Adam Smith advanced the idea of Absolute Advantage Theory which refers to the ability of a party to

produce a particular good at a lower absolute cost than the other. He proposed two requirements in his
system: the market must be free from government intervention and competition must be in full range. He
believed that producers, in order to earn profit, provide right goods and services as a consequence of
market forces. Without government intervention, he further argued, a laissez faire environment is possible
where competition exists to cater for organized production to suit the public. Hence, an increase in public
well being is inevitable. He introduced the basis of the free market economy competition would benefit
both the producers and consumers. He concluded that the greater the competition, the greater the
producers profit. According to him, when there is competition, the prices of commodity tend to decrease
which result to more demands and thus would mean more profit.
David Ricardo is most remembered for his Theory of Comparative Advantage which explains how
trade can create value for both parties even when one can produce all goods, with fewer resources than
the other. He termed the net benefits of such an outcome as gain from trade . His basic definition of
comparative advantage is the ability of an individual, a firm or a country to produce a particular good or
service at a lower marginal cost and opportunity cost than another country. He contributed the doctrine of
fiscal equivalence which is an economic theory that suggests that the governments initiative to increase
debt-financed government spending for the purpose of stimulating demand do not actually affect the
demand due to the publics consciousness to save excess money for the payment of future tax increases
in lieu of the debt settlement. He established the Theory of Rent which is directly tied to the marginal
productivity of the land. The basis of this theory is his analogy that population growth equals more mouth
to feed, more mouth to feed equals the need for more grains and the need for more grains equals the
need for more land. This led to the view that an increase in food cost, salary and profit is an advantage for
the land owners while the case is otherwise for the capitalist. The Theory of Value which is tied directly
to labor cost is another Ricardian principle. It states an direct proportion between price of goods and the
natural price of labor. He claimed that labor like all other goods which are purchased and sold, or which
may increased or decreased in quantity, has its natural price and market price. The natural price of labor
is the price which is necessary to enable constant subsistence and perpetuation. Finally, he postulated
the Theory of Distribution which is inextricably linked to the theories of rent and value. He pointed out
that the return of the land is not constant as the amount of capital available does not equate to similar
growth rate, the land suffers from diminishing returns. The maximum level of economic rent results from
the marginal cultivation of the land
Thomas Malthus had two major contributions to the modern economic system: the population theory and
the theory of market gluts. The Population Theory had great in influence on both Charles Darwin and
Alfred Wallace as this theory led to the formulation of the theory of natural selection. The basis of this
theory is the assumption that the power of population supersedes the power of the earth to provide
subsistence for man. The argument that the passion between sexes is an inevitable phenomenon
projects dramatic growth in population which bring about shortage in food supply. However, population
can be controlled either naturally or by the aid of human measures. The natural factors are disease, food
shortage and death due to starvation while the human measures are infanticide, abortion, delay in
marriage and strict rules on celibacy. On condition that the population is uncontrolled, agricultural
production is on the increase to provide for over population and food shortage. In order to validate this
theory on moral grounds he maintains the thought that suffering is a way of making human beings realize
the virtues of hard work and moral behavior. He also noted that such kind of suffering due to over
population is an expected outcome. On the other hand, the Theory of Market Gluts is centered on the
factors of wealth and poverty, which gave light to the recognition of the key to the accumulation of capital
in the distribution of income. Gluts are consequences of a decline in profits brought about by insufficient
demand. The reason for such insufficiency is the disproportion in the income distribution. In view of this,

saving by capitalists results to demand reduction; consumption by landlords increases demand.

Therefore, a redistribution of income from landlords to capitalists precipitates crisis. In order to eliminate
gluts and promote economic growth Malthus advocates redistributing income to the renter and increasing
government spending. He believes that the capitalists produce more than they consume so that the
landlords can consume more than they produce.
John Stuart Mill wrote the Principles of Political Economy, which became the leading economic
textbook for forty years after it was written. He elaborated on the ideas of David Ricardo and Adam Smith.
He helped develop the ideas of economies of scale, opportunity cost and comparative advantage in trade.
Mills analysis is fundamentally grounded in his broader approach to economics the view that economic
activity is only a part of all activities or basically termed as Mills Economics . Firstly, Mill identified that
two forces: competition and custom, govern the distribution of income, and he criticized the orthodox line
of English economists for emphasizing the role of competition while almost completely neglecting the role
of custom. He pointed out that the operation of competition in the market economy is comparatively young
historical phenomenon and that, if we glance backward, we find that custom has traditionally played a
major role in solving the economic problems surrounding the distribution of income.
Karl Marx believes that the basic determining factor of human history is Economics. He advanced the
idea that exchanges of equal value for equal value is fundamental to an ideal economic system where the
amount of work put into whatever is being produced is the determinant of value. He absolutely disagreed
with capitalism which he described as profit motivated a desire to produce an uneven exchange of
lesser value for greater value. So his belief had a great influence on communism, where all the factors of
production and all the industries are owned and managed by the state. This is also known as command
economy, where private property ownership is not allowed. Economics, then, are what constitute the base
of all of human life and history generating division of labor, class struggle, and all the social institutions
which are supposed to maintain the status quo. Those social institutions are a superstructure built upon
the base of economics, totally dependent upon material and economic realities but nothing else. All of the
institutions which are prominent in our daily lives marriage, church, government, arts, etc. can only be
truly understood when examined in relation to economic forces.
Leon Walras biggest contribution in economics is the General Equilibrium Theory and he is also one
of the founders of the marginal revolution by postulating the idea of marginal utility. The general
equilibrium theory studies the fundamentals of supply and demand in an economy with multiple markets,
with the objective of proving that all prices are at equilibrium. This theory analyzes the mechanism by
which the choices of economic agents are coordinated across markets. It attempts to look at several
markets simultaneously rather than a single market in isolation. On the other hand, marginal utility is
defined as the additional satisfaction or benefit that a consumer derives from buying an additional unit of a
commodity or service. The concept implies that the utility or benefit to a consumer of an additional; unit of
a product is inversely related to the number of units of that product he already owns.
Alfred Marshalls main argument is that the economy is an evolutionary process in which technology,
market institutions and peoples preferences evolve along with peoples behavior. He introduced the idea
of 3 periods namely, Market Period, Short Period and Long Period, to understand how markets adjust to
changes in supply or demand over time. Market Period is the amount of time for which the stock or
commodity is fixed. Meanwhile, the time in which the supply can be increased by adding labor and other
inputs but not adding capital is known as Short Period. Lastly, Long Period means the amount of time

taken for capital to be increased. Marshalls basic approach to welfare economic still stands today. In his
most important book, Principles of Economics, he was able to quantify the buyers sensitivity to price.
He emphasized that the supply and demand determines the price output of a good: the two curves are
like scissor blades that intersect at equilibrium. This concept is otherwise known as Price Elasticity of
Demand. He proposed that the price is basically parallel for each unit of commodity that a consumer
buys, but the value to the consumer of each additional unit declines. In line with this he illustrated the
benefits of the consumer from market surplus. He termed these benefits as Consumer Surplus which is
equated as the size of the benefit equals the difference between the consumers value of all the units and
the amount paid for the units. In other words, the consumers pay less than the value of the good to
themselves. Lastly, he also introduced the concept of Producer Surplus which is the amount the producer
is actually paid minus the amount that he would willingly accept.
Thorstein Veblens greatest contribution to economics is the introduction of the concept, conspicuous
consumption. In his widely known book, The Theory of Leisure Class , he defined conspicuous
consumption as the consumption undertaken to make a statement to others about ones class or
accomplishments. He broadened the views of other economists regarding understanding the social and
cultural causes and effects of economic changes. He advocated the identification of the causes and
effects of shifting from one source of income to another.
John Meynard Keynes revolutionized the economists conceptions about economics. Keynes General
Theory of Employment, Interest and Money, for instance, introduced the notion of aggregate demand as
the sum of consumption, investment and government spending. His reason is that it is apparent that
maintenance of full employment mainly depends on the support of government spending. Although his
thought was not favored by economists he argued that his theory aim to stabilize wages. Moreover, his
insight was that a general cut of wages tends to decrease income, consumption and aggregate demands
which lead to positive contributions of lower price of labor. This theory advocated deficit spending during
economic downturns to maintain full employment. Keynes believed in monetarism or the quantity theory
of money. His major policy view was that the approach to uphold economic stability is to stabilize the price
level, and that to reach the possibility, there is a need for the governments central bank to lower the
interest rates when prices tend to rise and raise when prices tend to fall. In his eloquent book entitled,
The Economic Consequences of the Peace, he wrote an excellent economic analysis of reparations.
This book also contains an insightful analysis of the Council of Four (Georges Clemenceau of France,
Prime Minister David Lloyd George of Britain, President Woodrow Wilson of the United States, and
Vittorio Orlando of Italy). Keynes was one of the advocates of the postwar system of fixed exchange
rates.
Irving Fisher pioneered the construction and the use of price indexes. His own Index Number Institute
computed price indexes worldwide from 1923 to 1936. He also initiated the clear distinction between real
and nominal interest rates which is still the basic principle in modern economy. He pointed out that the
real interest rate is equal to the nominal interest rest minus the expected inflation rate. He was also a
founder or president of numerous associations and agencies including the Econometric Society and the
American Economic Association. Fisher advocated a more modern quantity theory of money which
functions reasonably well in assuming the consistency of economy. He formulated his theory in terms of
the equation of exchange, which says that MV = PT, where M equals the stock of money; V equals
velocity or the speed of money circulation in an economy; P equals the price level; and T equals the total
volume of transactions. Moreover, the contemporary economic models of interest are based on Fisherian
principles. For one, Fishers principle of money and prices conceptualized monetarism. He called interest
an index of a communitys preference for a dollar of present income over a dollar of future income. He
postulated that Interest rates result from the interaction of two forces: the time preference and the

Investment Opportunity Principle (the present income investment will yield more future income
investment). His Capital theory which states that the value of capital is the present value of the flow of
income that the asset generates is still widely held these days. His reasoning on consumption taxes to
replace conventional income taxation gave light to double taxation of savings, and clearly became an
insight to understand that this double taxation biases the tax code against saving and in favor of
consumption.