Karl Marx's Theories
Key Figures
● Karl Marx (1818-1883): German philosopher, economist, and revolutionary; co-author of
"The Communist Manifesto" (1848) and author of "Das Kapital" (1867).
Main Concepts
1. Historical Materialism: Economic conditions, not ideas, drive societal change. History is
shaped by class struggles.
2. Theory of Alienation:
○ Workers are alienated from the products of their labor, the production process,
themselves, and fellow workers under capitalism.
3. Labor Theory of Value: The value of goods is determined by the labor required to
produce them. Capitalists exploit workers by appropriating surplus value.
4. Class Struggle: Society is divided into the bourgeoisie (capitalists) and the proletariat
(workers). Capitalism will eventually be replaced by socialism and communism.
Key Works
● "The Communist Manifesto" (1848): Advocates for the overthrow of capitalist systems
and the rise of socialism.
● "Das Kapital" (1867): Analyzes the capitalist mode of production, surplus value, and
exploitation.
Criticisms and Legacy
● Marx predicted monopolies and economic crises under capitalism. While some
predictions didn’t materialize, his work influenced modern sociology, economics, and
political thought.
Summary
● Austrian Economics focuses on individual decision-making and spontaneous market
order, emphasizing subjective value and deductive logic.
● Keynesian Economics advocates for government intervention to stabilize demand and
counter economic downturns, particularly in the short term.
● Marxian Theory critiques capitalism, highlighting class struggles, alienation, and labor
exploitation while envisioning a transition to socialism and communism.
introduction to Marginalism
Marginalism is the idea that decisions and behavior in economics are based on small,
incremental changes rather than big, categorical ones.
Key Concepts of Marginalism
1. Law of Diminishing Returns
Increasing one input (e.g., labor) while keeping others constant will eventually lead to
smaller output gains.
2. Marginal Utility
Measures the added satisfaction (utility) from consuming one more unit of a good or
service.
3. Marginal Cost
The additional cost incurred from producing one more unit of a good or service.
4. Marginal Benefit
The maximum amount a consumer is willing to pay for one additional unit of a good or
service.
Prominent Economists and Their Contributions
1. Alfred Marshall (1842–1924)
Known for foundational ideas in microeconomics and welfare economics.
Key works:
Elasticity of Demand: Measures how quantity demanded changes with price changes.
Consumer Surplus: The extra benefit consumers get from paying less than they are willing
to.
Supply and Demand Analysis: Explains market equilibrium.
2. William Stanley Jevons (1835–1882)
One of the founders of marginalist economics.
Key idea: Marginal Utility determines a good's value based on the satisfaction from
consuming additional units.
3. Carl Menger (1840–1921)
Founder of the Austrian School of Economics.
Key contributions:
Subjective Value Theory: Goods are valued based on how individuals use them.
Explained how money originates naturally in markets, not just by government mandate.
4. Vilfredo Pareto (1848–1923)
Father of modern sociology and contributor to economics.
Key ideas:
Pareto Principle (80/20 Rule): A small portion of causes often leads to a large portion of
effects Theory of Elites: Explored how power and wealth circulate among societal elites.
5. Léon Walras (1834–1910)
Developed the General Equilibrium Theory, using equations to show how markets balance
supply and demand.
Introduced “Tâtonnement” (trial-and-error process) to reach market equilibrium.
6. Johan Gustaf Knut Wicksell (1851–1926)
Known for the Wicksell Effect, analyzing capital and price changes.
Studied interest rates and their impact on economic equilibrium.
7. Irving Fisher (1867–1947)
Developed the Fisher Effect, linking inflation to nominal and real interest rates.
Introduced the Fisher Equation, explaining how interest rates adjust under inflation.
Quick Summary of Key Terms
Marginalism: Focus on small changes.
Law of Diminishing Returns: Adding more of one input decreases its effectiveness.
Marginal Utility: Extra satisfaction from one more unit consumed.Marginal Cost: Extra cost
of producing one more unit.
Marginal Benefit: Willingness to pay for one more unit.
Austrian Economics
Key Figures
● Carl Menger (1840-1921): Known as the father of Austrian Economics and author of
"Principles of Economics" (1871), a foundational work for the marginalism revolution.
● Friedrich Hayek (1899-1992): Proponent of classical liberalism, free-market capitalism,
and author of "The Road to Serfdom" (1944). He won the 1974 Nobel Prize for
explaining how price changes convey information.
Main Concepts
1. Subjective Value: The value of goods and services depends on individual preferences.
This concept explains diminishing marginal utility—the idea that the value of additional
units of a good decreases with consumption.
2. Market Mechanism: Markets evolve through individual actions rather than central
design.
3. Capital Goods: Not homogeneous; machinery and tools differ in purpose and cannot be
perfectly substituted.
4. Effect of Inflation: Increasing the money supply without a corresponding rise in goods
and services leads to uneven price increases.
Methodological Debate
● Austrian economists emphasized deductive reasoning and individual actions (Carl
Menger), contrasting with German historical economists' focus on empirical data (Gustav
von Schmoller).
Impact on Modern Economics
● Austrian economics influences discussions on supply and demand, money creation, and
inflation. Hayek’s "spontaneous order" theory highlighted how institutions like markets
and laws arise naturally.
Keynesian Economics
Key Figures
● John Maynard Keynes (1883-1946): Known as the father of Keynesian economics and
author of "The General Theory of Employment, Interest, and Money" (1936).
Main Concepts
1. Demand-Driven Economy: Aggregate demand (sum of household, business, and
government spending) is the primary driver of economic performance.
2. Government Intervention: During recessions, governments should increase spending
and lower taxes to stimulate demand.
3. Multiplier Effect: Investment changes have amplified effects on output and
employment.
4. Liquidity Preference: People's preference for holding money affects interest rates and
economic activity.
Key Works
● "A Tract on Monetary Reform" (1923): Advocated for monetary policy reforms.
● "The General Theory" (1936): Shifted focus from microeconomics to macroeconomics,
emphasizing the role of aggregate demand in economic stability.
Differences from Classical Economics
● Classical: Free markets are self-regulating and focus on long-term growth.
● Keynesian: Emphasizes short-term fluctuations and government intervention.
Impact of the Great Depression
● The Great Depression highlighted the need for active policies to stabilize economies,
which led to the adoption of Keynesian principles.
