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“Read not to contradict and confute,

nor to believe and take for granted,

nor to find talk and discourses,

but to weigh and consider.”

 

 

Francis Bacon: Essays, ‘Of Studies’

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOBEL ECONOMISTS

Contents

Preface

Chapters;

Economic Framework

1. Economics and Nobel Economists

2. National Income; Methods and Analysis

Approaches to Economics

3. Econometrics

4. Economic History

5. Experimental Economics

Methods and Tools of Economics

6. General Equillibrium Theory

7. Linear Programming

8. Game Theory

Branches of Economics

9. Demand Theory

10. Theory of Markets

11. Monetary Economics

12. Public Finance and Welfare Economics

13. International Economics

14. Financial Economics

15. Information Economics

16. Behavioral Economics

17. Economic Growth and Development

NOBEL ECONOMISTS

PREFACE

 

It is a book on Economists, though titled as Nobel Economists. My book emphasizes the contributions of Noble Economists.

I hope my book serves as a supplement to the prescribed text books of Economics for P.G students of Business, commerce and Economics. Further this book might be of some interest to general readers also. If some students are induced to read some of the excellent text books and the original works of Nobel Economists, my effort would have been amply rewarded.

As usual with book writers, I have borrowed ideas and material from many books and I take this opportunity to thank all the authors and the publishers of the books.

I owe a deep debt of gratitude to my teachers,specially to Dr.D.N.Rao, Prof.B.S.Rao, Dr.Bhate, Prof.D.L.Narayana and Prof.Marvin Schars. I have been fortunate in having affectionate and friendly colleagues and well behaved students. My thanks to all of them.

I wish to express my homage to my parents Late.V.Appala Naidu Garu and Late Mrs. Kurmamma to whom I owe everything. I recall to memory the affection shown to me by my adoptive father V.Swamy Naidu and two other uncles V.Satyam Naidu and V.Venkata Naidu.The affectionate encouragement of my brothers Sri V.L.Naidu, V.Seetha Ram Naidu and sister Parvatamma has been a source of encouragement to me in the early stages of my life. Finally all my efforts received the silent approval of my wife Sarojini.

Chapter I

Economics and Nobel Economists

Adam Smith, the founder of Economics, wrote his Classic book, Wealth of Nations in 1776. The sub-title of his book, “An Enquiry into Nature and Causes of The Wealth of Nations” may be taken as Smith’s definition of Economics.      

Lionel Robbins provided in 1935 an analytical definition of Economics. According to him, “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses”. Samuelson in his widely read textbook Economics (first published in 1948 and 17th edition, co-authored with William Nordhus in 2001) defines Economics in terms of choice. According to him, “Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people”. Robert Mundell says that whenever alternatives exist, life takes on an economic aspect. Whenever decisions are made, the law of the economy is called into play. In short, Economics is the science of choice.

Douglas North approves of the choice definition, but he contends that the discipline neglects to explore the context within which choice occurs. North opines that we must understand the sources of human decision making and he advocates a new institutional Economics.

Friedman and others would like to restrict the scope of economics to Positive Economics, dealing with the issues of the functioning of the economic system while A.K.Sen and others want the scope of economics to be extended to Normative and ethical issues as well. Lucas and others want economics to be theory oriented while others like Akerloff want it to be more pragmatic. It is difficult to give a generally agreed definition of Economics which accommodates the divergent opinion among economists and which encapsulates the ever widening fields and sub-fields of Economics.

Economics has become eclectic. Economics is now defined neither by its subject matter nor by its method. The Economist, a prestigious weekly, defines Economics as follows: “Economics is what Economists do – the best of them, anyway”. The Nobel Economists, by and large, are the best among economists. This explains our writing of this book, Economics, using the contributions of Nobel Economists and their equals.

Nobel prizes have been given annually for Physics, Chemistry, Medicine, Literature and Peace, for more than one hundred years. The Nobel Economics Prize was instituted in 1969 by the Central Bank of Sweden. Since then, the Swedish Academy has been awarding the economics prize along with other prizes. The stated reason for institution of Economics Prize is to commemorate the tri- Centennial year of The Bank of Sweden. The real reason behind might be that the Bank of Sweden had realized the significance of Economics.

The wider significance of Economics especially of its practical application is recognized by the Nobel committee by awarding Nobel Peace Prize to Norman E. Borlaug in 1970 and the 2006 Nobel Peace Prize to Muhammad Yunus and to the Grameen Bank of Bangladesh. Borlaug helped to solve the world food problem and Muhammad Yunus helped the world’s poor through Grameena Bank Credit to them. The 2009 Noble Peace Prize is awarded to Barrack Obama for creating a new climate of peace in International Politics. He justly deserves the prize for another reason. By his bold fiscal stimulus policies, he averted the U.S. Economic disaster and helped indirectly to solve the world economic crisis of 2008. By helping to solve the pressing economic problems of the world, these individuals have promoted lasting peace in the world.

      Keynes recognized the significance of Economics much earlier. In his book, General Theory of Employment, Keynes states thus: “The Ideas of Economists and Political Philosophers, both when they are right and when they are wrong, are powerful than is commonly understood. Indeed, the world is ruled by little else.”

Economics, like all Sciences, need facts and theory. Economists collect facts and draw conclusions from them. If some needed facts or figures are not available, they are estimated by statistical (Econometric) methods. Economic theory is needed to prepare questions which we want to ask of the facts. Facts are collected on the basis of theoretical guidelines. After the collection of facts, they are arranged and analyzed so as to find answers to the questions raised’. Thus, Economics uses the deductive methods of Logic and Geometry in formulating Theory and inductive methods of statistical and empirical inference in Economic applications which includes Economic History.

Economics is discussed in this book under broad groups. They are: Economic Framework, Approaches to Economics, Methods and Tools of Economics, and Branches of Economics. The topics under each group are listed in the Contents. The topics are explained in one chapter each using the contributions of Nobel Economists. Names of Nobel Economists who have made significant contributions to the topic, figure in the chapter concerned.

The Nobel Economists have made important contributions not only to the areas listed in our classification, but also to other areas, such as Agricultural Economics, Demography, Energy, Ecology and Labor Economics. They have made forays into other disciplines such as Sociology, Psychology, Geography, Political Science, Ethics, Law and Philosophy. As the contributions of Noble Economists are vast, we are constrained to focus on one of their significant contributions only. It is not that their contribution is less in other areas but the one’s used are relevant to the topics discussed.

Many other eminent Economists (other than Nobel Economists) have made notable contributions to the areas classified and to other areas. The scope of Economics is vast and is expanding. There is Economics of war and Economics of Peace. There is Economics of poverty and there is Economics of Affluence. There is a Freakonomics too. StevenDLewitt collaroborated withStephenJ Dubner in writing the books Freakonomics and Super FreakonomicsThese books deal with everyday issues of modern world such as cheating corruption crime prostitution global warming-all hidden side of everthing As rightly noted by Robert Mundell “Economics seems to apply to every nook and cranny of human experience”.

It is said that Economics is not as precise as physics. A high degree precision is a characteristic feature of Physics. Earnest Rutherford, a noble prize winner in Physics, claimed that Science is Physics; everything else is not. Sciences differ in their degree of precision among them. To deny the label Science to others such as Economics is to falsify truth. Though Economic variables are difficult to measure, efforts have been made to measure them with adequate precision Economists have begun using systematically the experimental method in their investigations. In 2002 Nobel Prize is awarded to the pioneers in ‘Experimental Economics’, Danial Kahneman and Vernon Smith. Widespread use of Econometric methods is another step in the direction of making Economics a scientific one.

Economics, as discussed above uses many methods, several approaches, covers many areas and as integral links with many disciplines. Economics is an unique social science and indeed the queen of social sciences. Economics need not be as precise has physics. Prof. A.K. Sen rightly says that what Aristotle said of Political science applies equally well to Economics. Aristotle said that “the account of this science will be adequate if it achieves such clarity as the subject matter allows; for the same precision is not to be expected in all sciences”.

Economics too has become highly mathematical during the last half-century. There is a need to explain the advances made in economic theories and models to all – to non-mathematical professional economists, like this author, to students, lay readers and specially to policy makers – in an easy and lucid prose and in an engaging style.

Only a few policy makers like Dr. Manmohan Singh, Prime Minister of India can understand the esoteric language of the Economists. He belongs to the two cultures of top economists and top policy makers. Bridging the wide gap in communication between Economists and policy makers is a must. Otherwise, the rich contribution of Economists to knowledge become unused and remain in a limbo.