• Classical Economics • Georgism • Marginalism • Austrian School of Economics • Behavioral Economics • Mechanism Design Theory

1. Economic Thoughts Overview
in ‘Radical Markets’
Focusing on the History of Economic Thoughts
Jongseung Kim(deframing@gmail.com)
Director, SK telecom Blockchain Business Development Unit
2018. 10. 18

2. Outline
• Classical Economics
• Georgism
• Marginalism
• Austrian School of Economics
• Behavioral Economics
• Mechanism Design Theory
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3. Classical Economics
3
• Classical economics : Its main thinkers are held to be Adam Smith, Jean-Baptiste Say, David
Ricardo, Thomas Robert Malthus, and John Stuart Mill.
- These economists produced a theory of market economies as largely self-regulating systems, governed
by natural laws of production and exchange (famously captured by Adam Smith's metaphor of
the invisible hand).
- labor of its inhabitants, organized efficiently by the division of labour and the use of
accumulated capital, which became one of classical economics' central concepts.
- In terms of economic policy, the classical economists were pragmatic liberals, advocating the freedom
of the market, though they saw a role for the state in providing for the common good.
- Classical economists developed a theory of value, or price, to investigate economic dynamics. In
political economics, value usually refers to the value of exchange, which is separate from the price.
- Smith confined the labour theory of value to a mythical pre-capitalist past.

4. Georgism
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• Georgism : Georgism, also called geoism and single tax (archaic), is an economic philosophy holding
that, while people should own the value they produce themselves, economic value derived
from land should belong equally to all members of society.
- The Georgist paradigm seeks solutions to social and ecological problems, based on principles of land
rights and public finance which attempt to integrate economic efficiency with social justice.
- Georgism is concerned with the distribution of economic rent caused by natural
monopolies, pollution, and the control of commons, including title of ownership for natural
resources and other contrived privileges (e.g., intellectual property).
- Economists still generally favor a land value tax. Milton Friedman publicly endorsed the Georgist land
value tax as the "least bad tax". Joseph Stiglitz stated that: "Not only was Henry George correct that a
tax on land is non-distortionary, but in an equilibrium society … tax on land raises just enough revenue
to finance the (optimally chosen) level of government expenditure.”

5. Marginalism
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• William Stanley Jevons, Léon Walras, Karl Menger
- Marginalism as a formal theory can be attributed to the work of three economists, Jevons in
England, Menger in Austria, and Walras in Switzerland.
- William Stanley Jevons first proposed the theory in articles in 1863 and 1871. “Property is only another
name for monopoly.”
- Carl Menger presented the theory in 1871. Menger explained why individuals use marginal utility to
decide amongst trade-offs, but while his illustrative examples present utility as quantified, his essential
assumptions do not.
- Léon Walras introduced the theory in Éléments d'économie politique pure, the first part of which was
published in 1874. He wanted landed property to be controlled by society through a process of
competition and wanted returns on that property to be enjoyed by society.

6. Austrian School of Economics
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• First Wave : Carl Menger, Eugen Böhm von Bawerk, Friedrich von Wieser
- The Austrian School was one of three founding currents of the marginalist revolution of the 1870s.
- While marginalism was generally influential, there was also a more specific school that began to
coalesce around Menger's work, which came to be known as the "Psychological School", "Vienna
School", or "Austrian School”.
• Early 20th century : Frank Albert Fetter, Ludwig von Mises, Karl Menger
- Several important Austrian economists trained at the University of Vienna in the 1920s and later
participated in private seminars held by Ludwig von Mises.
• Later 20th century : Israel Kirzner, Ludwig Lachmann, Murray Rothbard
- Political individualism : only when individuals are given full economic freedom will it be possible to
secure political and moral freedom.

7. Behavioral Economics
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• Behavioral Economics : It studies the effects of psychological, cognitive, emotional, cultural and social
factors on the economic decisions of individuals and institutions and how those decisions vary from
those implied by classical theory.
- Behavioral economics is primarily concerned with the bounds of rationality of economic agents.
- Behavioral models integrate insights from psychology, neuroscience and microeconomic theory.
- The study of behavioral economics includes how market decisions are made and the mechanisms that
drive public choice.
• Behavioral Finance : The central issue in behavioral finance is explaining why market participants make
irrational systematic errors contrary to assumption of rational market participants.
- Behavioral finance highlights inefficiencies, such as under- or over-reactions to information, as causes
of market trends and, in extreme cases, of bubbles and crashes.

8. Mechanism Design Theory
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• Mechanism Design : Mechanism design is a field in economics and game theory that takes
an engineering approach to designing economic mechanisms or incentives, toward desired objectives,
in strategic settings, where players act rationally.
- Because it starts at the end of the game, then goes backwards, it is also called reverse game theory. It
has broad applications, from economics and politics (markets, auctions, voting procedures) to
networked-systems (internet inter-domain routing, sponsored search auctions).
- Mechanism design studies solution concepts for a class of private-information games. Leonid
Hurwicz explains that 'in a design problem, the goal function is the main "given", while the mechanism
is the unknown. Therefore, the design problem is the "inverse" of traditional economic theory, which is
typically devoted to the analysis of the performance of a given mechanism.
- The 2007 Nobel Memorial Prize in Economic Sciences was awarded to Leonid Hurwicz, Eric Maskin,
and Roger Myerson "for having laid the foundations of mechanism design theory”.

9. Adam Smith (16 June 1723 – 17 July 1790)
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• [The Theory of Moral Sentiments]
- Smith suggests that conscience arises from dynamic and interactive social relationships through which
people seek ‘mutual sympathy of sentiments’.
- A theory of sympathy : The act of observing others and seeing the judgements they form of both others
and oneself makes people aware of themselves and how others perceive their behaviour.
• [The Wealth of Nations]
- “By directing that industry in such a manner as its produce may be of the greatest value, he intends only
his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end
which was no part of his intention.”
- By pursuing his own interest he frequently promotes that of the society more effectually than when he
really intends to promote it.

10. John Stuart Mill (20 May 1806 – 8 May 1873)
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• [On Liberty]
- “The only purpose for which power can be rightfully exercised over any member of a civilized
community, against his will, is to prevent harm to others.”
• [Principles of Political Economy]
- Mill's early economic philosophy was one of free markets.
- However, he accepted interventions in the economy, such as a tax on alcohol, if there were
sufficient utilitarian grounds.
- He also accepted the principle of legislative intervention for the purpose of animal welfare.
- Mill originally believed that "equality of taxation" meant "equality of sacrifice" and that progressive
taxation penalised those who worked harder and saved more and was therefore "a mild form of
robbery”.

11. Henry George (2 September 1839 – 29 October 1897)
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• [Progress and Poverty]
- "We must make land common property.”
- Georgism("single-tax" movement) : By taxing land values, society could recapture the value of its
common inheritance, raise wages, improve land use, and eliminate the need for taxes on productive
activity.
- George believed it would remove existing incentives toward land speculation and encourage
development, as landlords would not suffer tax penalties for any industry or edifice constructed on their
land and could not profit by holding valuable sites vacant.
• Intellectual property reform : George was opposed to or suspicious of all intellectual property privilege,
because his classical definition of "land" included "all natural forces and opportunities." Therefore,
George proposed to abolish or greatly limit intellectual property privilege.

12. Oskar R. Lange (27 July 1904 – 2 October 1965)
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• [On the Economic Theory of Socialism]
- Lange advocated the use of market tools in economic planning of socialism and Marxism.
- He proposed that central planning boards set prices through "trial and error", making adjustments as
shortages and surpluses occur rather than relying on a free price mechanism.
- Under this system, central planners would arbitrarily pick a price for products manufactured in
government factories and raise it or reduce, depending on whether it resulted in shortages or gluts.
After this economic experiment had been run a few times, mathematical methods would be employed
to plan the economy.
- With the utilization of this idea, Lange claimed, a state-run economy would be at least as efficient as a
capitalist or private market economy.
- Lange's argument was one of the pivots of the socialist calculation debate with the Austrian
School economists.

13. Ludwig von Mises (29 September 1881 – 10 October 1973)
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• [Human Action]
- Mises adopted praxeology as a general conceptual foundation of the social sciences and set forth his
methodological approach to economics.
- Mises sees economic calculation as the most fundamental problem in economics.
- Human action is an application of human reason to select the best means of satisfying ends. The
reasoning mind evaluates and grades different options. This is economic calculation.
- Human action concerns dynamics. Mises explains dynamic change in terms of "the plain state of rest."
A final state of rest involves perfect plans to fully satisfy human desires. A plain state of rest is a
temporary and imperfect equilibrium deriving from past human plans.
- The close association that Mises draws between economic calculation and monetary calculation leads
him to conclude that market prices are indispensable to progress in bettering the human condition.
Without markets there are no prices, and without prices there is no economic calculation.

14. Friedrich Hayek (8 May 1899 – 23 March 1992)
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• The business cycle : Hayek's principal investigations in economics concerned capital, money and the
business cycle. “The business cycle resulted from the central bank's inflationary credit expansion and its
transmission over time, leading to a capital misallocation caused by the artificially low interest rates.”
• The economic calculation problem : Hayek argued that while in centrally planned economies an
individual or a select group of individuals must determine the distribution of resources, these planners
will never have enough information to carry out this allocation reliably.
• Spontaneous order : Hayek viewed the free price system not as a conscious invention (that which is
intentionally designed by man), but as spontaneous order.
- Like the market, ecosystems contain complex networks of information, involve an ongoing dynamic
process, contain orders within orders and the entire system operates without being directed by a
conscious mind.

15. Milton Friedman (31 July 1912 – 16 November 2006)
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• [Capitalism and Freedom]
- Friedman talks about the need to move to a classically liberal society, that free markets would help
nations and individuals in the long-run and fix the efficiency problems currently faced by the United
States and other major countries of the 1950s and 1960s.
- He recounts how the best of a country's abilities come from its free markets while its failures come
from government intervention.
• QTM(Quantity Theory of Money) / Monetarism
- He maintained that there is a close and stable association between inflation and the money supply,
mainly that inflation could be avoided with proper regulation of the monetary base's growth rate.
- He famously used the analogy of ‘dropping money out of a helicopter’, in order to avoid dealing with
money injection mechanisms and other factors that would overcomplicate his models.

16. Ronald Coase (29 December 1910 – 2 September 2013)
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• [The Nature of the Firm]
- Coase noted, a number of transaction costs involved in using the market; the cost of obtaining a good or
service via the market actually exceeds the price of the good.
- “The size of a firm (as measured by how many contractual relations are "internal" to the firm and how
many "external") is a result of finding an optimal balance between the competing tendencies of the
costs outlined above. making the firm larger will initially be advantageous, but the decreasing returns
indicated above will eventually kick in, preventing the firm from growing indefinitely.”
• [The Problem of Social Cost]
- With sufficient transaction costs, initial property rights matter for both equity and efficiency. From the
point of view of economic efficiency, property rights should be assigned such that the owner of the
rights wants to take the economically efficient action.

17. George Stigler (17 January 1911 – 1 December 1991)
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• [The Theory of Price]
- George Stigler promoted the “Coase Theorem” as a justification for the simplistic idea that private
bargaining that takes place under any set of strong and clearly defined property rights will usually lead
to efficient outcomes.
- This misinterpretation assumes away the monopoly problem, implying the superiority of private
property because it enhances investment efficiency.
• [The Theory of Economic Regulation]
- Stigler is best known for developing ‘the Economic Theory of Regulation’, also known as ‘capture’,
which says that interest groups and other political participants will use the regulatory and coercive
powers of government to shape laws and regulations in a way that is beneficial to them.

18. William Vickrey (21 June 1914 – 11 October 1996)
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• [Counterspeculation, Auctions, and Competitive Sealed Tenders]
- Vickrey was the first to use the tools of game theory to explain the dynamics of auctions.(1961)
- Bidders submit written bids without knowing the bid of the other people in the auction.
- The highest bidder wins but the price paid is the second-highest bid.
• Vickrey’s paper was the first to study the power of auctions to solve major social problems, helped found
a field of economics called “mechanism design”, and earned him the Nobel Prize in 1996.
• Vickrey’s ideas have transformed economic theory and had an impact on policy. Governments around
the world use auctions based on Vickrey’s ideas to sell licenses to use radio spectrum.
• He was sharply critical of the Chicago school of economics and was vocal in opposing the political focus
on achieving balanced budgets and fighting inflation, especially in times of high unemployment.

19. Kenneth Arrow (23 August 1921 – 21 February 2017)
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• [ Social Choice and Individual Values]
- “If we exclude the possibility of interpersonal comparisons of utility, then the only methods of passing
from individual tastes to social preferences which will be satisfactory and which will be defined for a
wide range of sets of individual orderings are either imposed or dictatorial.”
• Arrow's impossibility theorem : Arrow theorized that it was impossible to formulate a social preference
ordering that satisfies all of the following conditions.
- Nondictatorship
- Individual Sovereignty
- Unanimity
- Independence of Irrelevant Alternatives
- Uniqueness of Group Rank

20. Richard Thaler (12 September 1945 – Now)
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• Endowment Effect : In psychology and behavioral economics, the endowment effect (also known
as divestiture aversion and related to the mere ownership effect in social psychology) is the hypothesis
that people ascribe more value to things merely because they own them.
- Thaler found that people’s minimum willingness to pay to buy an object is usually lower that their
minimum willingness to accept to part with it, even if they have never actually touched or used it.
- In an exchange paradigm, people given a good are reluctant to trade it for another good of similar
value.
- Even just owning an object in the abstract seems to make a person value it more.
- The endowment effect seems to be a characteristic of people who lack the time and ability to navigate
the complex pricing decisions required in a market society.

21. Roger Myerson (29 March 1951 – Now)
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• [Efficient Mechanism for Bilateral Trading]
- Roger Myerson and Mark Satterthwaite used Vickrey’s ideas to deepen Jevons and Walras’s insight
about the monopolistic nature of property.
- They showed mathematically that the simplistic interpretation of Coase’s results will never hold except
in the unusual case that the buyer and seller are both absolutely certain that the buyer values the asset
more than the seller does.
- “We consider bargaining problems between one buyer and one seller for a single object. The seller’s
valuation and the buyer’s valuation for the object are assumed to be independent random variables, and
each individual’s valuation is unknown to the other. We characterize the set of allocation mechanisms
that are Bayesian incentive compatible and individually rational, and show the general impossibility of
ex post efficient mechanisms without outside subsidies.”

22. References
• Eric A. Posner & E. Glen Weyl, <Radical Markets> Princeton University Press, 2018
• https://en.wikipedia.org/wiki/Classical_economics
• https://en.wikipedia.org/wiki/Georgism
• https://en.wikipedia.org/wiki/Marginalism
• https://en.wikipedia.org/wiki/Austrian_School
• https://en.wikipedia.org/wiki/Behavioral_economics
• https://en.wikipedia.org/wiki/Mechanism_design
• https://en.wikipedia.org/wiki/Adam_Smith
• https://en.wikipedia.org/wiki/John_Stuart_Mill
• https://en.wikipedia.org/wiki/Henry_George
• https://en.wikipedia.org/wiki/Oskar_R._Lange
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23. References
• https://en.wikipedia.org/wiki/Ludwig_von_Mises
• https://en.wikipedia.org/wiki/Friedrich_Hayek
• https://en.wikipedia.org/wiki/Milton_Friedman
• https://en.wikipedia.org/wiki/Ronald_Coase
• https://en.wikipedia.org/wiki/George_Stigler
• https://en.wikipedia.org/wiki/William_Vickrey
• https://en.wikipedia.org/wiki/Kenneth_Arrow
• https://en.wikipedia.org/wiki/Richard_Thaler
• https://en.wikipedia.org/wiki/Roger_Myerson
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