---
title: "History of economic thought"
chunk: 12/18
source: "https://en.wikipedia.org/wiki/History_of_economic_thought"
category: "reference"
tags: "science, encyclopedia"
date_saved: "2026-05-05T03:59:30.681827+00:00"
instance: "kb-cron"
---

In 1920 Alfred Marshall's student Arthur Cecil Pigou (1877–1959) published Wealth and Welfare, which insisted on the possibility of market failures, claiming that markets are inefficient in the case of economic externalities, and the state must interfere to prevent them. However, Pigou retained free market beliefs, and in 1933, in the face of the economic crisis, he explained in The Theory of Unemployment that the excessive intervention of the state in the labor market was the real cause of massive unemployment because the governments had established a minimal wage, which prevented wages from adjusting automatically.  This was to be the focus of attack from Keynes.  In 1943 Pigou published the paper The Classical Stationary State, which popularized the Pigou (Real Balance) Effect, the stimulation of output and employment during deflation by increasing consumption due to a rise in wealth.

=== Market socialism ===

In response to the Economic Calculation Problem proposed by the Austrian School of Economics that disputes the efficiency of a state-run economy, the theory of Market Socialism was developed in the late 1920s and 1930s by economists Fred M. Taylor (1855–1932), Oskar R. Lange (1904–1965), Abba Lerner (1903–1982) et al., combining Marxian economics with neoclassical economics after dumping the labor theory of value. In 1938 Abram Bergson (1914–2003) defined the Social Welfare Function.

=== The Stockholm school of economics ===

In the 1930s the Stockholm School of Economics was founded by Eli Heckscher (1879–1952), Bertil Ohlin (1899–1977), Gunnar Myrdal (1898–1987) et al. based on the works of John Maynard Keynes and Knut Wicksell (1851–1926), advising the founders of the Swedish Socialist welfare state.
In 1933 Ohlin and Heckscher proposed the Heckscher-Ohlin Model of International Trade, which claims that countries will export products that use their abundant and cheap factors of production and import products that use their scarce factors of production. In 1977 Ohlin was awarded a share of the Nobel Economics Prize.
In 1957 Myrdal published his theory of Circular Cumulative Causation, in which a change in one institution ripples through others.  In 1974 he received a share of the Nobel Economics Prize.

=== French Regulation school ===
This school includes economists like Michel Aglietta (1938), André Orléan (1950), Robert Boyer (1943), Benjamin Coriat (1948) and Alain Lipietz (1947). It is one of the two heterodox schools in France, the other being l'école des conventions. Their interests revolves around accounting for the regime of regulation of specific historic stage of capitalism. They have mainly analysed the fordist mode of regulation, who corresponds to the after war period. Production as organised scientifically and products were not diversified. This corresponds with a homogenous consumption of goods. The economy was production led, where firms first produce the optimal amount of a type of good in the cheapest manner possible, destined to be mass consumed. Their inquiry consists of explaining how a stable mode of regulation can emerge in a capitalist economy, which inherently contains crises. Whereas orthodox economists tend to explain the causes of crises and disequilibriums in a supposedly self-regulating economy.

=== The American Economic Association ===

In 1885 the American Economic Association (AEA) was founded by Richard T. Ely (1854–1943) et al., publishing the American Economic Review starting in 1911. In 1918 Ely published Private Colonization of Land, founding Lambda Alpha International in 1930 to promote Land Economics.

== Keynesianism (20th century) ==

John Maynard Keynes (1883–1946) was born in Cambridge, educated at Eton, and supervised by both A. C. Pigou and Alfred Marshall at Cambridge University. He began his career as a lecturer before working for the British government during the Great War, rising to be the British government's financial representative at the Versailles Conference, where he profoundly disagreed with the decisions made.  His observations were laid out in his book The Economic Consequences of the Peace (1919), where he documented his outrage at the collapse of American adherence to the Fourteen Points and the mood of vindictiveness that prevailed towards Germany. He resigned from the conference, using extensive economic data provided by the conference records to argue that if the victors forced war reparations to be paid by the defeated Central Powers, then a world financial crisis would ensue, leading to  World War II. Keynes finished his treatise by advocating, first, a reduction in reparation payments by Germany to a realistically manageable level, increased intra-governmental management of continental coal production and a free trade union through the League of Nations; second, an arrangement to set off debt repayments between the Allied countries; third, complete reform of international currency exchange and an international loan fund; and fourth, a reconciliation of trade relations with Russia and Eastern Europe.
The book was an enormous success, and though it was criticized for false predictions by a number of people, without the changes he advocated, Keynes's dark forecasts matched the world's experience through the Great Depression which began in 1929, and the descent into World War II in 1939.  World War I had been touted as the "war to end all wars", and the absolute failure of the peace settlement generated an even greater determination to not repeat the same mistakes.  With the defeat of Fascism, the Bretton Woods Conference was held in July 1944 to establish a new economic order, in which Keynes was again to play a leading role.

=== The General Theory ===