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Economics as a subject of modern study, distinguishable from moral philosophy and politics, dates from the work, Inquiry into the Nature and Causes of the Wealth of Nations (1776), by the Scottish philosopher and economist Adam Smith. Mercantilism and physiocracy were precursors of the classical economics of Smith and his 19th-century successors. 

Mercantilism. 
The development of modern nationalism during the 16th century shifted attention to the problem of increasing the wealth and power of the various nation-states. The economic policy of the leaders of that time, known as mercantilism, sought to encourage national self-sufficiency. The heyday of the mercantilist school in England and western Europe occurred during the 16th through the early 18th centuries. 

Mercantilists valued gold and silver as an index of national power. Without the gold and silver mines in the New World from which Spain drew its riches, a nation could accumulate these precious metals only by selling more merchandise to foreigners than it bought from them. This favorable balance of trade necessarily compelled foreigners to cover their deficits by shipping gold and silver. 

Mercantilists took for granted that their own country was either at war with its neighbors, recovering from a recent conflict, or getting ready to plunge into a new war. With gold and silver, a ruler could hire mercenaries to fight, a practice followed by King George III of Great Britain when he used Hessian troops during the American Revolution. As needed, the monarch could also buy weapons, uniforms, and food to supply the soldiers and sailors. 

Mercantilist preoccupation with precious metals also inspired several domestic policies. It was vital for a nation to keep wages low and the population large and growing. A large, ill-paid population produced more goods to be sold at low prices to foreigners. Ordinary men and women were encouraged to work hard and avoid such extravagances as tea, gin, ribbons, ruffles, and silks. It also followed that the earlier that children began to work, the better it was for their country's prosperity. One mercantilist writer had a plan for children of the poor: "When these children are four years old, they shall be sent to the county workhouse and there taught to read two hours a day and be kept fully employed the rest of the time in any of the manufactures of the house which best suits their age, strength, and capacity." 

Physiocracy. 
Physiocracy was briefly in vogue in France during the second half of the 18th century as a reaction against the narrow and restrictive policies of mercantilism. The founder of the school, François Quesnay, was a physician at the royal court of King Louis XV. His major work, the Tableau économique, an attempt to trace income flows through the economy, crudely anticipated 20th-century national income accounting. All wealth, in the doctrine of the physiocrats, originates in agriculture; through trade, wealth is distributed from farmers to other groups. The physiocrats were partisans of free trade and laissez-faire . They maintained that the revenue of the state should be raised by a single direct tax levied on the land. Adam Smith met the leading physiocrats and wrote-for the most part, favorably-of their doctrines. 

The Classical School. 
As a coherent economic theory, classical economics starts with Smith, continues with the British economists Thomas Robert Malthus and David Ricardo, and culminates in the synthesis of John Stuart Mill, who as a young man was a follower of Ricardo. Although differences of opinion were numerous among the classical economists in the three-quarters of a century between Smith's Wealth of Nations and Mill's Principles of Political Economy (1848), members of the group agreed on major principles. All believed in private property, free markets, and, in Mill's words, that "only through the principle of competition has political economy any pretension to the character of a science." They shared Smith's strong suspicion of government and his ardent confidence in the power of self-interest represented by his famous "invisible hand," which reconciled public benefit with individual pursuit of private gain. From Ricardo, classicists derived the notion of diminishing returns, which held that as more labor and capital were applied to land, yields after "a certain and not very advanced stage in the progress of agriculture steadily diminished." 

Through Smith's emphasis on consumption, rather than on production, the scope of economics was considerably broadened. Smith was optimistic about the chances of improving general standards of life. He called attention to the importance of permitting individuals to follow their self-interest as a means of promoting national prosperity. 

Malthus, on the other hand, in his enormously influential book An Essay on the Principle of Population (1798), imparted a tone of gloom to classical economics, arguing that hopes for prosperity were fated to founder on the rock of excessive population growth. Food, he believed, would increase in arithmetic ratio (2-4-6-8-10 and so on), but population tended to double in each generation (2-4-8-16-32 and so on) unless that doubling was checked either by nature or human prudence. According to Malthus, nature's check was "positive": "The power of population is so superior to the power of the earth to produce subsistence for man, that premature death must in some shape or other visit the human race." The shapes it took included war, epidemics, pestilence and plague, human vices, and famine, all combining to level the world's population with the world's food supply. 

The only escape from population pressure and the horrors of the positive check was in voluntary limitation of population, not by contraception, rejected on religious grounds by Malthus, but by late marriage and, consequently, smaller families. These pessimistic doctrines of classical economists earned for economics the epithet of the "dismal science." 

Mill's Principles of Political Economy was the leading text on the subject until the end of the 19th century. Although Mill accepted the major theories of his classical predecessors, he held out more hope than did Ricardo and Malthus that the working class could be educated into rational limitation of their own numbers. Mill was also a reformer who was quite willing to tax inheritances heavily and even to allow government a larger role in protecting children and workers. He was far more critical than other classical economists of business behavior and favored worker ownership of factories. Mill thus represents a bridge between classical laissez-faire economics and an emerging welfare state. 

The classical economists also accepted Say's Law of Markets, the doctrine of the French economist Jean Baptiste Say (1767-1832). Say's law holds that the danger of general unemployment or "glut" in a competitive economy is negligible because supply tends to create its own matching demand up to the limit of human labor and the natural resources available for production. Each enlargement of output adds to the wages and other incomes that constitute the funds needed to purchase added output. 

Marxism. 
Opposition to the classical school of economics came first from early socialist writers such as the French social philosopher the comte de Saint-Simon and the British reformer Robert Owen. It was Karl Marx, however, who provided the most important social theories. 

To the classical vision of capitalism, Marxism was in large measure a sharp rebuttal, but to some extent it embodied variations of classical themes. Marx adopted, for example, a version of Ricardo's labor theory of value. With a few qualifications, Ricardo had explained prices as the result of the different quantities of human labor needed to produce different finished products. Accordingly, if a shirt is priced at $12 and a pair of socks at $2, it is because six times as many hours of human labor entered into the making of the shirt as the socks. For Ricardo, this theory of value was an analytical convenience, a way of making sense of the multitude of different prices in shops. For Marx, the labor theory was a clue to the inner workings of capitalism, the master key to the inequities and exploitation of an unjust system. 

An exile from Germany, Marx spent most of his mature years in London, supported by his friend and collaborator, the German revolutionist Friedrich Engels, and by the proceeds from occasional contributions to newspapers. He conducted his extensive research in the reading room of the British Museum. Marx's historical studies convinced him that profit and other property income are the proceeds from force and fraud inflicted by the strong on the weak. 

"Primitive accumulation" in English economic history was epitomized by the record of land enclosure. In the 17th and 18th centuries, landowners used their control of Parliament to rob their tenants of traditional rights to common lands. Taking these lands for their own use, they drove their victims reluctantly into cities and factories. 

Deprived both of tools and land, British men, women, and children had to work for wages. Thus, Marx's central conflict was between so-called capitalists who owned the means of production-factories and machines-and workers or proletarians who possessed nothing but their bare hands. Exploitation, the heart of Marxist doctrine, is measured by the capacity of capitalists to pay no more than subsistence wages to their employees and extract for themselves as profit (or surplus value) the difference between these wages and the selling price of market commodities. 

Although in the Communist Manifesto (1848) Marx and Engels paid grudging tribute to the material achievements of capitalism, they were convinced that these were transitory and that the internal contradictions within capitalism would as surely terminate its existence as earlier in history feudalism had faltered and disappeared. 

On this point Marx wrote not in the tradition of English classical economics but rather out of his training in the metaphysics of the German philosopher G. W. F. Hegel. Hegel interpreted the movement of human history and thought as a progression of triads: thesis, antithesis, and synthesis. For example, a thesis might be a set of economic arrangements such as feudalism or capitalism. Its opposite or antithesis was, say, socialism as opposed to capitalism. The clash between thesis and antithesis evolved into the higher stage of synthesis-in this case communism, which unites capitalist technology with social public ownership of factories and farms. 

In the long run, Marx believed that capitalism was certain to falter because its tendency to concentrate income and wealth in ever fewer hands created more and more severe crises of excess output and rising unemployment. For Marx, capitalism's fatal contradiction was between improving technological efficiency and the lack of purchasing power to buy what was produced in ever larger quantities. 

According to Marx, the crises of capitalism were certain to manifest themselves in falling rates of profit, mounting hostility between workers and employers, and ever more severe depressions. The outcome of class welfare was fated to be revolution and progress toward, first, socialism and ultimately communism. In the first stage a strong state would still be required in order to eliminate the remnants of capitalist opposition. Each person's work would be rewarded according to the value of his or her contribution. Once communism was achieved, the state, whose central purpose was class domination, would wither away, and each individual would in the utopian future be compensated according to need. See COMMUNISM; SOCIALISM. 

The Neoclassicists. 
Classical economics proceeded from the assumption of scarcity, such as the law of diminishing returns and Malthusian population doctrine. Dating from the 1870s, neoclassicist economists such as William Stanley Jevons in Great Britain, Léon Walras (1834-1910) in France, and Karl Menger (1840-1921) in Austria shifted emphasis from limitations on supply to interpretations of consumer choice in psychological terms. Concentrating on the utility or satisfaction rendered by the last or marginal unit purchased, neoclassicists explained market prices not by reference to the differing quantities of human labor needed to produce assorted items, as in the theories of Ricardo and Marx, but rather according to the intensity of consumer preference for one more unit of any given commodity. 

The British economist Alfred Marshall, particularly in his masterly neoclassicist work Principles of Economics (1890), explained demand by the principle of marginal utility, and supply by the rule of marginal productivity (the cost of producing the last item of a given quantity). In competitive markets, consumer preferences for low prices of goods and seller preferences for high prices were adjusted to some mutually agreeable level. At any actual price, then, buyers were willing to purchase precisely the quantity of goods that sellers were prepared to offer. 

As in markets for consumer goods, this same reconciliation between supply and demand occurred in markets for money and human labor. In money markets, the interest rate matched borrowers with lenders. The borrowers expected to use their loans to earn profits larger than the interest they had to pay. Savers, for their part, demanded a price for postponing the enjoyment of their own money. A similar accommodation had to be made in wages paid for human labor. In competitive labor markets, wages actually paid represented at least the value to the employer of the output attributed to hours worked and at least acceptable compensation to the employee for the tedium and fatigue of the work. 

By implication, if not direct statement, the tendency of neoclassical doctrine has been politically conservative. Its advocates distinctly prefer competitive markets to government intervention and, at least until the Great Depression of the 1930s, insisted that the best public policies were echoes of Adam Smith: low taxes, thrift in public spending, and annually balanced budgets. Neoclassicists do not inquire into the origins of wealth. They explain disparities in income as well as wealth for the most part by parallel differences among human beings in talent, intelligence, energy, and ambition. Hence, men and women succeed or fail because of their individual attributes, not because they are either beneficiaries of special advantage or victims of special handicaps. In capitalist societies, neoclassical economics is the generally accepted textbook explanation of price and income determination. 

Keynesian Economics. 
John Maynard Keynes was a student of Alfred Marshall and an exponent of neoclassical economics until the 1930s. The Great Depression bewildered economists and politicians alike. The economists continued to hold, against mounting evidence to the contrary, that time and nature would restore prosperity if government refrained from manipulating the economy. Unfortunately, approved remedies simply did not work. In the U.S., Franklin D. Roosevelt's 1932 landslide presidential victory over Herbert Hoover attested to the political bankruptcy of laissez-faire policies. 

New explanations and fresh policies were urgently required; this was precisely what Keynes supplied. In his enduring work The General Theory of Employment, Interest, and Money, the central message translates into two powerful propositions. (1) Existing explanations of unemployment he declared to be nonsense: Neither high prices nor high wages could explain persistent depression and mass unemployment. (2) Instead, he proposed an alternative explanation of these phenomena focused on what he termed aggregate demand-that is, the total spending of consumers, business investors, and governmental bodies. When aggregate demand is low, he theorized, sales and jobs suffer; when it is high, all is well and prosperous. 

From these generalities flowed a powerful and comprehensive view of economic behavior-the basis of contemporary macroeconomics. Because consumers were limited in the amounts that they could spend by the size of their incomes, they could not be the source of the ups and downs of the business cycle . It followed that the dynamic forces were business investors and governments. In a recession or depression, the proper thing to do was either to enlarge private investment or create public substitutes for the shortfalls in private investment. In mild economic contractions, easy credit and low interest rates (monetary policy) might stimulate business investments and restore aggregate demand to a figure consistent with full employment. More severe contractions required the sterner remedy of deliberate budget deficits either in the form of spending on public works or subsidies to afflicted groups.

Mathematical Economics. 
Both neoclassical price theory and Keynesian income theory have been illustrated by the mathematics of calculus, linear algebra, and other sophisticated techniques. The most powerful and popular-if not necessarily the most successful-alliance of economics with mathematics and statistics occurs in the specialty called econometrics. Econometricians are model builders who link together hundreds or even thousands of equations that purport to explain the behavior of an entire economy. As forecasting tools, econometric models generally are used by both corporations and government departments, although their record of accuracy is neither better nor worse than that of alternative ways of looking into the future. 

Operations research and input-output analysis are two additional specialties in which economic analysis and higher mathematics operate in tandem. Operations research stresses a systems approach to problems. Typical puzzles involve coordinating the functions of a multiple-plant corporation, fabricating many products, and using equipment so as to minimize costs and maximize efficiency. Researchers make use of the expertise of engineers, economists, industrial psychologists, statisticians, and mathematicians. 

In the words of its inventor, the Russian-American economist Wassily Leontief, input-output analysis tables "describe the flow of goods and services between all the individual sectors of a national economy over a stated period of time." Although constructing such a table is a challenge, this method has had a major impact on economic thinking. It is now widely used in socialist as well as capitalist countries.