes his satisfaction. Elasticity of demand
is another concept contributed by Marshall to economics. Elasticity of demand shows the degree of responsiveness
of change in quantity demanded to a change in price.
Marshall developed the concept of Consumer’s Surplus in economics. He explains consumer’s surplus in the
following manner:” the excess of price which he would be willing to pay rather than go without the thing, over
that which he actually does pay, is the economic measure of this surplus satisfaction. It may be called
consumer’s surplus”.

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Factors of production were also a theme for Marshall. He stated that land and capital are the two chief factors of
production. While land and labour were regarded as primary factors of production, capital was the secondary factors
of production. Organisation is just a sort of labour, according to Marshall.

He developed laws of returns to explain certain features of the economy. There are three laws of returns, viz, law
of increasing returns, diminishing returns and constant returns. Among these, laws of diminishing returns are
commonly quoted and the agriculture is subjected to this law in the long run. He explained the law of diminishing
returns as follows: an increase in the capital and labour applied in the cultivation of land causes in general a less
than proportionate increase in the amount of produce raised, unless it happens to coincide with an improvement in
the arts of agriculture”. Just opposite of this phenomenon is the law of increasing returns and Marshall believed that
it is applicable to manufacturing industry. If the input and output are in the same proportions, it is called constant
returns.

Another important contribution of Marshall is ‘Economies of scale’. Economies of Scale refer to the cost
advantage experienced by a firm when it increases its level of output. There are two types of economies of scale.
They are: Internal and external economies. Internal economies arise within a firm when its production increases.
External economies are external to a firm accrue to it when the size of the industry expands.

Marshall’s another contribution is in the field of distribution or factor pricing. Like value, he stated that the price
of factors is determined by demand and supply. Marshall’s theory of distribution was essentially marginal
productivity theory of distribution. His contribution is the concept of ‘quasi-rent’. It is the income earned from
machines and other appliance other than land.It is applicable in the short period. In the long run it disappears.

JEREMY BENTHAM (1748-1832)

Jeremy Bentham was a English philosopher, jurist and social reformer. He is regarded as the father of modern
utilitarianism. Bentham defined it as the “Fundamental axiom”. His thought is based on the hedonistic psychology.
Hedonism is the doctrine that pleasure is the chief good. Bentham thought the individual actions are motivated by
a desire for pleasure and dislike of pain. Happiness is defined as the difference between pleasure and pain. He
believed that pleasure and pain are measurable.

He said that pleasure and pain depended upon a number factors such as duration, intensity, certainty and nearness.
Bentham’s main contribution to the fields of philosophy and economics was that of Utilitarianism. Utilitarianism
was the principle that the greatest happiness or utility was the most important, most valuable, etc., furthermore,

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such a belief led that people would strive to maximize their net pleasure (or, spoken alternatively: maximize their
pleasure while minimizing their pain) - a strong origin for the theories of maximization

Bentham reaches two conclusions which are of great importance in the development of economic thought. The first
one is that “natural rights” do not exist because rights depend upon laws and laws are made by government. The
other one is the doctrine of laissez-faire.

A C PIGOU

Arthur Cecil Pigou, British economist noted for his studies in welfare economics. Educated at King’s College,
Cambridge, Pigou was considered one of Alfred Marshall’s best students. When Marshall retired as a professor
of political economy in 1908, Pigou was named as Marshall’s replacement. Pigou was responsible
for disseminating many of Marshall’s ideas and thereby provided the leading theoretical basis for what came to be
known as the Cambridge school of economics.

Pigou’s most influential work was The Economics of Welfare (1920). In it, Pigou developed Marshall’s concept
of externalties, which are the costs imposed or benefits conferred on others that are not accounted for by the person
who creates these costs or benefits. Pigou argued that negative externalities (costs imposed) should be offset by a
tax, while positive externalities should be offset by a subsidy. Pigou applied his economic analysis to a number of
other problems, including tariff policy, unemployment, and public finance. He also served on the Royal
Commission on Income Tax (1919–20) and on two committees on the currency (1918–19; 1924–25).
WALRAS

Walras was a French mathematical economist. He formulated the marginal theory of value and pioneered the
development of general equilibrium theory. Walras was the founder of the modern theory of general economic
equilibrium. In 1874 and 1877, Walras published Elements of pure economics, a work that provided the foundation
of the general equilibrium theory. In this work, Walras provided his definition of the scope of economics. Major
aspects of Walra’s theory include the use of mathematics in economics, the notion of free competition, the
notion of utility, and price formation in competitive markets.

SOCIALIST AND MARXIST ECONOMIC THOUGHT

Socialists Economic thought

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Socialism arose in the late 18th and early 19th century as a reaction to the economic and social changes associated
with the Industrial Revolution. While rapid wealth came to the factory owners, the workers became poor. The first
theorist who may properly be called socialist was François Noël Babeuf, who came to prominence during the French
Revolution. Socialist writers who followed Babeuf, however, were more moderate. Known as ‘utopian socialists,’
they included Saint-Simon, Charles Fourier, and Robert Owen. Saint-Simon proposed that production and
distribution should be carried out by the state. The leaders of society would be industrialists who would found a
national community based upon cooperation and who would eliminate the poverty of the lowest classes. Fourier
and Owen, though differing in many respects, both believed that social organization should be based on small local
collective communities rather than the large centralist state of Saint-Simon. All these men agreed, however, that
there should be cooperation rather than competition, and they implicitly rejected class struggle. In the early 19th
century numerous utopian communistic settlements founded on the principles of Fourier and Owen sprang up in
Europe and the United States.

Socialism developed in opposition to the excesses and abuses of liberal individualism and capitalism. Under early
capitalist economies during the late 18th and 19th centuries. The most famous early socialist thinkers were Robert
Owen, Henri de Saint-Simon, Karl Marx, and Vladimir Lenin. It was primarily Lenin who expounded on the ideas
of earlier socialists and helped bring socialist planning to the national level after the 1917 Bolshevik Revolution in
Russia. Socialism is a populist economic and political system based on public ownership (also known as collective
or common ownership) of the means of production. Those means include the machinery, tools, and factories used
to produce goods that aim to directly satisfy human needs. In a purely socialist system, all legal production
and distribution decisions are made by the government, and individuals rely on the state for everything from food
to healthcare. The government determines the output and pricing levels of these goods and services. Socialists
contend that shared ownership of resources and central planning provide a more equal distribution of goods and
services and a more equitable society.

SAINT SIMON:

Saint-Simon, was born in Paris, France, in 1760 as the son of a minor noble. He served in the French Army during
the American War of Independence. Afterwards he travelled to Mexico and Spain where he became involved in
several canal projects. Claude Henri de Rouvroy, comte de Saint-Simon, often referred to as Henri de Saint-
Simon (October 17, 1760 - May 19, 1825), was a French social theorist and the founder of French socialism. In the
wake of the French Revolution, Saint-Simon proposed a new and positive reorganization of society, controlled by
the chiefs of industry, with scientists in the role of priests. The aim of this society would be to produce things useful

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to life, and peace would be assured by universal association. Saint-Simon’s call for a “science of society” influenced
the development of sociology and economics as fields of scientific study. Saint-Simon’s vision influenced French
and European society throughout the nineteenth century.

His first book on political theory, Letters of a Genevan to His Contemporaries, was published in 1802. This was
followed by Introduction to the Work of Science in the 19th Century (1807), Memoir on the Science of Man (1813),
On the Reorganisation of European Society (1814), and The New Christianity (1825). In his books Saint-Simon
argued that Europe was in ‘critical disequilibrium’ and would soon undergo reconstruction. He argued strongly for
a planned economy.

He suggested a framework of three chambers: one body made up of engineers and artists to propose plans, a second
of scientists responsible for assessing the plans, and a third group of industrialists whose task would be that of
implementing the schemes according to the interests of the whole community. After his death in 1825, Saint-
Simon’s ideas were developed by a group of loyal followers such as Olindes Rodriguez, Armand etc.,

SISMONDI

Jean Charles Leonard de Sismondi was born in May 1773, whose real name was Simonde, was a writer born at
Geneva. He is best known for his works on French and Italian history, and his economic ideas. As an economist,
Sismondi represented a humanitarian protest against the dominant orthodoxy of his time. In his first book, he
followed Adam Smith; but in his principal subsequent economic work, Nouveaux principesd’économiepolitique
(1819), he insisted on the fact that economic science studied the means of increasing wealth too much, and the use
of wealth for producing happiness, too little. For the science of economics, his most important contribution was
probably his discovery of economic cycles. In refutation of other thinkers at the time (notably J. B. Say and David
Ricardo), Sismondi challenged the idea that economic equilibrium leading to full employment would be
immediately and spontaneously achieved. He wrote, ‘Let us beware of this dangerous theory of equilibrium which
is supposed to be automatically established. A certain kind of equilibrium, it is true, is re-established in the long
run, but it is after a frightful amount of suffering.’ He was not a socialist; but, in protesting against laissez faire and
invoking the state ‘to regulate the progress of wealth,’ he was an interesting precursor of the German Historical
School of economics. He discussed the occurrences of cyclical fluctuations in economic activity Sismondi also
contributed a great deal to economics with his thoughts on aggregate demand. Observing the capitalist industrial
system in England, Sismondi saw that unchecked competition both resulted in producers all increasing individual
production (because of lack of knowledge of other producers’ production) this was then seen as forcing employers

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to cut prices, which they did by sacrificing workers’ wages. This yielded overproduction and under consumption;
with most of England’s workforce suffering from depressed wages, workers were then unable to afford the goods
they had produced, and under consumption of goods then followed. Sismondi believed that by increasing the wages
of labourers they would have more buying power, be able to buy the national output and thus increase demand. In
his book On Classical Economics, Thomas Sowell devotes a chapter to Sismondi, arguing that he was a neglected
pioneer.

MARXIAN ECONOMIC THOUGHT

Karl Marx
Karl Marx (1818-1883) was a German philosopher, political economist, historian, political theorist, sociologist,
communist, and revolutionary, whose ideas played a significant role in the development of modern communism.
Marx summarized his approach in the first line of chapter one of The Communist Manifesto, published in 1848:
"The history of all hitherto existing society is the history of class struggles." Marx argued that capitalism, like
previous socioeconomic systems, would inevitably produce internal tensions which would lead to its destruction.
Just as capitalism replaced feudalism, he believed socialism would, in its turn, replace capitalism, and lead to a
stateless, classless society called pure communism. Karl Marx founder of Marxism an influential political science
which was highly critical of capitalism. The ideology of Marx and Communism shaped the Twentieth Century.
MARXISM
The theory of socialism developed by Marx is known as Marxism. It is also known as scientific socialism or
revolutionary socialism. He developed his theory in the famous book Das Capital. He inspired by German idealism
and French revolution and also the classical economic theory of David Ricardo.
The basic principles of Marxism are:
Dialectical materialism: The process of dialectic was developed by Hegel. Marx holds that the movement of
history is dialectical. Everything has its own opposite and due to the result of conflict between the two a new thing
would emerge. The new synthesis will become the thesis in the next stage of development.
Materialistic interpretation of history: The Materialistic Interpretation of History is the application of the
principles of dialectical materialism to the development or growth of society. This term has been used by Marx
to explain that all historical events have influenced by economic conditions. Marx believes that economic forces
determine the entire social cultural, legal and institutional structure of society. Thus, economic forces are
fundamental and vital which shape the structure of the society.

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According to Marx the mode of production is the basis of all social order. The cause of all social change is
economic- that is mode of production. Marx interprets the historical movements in terms of the existing economic
condition of the society.
Class war/struggle: The history of society is the history of class war of conflicting classes which are exploiters
and exploited or the oppressor and the oppressed .There is always been a clash of interest between two classes.
The capitalist class owns the mean of production and exploits the working class. Exploitation accentuates when
new techniques, new methods of production, new machines are introduced. These changes hard press the
exploited class and leads to discontentment and dissatisfaction. The class struggle leads revolution, which gives
birth to new social order, economic conditions are improved and as satisfied labour class emerges which works
for the progress and development of the society. The history of society is classified as slave society, feudal
society, and capitalist society on the basis of class war.

Surplus value: Marx developed the theory from the theory of David Ricardo. The surplus value is the difference
between the value of a product as charged by the producers from the consumers and the value of labour power
employed to produce that commodity which is likely to be equal to the subsistence level. Value of a commodity
should be given to the labourers. But the capitalists taken away the value and gave a minimum wage to the labourers.
This unpaid value of a commodity to the labourer is known as surplus value. This is exploitation. The capitalists
may increase the amount of surplus value extracted from the working class by two means:(1)by absolute surplus
value-extending the working day as long as possible, and (2)by relative surplus value-by cutting wages and by
increasing the productivity of the labour. Through the surplus value capitalists grow richer and the labourers poorer.

The concept of Reserve Army: The introduction of technology results in the surplus manpower and Marx calls
it ’industrial reserved army’ or relative surplus population. With advances in the technological development, the
ratio of the reserve army increases, but the wage-bill falls. The falling wage rate raises the surplus value and the
further encourages the use of capital-intensive techniques. The existence of reserve army(via technical
progress)keeps the wage –rate at the subsistence level and progressively raises the surplus value and capital
formation and hence development.

Classless and stateless society: After the revolution the working class would establish a state known as dictatorship
of proletariat. But it is a transitional state. When they destroy the private property of the capitalists, the society will
be a classless one. In such a society state is not needed because according to Marx State is an instrument of
exploitation- to exploit the have-nots. But if there will be no classes the state will wither away. That society is

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known as classless and stateless society. It is the last stage of Marxism – communism. The society is functioning
on the basis of the principle “from each according to his own ability and to each according to his own needs”.
KEYNESIANISM

A school of economic thought founded by the UK economist John Maynard Keynes (1883-1946) and developed
by his followers. In 1936, at the height of the great depression, Keynes' landmark book ‘The General Theory of
Employment, Interest and Money’, caused a paradigm shift for economics. It suddenly replaced their emphasis on
study of the economic behavior of individuals and companies (microeconomics) to the study of the behavior of the
economy as a whole (macroeconomics).It was the dominant school of macroeconomics and represented the
prevailing approach to economic policy among most Western governments until the 1970s.

Keynesian economics is an economic theory of total spending in the economy and its effects on output and inflation.
It was an attempt to understand the Great Depression. Keynes advocated increased government expenditures and
lower taxes to stimulate demand and pull the global economy out of the depression. Subsequently, Keynesian
economics was used to refer to the concept that optimal economic performance could be achieved -- and
economic slumps prevented -- by influencing aggregate demand through activist stabilization and economic
intervention policies by the government. Keynesian economics is considered a "demand-side" theory that focuses
on changes in the economy over the short run. The main plank of his revolutionary theory is the assertion that the
aggregate demand created by households, businesses and the government and not the dynamics of free markets is
the most important driving force in an economy

Supporters of Keynesianism, or Keynesian economics, believe that although businesses and private sector
entities working on a liberal environment function in an efficient way, sometimes market failures may appear.
For this, they support a certain degree of implication by the public sector in order to prevent these failures and
restore the economy if they appear, through fiscal and monetary policies. However, they will give more credit to
the former, the latter being more supported by Monetarists. Keynesianism was the main economic doctrine from
1936 until the advent of Monetarism, with which it coexisted until the stagflation of the seventies. Joan
Robinson, Nicholas Kaldor and John R. Hicks, are just some of the great disciples of Keynes, and therefore
Keynesian economists, mainly from the Cambridge School.

Contributions of Keynes to Economic Theory

Underemployment equilibrium : Barring periods like wars or some other upheaval, the economy, be it in the
short run or long run, will be in equilibrium at a point less than full employment. This condition is called
underemployment equilibrium In Keynesian economics, underemployment equilibrium is a situation with a

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persistent shortfall relative to full employment and potential output so that unemployment is higher than at the
"natural" rate of unemployment.
Macro economics: Macroeconomics studies economy-wide phenomena such as inflation, price levels, rate of economic
growth, national income, gross domestic product (GDP), and changes in unemployment.
The General character of Keynesian Economics: Keynes theory is called General theory because of its
applicability to all sorts of situations like underemployment, full employment and over full employment.
Consumption Function: One of the important tools of the Keynesian economics is the consumption
function. The consumption function or propensity to consume refers to income consumption relationship. It is a
“functional relationship between two aggregates, i.e., total consumption and gross national income.”
The Multiplier: Keynes’s multiplier is “Investment Multiplier” expressing relationship between initial
increment in investment and ultimate increment in the aggregate income.
Inflationary and Deflationary Gap : Inflationary gap is the amount by which the actual aggregate demand
exceeds ‘aggregate supply at level of full employment’. Deflationary gap is the amount by which actual
aggregate demand falls short of aggregate supply at level of full employment’.
Role of Investment: In Keynesian economics investment means real investment i.e., investment in the building of
new machines, new factory buildings, roads, bridges and other forms of productive capital stock of the
community, including increase in inventories.
Role of state: Keynes gives most needed role of the government in restoring and maintaining desirable
conditions in the economy.
Role of Expectations: Keynesian economics brings forth the role of Expectations. Expectations are the means
by which future influences are presented.
Keynes as Critique of Classical Economics

The following are the main points of Keynes’ criticisms against the classical theory:
1. Unrealistic Assumption of Full Employment Condition: Keynes considered the fundamental classical
assumption of full employment equilibrium condition as unrealistic. To him, there is the possibility of equilibrium
condition of underemployment as a normal phenomenon. Keynes regarded it as a rare phenomenon. Keynes in fact
considered the underemployment condition of equilibrium to be more realistic.
2. Undue Importance to the Long Period: Keynes opposed the classical insistence on long-term equilibrium;
instead, he attached greater importance to short-term equilibrium. To him, “in the long run, we are all dead.” So, it
is no use to say that in the long run everything will be all right.

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3. Keynes’ Denial of Say’s Law of Markets: Classical economists rest on Say’s Law which blindly assumed that
supply always creates its own demand and affirmed the impossibility of general overproduction and disequilibrium
in the economy. Keynes totally disagreed with this view and stressed the possibility of supply exceeding demand,
causing disequilibrium in the economy and pointed out that there is no automatic self-adjustment in the economy.
4. Attack on Money Wage Cut Policy: Keynes objected to the classical formulation of employment theory,
particularly, Pigou’s notion that unemployment will disappear if the workers will just accept sufficiently low wage
rates (i.e., a voluntary cut in money wage). He rejected Pigou’s plea for wage flexibility as a means of promoting
employment at a time of depression.
Keynes, thus, maintained that the volume of employment is determined by the effective aggregate demand and not
by the wage bargain between workers and employers as the classicists had explained. The wage cut policy of the
classicists appeared both immoral and unsound.

5. Keynes’ attack on Interest Rate to be strategic variable: Keynes also attacked the classical theory in regard
to saving and investment. He objected to the classical idea of saving and investment equilibrium through flexible
rates of interest. To him saving and investment equilibrium are obtained through changes in income rather than in
the interest rate.

6. Keynes’ Attack on Laissez-faire Policy:

Keynes strongly attacked the classicists for their unrealistic approach to the problems of contemporary capitalist
economic system. Keynes wanted governmental action to bring about adjustment in the economic system, because
the modern economic system is not self-adjusting in character as assumed by the classicists.

In short, classical theory, in Keynes’ view, is unrealistic and irrelevant to the present conditions and out of date,
and, thus, cannot be a guide to the solution of modern economic problems. Thus; the basic need is for a theory
which will diagnose the ills of the modern economic system and furnish a guide for the solution of problems like
unemployment, business cycles, inflation and other economic ills.

MONETARISM

Monetarism is a set of views based on the belief that the total amount of money in an economy is the primary
determinant of economic growth. Monetarism is closely associated with economist Milton Friedman, who
argued, based on the quantity theory of money, that the government should keep the money supply fairly steady,
expanding it slightly each year mainly to allow for the natural growth of the economy

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 Monetarism is an economic school of thought that states that the supply of money in an economy is the primary
driver of economic growth. As the availability of money in the system increases, aggregate demand for goods
and services goes up. An increase in aggregate demand encourages job creation which reduces the rate of
unemployment and stimulates economic growth. However, in the long-term, the increasing demand will
eventually be greater than supply, causing a disequilibrium in the markets. The shortage caused by a greater
demand than supply will force prices to go up, leading to inflation.

Monetary policy, an economic tool used in monetarism, is used to adjust interest rates to control the money
supply. When interest rates are increased, people have more of an incentive to save than to spend, thereby,
reducing or contracting the money supply. On the other hand, when interest rates are lowered following
an expansionary monetary scheme, the cost of borrowing decreases which means people can borrow more and
spend more, thereby, stimulating the economy.

We may describe Friedman's monetarism into the following three propositions:

1. The level of economic activity in current rupee terms, that is, the level of nominal income is determined primarily
by the stock of money.
2. In the long run, the effect of expansion in money supply is primarily on the price level and other nominal
variables.
3. In the short run price level as well as the level of real national income (ie. real output) and employment are
determined by the supply of money. In the short-run changes in the quantity of money are the dominant factor
causing cyclical fluctuations in output and employment.

The above conclusions were derived by Friedman based on the restatement of quantity theory money theory of
money

CONTRIBUTION OF INDIAN ECONOMISTS

KAUTILYA (350 BC-275 BC)

Kautilya was a professor of political science at the Takshashila University of ancient India, and later the chief
Minister of Chandragupta Maurya who ruled over the mighty Indian empire in the 4th century BC. He wrote the
Arthashastra ("Science of Material Gain" or "''Science of political economy" in Sanskrit). both names that are
traditionally identified with Kautilya. He is known by the name of Kautilya because he was an expert in diplomacy

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and political strategy. Arthashastra deals extensively with aspects of political, economic, and social management
and is the oldest book on management in the world. Arthashastra provides an authentic account of the economic
and political ideas of the day. It also contains information about law, agriculture etc. prevailed at that time. It also
deals in detail with the qualities and disciplines required for a wise and virtuous king.

According to Kautilya, the king's happiness lies in the happiness of his subjects and his welfare lies in the welfare
his subjects. Kautilya has given vivid description of the administrative procedures, the duties of kings, ministers
and government officers, in his book, Arthasastra. It covers almost every aspect of the theory and practice of
economics. It also deals with nature and purpose of material wealth, varta - agriculture and animal husbandry,
dignity of labour, trade, public finance, population, slavery, welfare state, social security, interest, price control,
socio-economic institutions and town planning. His book contains ample ideas on a welfare state.

DADABHAI NAOROJI (1825 – 1917)

Dadabhai Naoroji, the Grand Old Man of India, was the father of Indian nationalism. He was from a rich Parsi
family of Bombay and was an intellectual, educator, and a political and social leader. He was a Member of
Parliament (MP) in the United Kingdom (House of Commons between 1892 and 1895), and the first Asian to be a
British MP. Naoroji is also credited with the founding of the Indian National Congress, along with A.O. Hume. He
was also member of Second International along with Kautsky and Plekhanov. At the early age of 25, he was
appointed leading Professor at the Elphinstone Institution in 1850, becoming the first Indian to hold such an
academic position. Naoroji was elected President of the Congress in 1886. He died in Bombay on 30 June 1917, at
the age of 91. He was the first Indian to estimate the national income of India. Naoroji published “Poverty and un-
British Rule in India” in 1901. His book brought attention to the draining of India's wealth into Britain.

Economic Ideas of Naoroji

Poverty: The economic ideas of Naoroji are found in his work: ‘Poverty and Un-British Rule in India”. He
considered poverty as the major problem of India and attributed the mass poverty of India to the British rule.
According to him, the continuous exploitation of India by the British government and the consequent draining of
Indian wealth to Britain was the reason for the poverty of Indians.

The Drain Theory: Dadabhai Naoroji is known for drain theory by which he focused on the drain of India’s wealth
to England through the colonial rule. The consequence of foreign domination was the drain of wealth of India to
Britain. Through his work with economics, Naoroji sought to prove that Britain was draining money out of India.

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Naoroji described 6 factors which resulted in the external drain. Firstly, India is governed by a foreign government.
Secondly, India does not attract immigrants which bring labour and capital for economic growth. Thirdly, India
pays for Britain’s civil administrations and occupational army. Fourthly, India bears the burden of empire building
in and out of its borders. Fifthly, opening the country to free trade was actually a way to exploit India by offering
highly paid jobs to foreign personnel. Lastly, the principal income-earners would buy outside of India or leave with
the money as they were mostly foreign personnel.

Naoroji estimated that the drain was about 3 million pounds at the beginning of 19th century to 30 million pounds
towards the end of the 20th Century. When referring to the Drain, Naoroji stated that he believed some tribute was
necessary as payment for the services that England brought to India such as the railways. However, the money from
these services was drained out of India. According to Naoroji, certain measures are needed to reduce Indian poverty
and they are:

1. India and England should pay all salaries to their people within their boundaries. 2. As the Englishmen were paid
reasonable salaries while they served India, there was no need to pay pension to them 3. As there was no danger of
invasion of India by sea, India should not be charged any portion of the expenditure incurred for the Indian navy.

AMARTYA SEN
Amartya Sen occupies a unique position among modern economists. He is an outstanding economic theorist, a
world authority on social choice and welfare economics he is carrying out path-breaking work on appraising the
effectiveness of investment in poor countries and more recently, on the economic analysis of famines. Amartya
Kumar Sen was born in West Bengal 1933. Sen is an Indian economist who was awarded the Nobel Prize in
Economics 1998. He was awarded Nobel Prize for his contributions to welfare economics and social choice theory,
and for his interest in the problems of society's poorest members. Sen is best known for his work on the causes of
famine, which led to the development of practical solutions for preventing shortages of food. He helped to create
the United Nations Human Development Index. In 2012, he became the first non-U.S. citizen recipient of the
National Humanities Medal. He is currently the Professor of Economics and Philosophy at Harvard University. He
has taught economics also at the University of Calcutta and at the Delhi School of Economics. In 1972, he joined
the London School of Economics as a Professor of Economics where he taught until 1977. In 1998 he was appointed
as Master of Trinity College, Cambridge. In January 2004, Sen returned to Harvard. He has served as president of
the Econometric Society (1984), the International Economic Association (1986–1989), the Indian Economic
Association (1989) and the American Economic Association (1994). He has also served as President of the

25
Development Studies Association (1980–1982) and is a Honorary Vice-President of the Royal Economic Society,
which he has been since 1988.

He served as Honorary Director of Center for Human and Economic Development Studies at Peking University in
China and is also a board council member of the Prime Minister of India's Global Advisory Council of Overseas
Indians.

Main Ideas of Amartya Sen

Capability Approach: Amartya Kumar Sen has defined development in term of an expansion in capabilities and
‘entitlement’. Capabilities refer to what a person can (not) do or can (not) be. Freedom from hunger, being free to
participate in the political process, being adequately sheltered access to health and education etc can be quoted
different manifestations of capabilities
Poverty and Famine: Poverty and famine is one of the most important works of Amartya Sen highlighted in his
one of the best ever remembered books “An Essay on Entitlement of Deprivation published in 1981. In this work
he demonstrated that famine occurs not only from a lack of food, but from inequalities built into mechanisms for
distributing food. Sen's interest in famine stemmed from personal experience. As a nine-year-old boy, he witnessed
the Bengal famine of 1943, in which three million people perished.
The Entitlement Approach: Entitlements approach defined as the set of alternative commodity bundles that a
person can command in a society using the totality of rights and opportunities that he or she faces. The entitlements
derive from legal rights rather than morality or human right (Sen, 1981).
Social Choice Theory: Amartya Sen highlighted Arrow’s Theory of Impossibility of Social Choice in his famous
book by name Choice and Social Welfare in 1970. The theory should aim at establishing the need for equitable
distribution arrangements in the initial status of human beings in society.
JAGDISH BHAGWATI

Jagdish Natwarlal Bhagwati was born in 1934, into a Gujarati family in the Bombay Presidency during the British
Raj, and graduated from Sydenham College, Mumbai. He then went with "senior status" to read over two years for
the BA in Economics at Cambridge. Jagdish Natwarlal Bhagwati is an economist and professor of economics and
law at Columbia University. Bhagwati is a Democrat. He is well known for his research in international trade and
for his advocacy of free trade. He received the Ph.D.in Economics from the Massachusetts Institute of Technology
in 1967. Bhagwati has previously served as an external advisor to the Director General of the World Trade
Organization in 2001, as a special policy advisor on globalization to the United Nations in 2000, and as an

26
economics policy advisor to the Director-General of the Trade from 1991 to 1993. From 1968 until 1980, Bhagwati
was an economics professor at the Massachusetts. Bhagwati currently serves on the Academic Advisory Board of
Human Rights Watch (Asia) and on the board of scholars of the Centre for Civil Society. He is a Senior Fellow of
the Council on Foreign Relations. In January 2004, Bhagwati published ‘In Defense of Globalization, a book in
which he argues "this process (of globalization) has a human face, but we need to make that face more agreeable."
In 2006, Bhagwati was a member of the Panel of Eminent Persons who reviewed the work of the United Nations
Conference on Trade and Development (UNCTAD).

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