Essay:Greatest economists of all time

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I decided to write this essay for a few reasons. First, because I don’t think I’ll have enough time to make deep research that sometimes take months.[note 1] Second, I want to test my own knowledge on economic history and history of the economic thought. Third, because writing stuff is fun, and something that I miss.

Is this a “fanboy” list? I hope it isn’t. There is some objectivity here: I’m not showing my own biases in this page, nor ranking my favorite economists. If I did that, the list would be entirely different. I’m using the best criterion I could found. The rank here is based on which economists influenced more the economic science (though I admit I’m using just my perception of which authors influenced more the current status of economics). That means that 1: political influence is not relevant here and 2: their mistakes are not being being considered. We’ll nonetheless talk about the political work and the mistakes of some of the names here.

One last thing that I should mention is that I’ll link to pages on the main space, so I won’t have to write again about the contributions of each economist. It is possible, therefore, that the main pages will be very different depending on when you are reading this.

I hope I can updade this page every dayand finish the list within a month.

The list[edit]

30 Vernon Smith[edit]

The economist Vernon Smith launched a revolution in economics in the 1950s by testing the supply and demand model. He took a group of students and broke them into two groups: buyers and sellers. His test worked. The influence of this experiment is twofold: first, it of course provided empirical evidence that the equilibrium is real. Second, and perhaps even more important, it basically created the field of experimental economics, showing that at least to some extent social sciences could be tested in a lab, making the invisible hand more visible.

Smith is a radical libertarian and has even denied the existence of marker failures. I find this position absurd at this day and age. Still, his influence on economics is undeniable, and we can ignore this part of his career just to enjoy the best he has to offer.

29 Daniel Kahneman[edit]

The next name on the list shared his Nobel Prize with Smith and has many different opinions from his colleague. If Smith believe that people are almost always rational, Kahneman showed that this might not be the case, thus creating what is now called “behavioral economics” and putting the concept of homo economicus is disarray.

I must admit I’m not familiar enough with behavioral economics to talk a lot about Kahneman, but I know it’s important enough to be here, and I am capable of at least giving an overview on his opinions and research. First, we lack at least some self-control. Most, if not all of us have, at some point of our lives, eaten, drunk, or spent too much, and exercised, studied, saved, or worked way too little. Second, individuals tend, according to Kahneman, prefer a situation with less uncertainty even if it means sacrificing some potential financial gain (loss aversion). As a result, people tend to invest less, because they believe that losing money is worse than earning it.

Behavioral economics is still subject to controversy, and some people find its premises and empirical evidence wanting. It’s been around for quite some time, so it’s unlikely to be as influential as the rational expectations theories. But at least it’s something that people have to take serious.

28 Amartya Sen[edit]

As much as I hate to admit, this list is made almost entirely by white old men (although most similar lists in other areas of knowledge would probably face the same problem). Being born in India and being capable of remember the Great Bengal Famine of 1943, Amartya Sen, one of the fathers of the Human Development Index, is pretty old, but he’s the only person on the list that is not white.

My favorite contribution of Sen is his brilliant insight that famines are a result of policies and politics, not simply weather. As he eloquently puts, a large-scale famine never happened in a democratic, independent nation. Why? Because famines are unpopular, and governments that face famine lose elections. Meanwhile, dictators often have little to lose if their countries are starving, so they don’t act nor change their policies.

Sen is a philosopher as much as he is an economist, and he used both disciplines in his research. One example are his studies on capability approach, a framework that he developed to argue that what matters is not just the resources individuals have, but “the ability to achieve the kind of lives we have reason to value”. One of the most empathetic figures of this list, he is also one of the few economists that reject utilitarianism. While being as far from socialism as he is from libertarianism, he still sees free markets as part of the human natural behavior. On one occasion, he wrote that abolishing markets is akin to prohibit people from talking to each other. In his book Development as Freedom, Sen said that markets are part of individual liberty, and even if a computer or a group of people could allocate resources as good as the market does, markets would still be morally superior to any form of socialism, as they reflect the human decisions. His views are complicated, and I believe that, in the future, people will remember him more than many others in this list.

27 George Akerlof[edit]

Being born in 1940, Akerlof is the youngest person of this list, which says a lot. He’s also married to Janet Yellen, someone that you may know better than him, but since this list is not about political influence, she’s not here. Akerlof is one of the fathers of the New Keynesian school, and the fact that he wrote his most important work in the 1970, when Keynesian economics was about to be ravaged, makes his influence even more impressive.[note 2]

Economist quickly internalized the Hayekian idea that governments don’t have enough information. But do markets always have enough information? Many economists thought that yes, they had. Akerlof disagreed – and he proved them wrong with this famous article The Market for Lemons. It is very short, and mostly written in prose, being therefore far more readable than most the articles in economics.

In The Market for Lemons, Akerlof gave a great answer for a very good question. Why are cars that are barely a few months old sold for well below their new-car prices? To illustrate Akerlof’s answer, let's suppose that are two kinds of people selling their cars: those who have been careful with their cars and those who have been careless. The seller who took more care of the car wants a greater return, and the other is willing to receive less. In other words, the willingness to receive payment for the car will be different between the two sellers. But on the other side we have an uninformed consumer who doesn't know who is who, in what is called asymmetric information.

If buyers knew which cars are in good shape and which are not, the result would be two different markets, one for good and one for bad cars. But here is the catch: most buyers cannot tell which cars are good. They know, however, that there is some probability that the car they buy will be a low-quality car. As a result, they are willing to pay less than they would pay if they were certain that they were buying a high-quality car. Such lower price for all used cars discourages sellers of high-quality cars, a phenomenon called adverse selection. Thus, exchanges that could benefit both sides on the transaction don’t happen and the market fails.

Akerlof’s insight poses a major challenge for the efficient market hypothesis and his conclusions can be applied to many other sectors of the economy, like the insurance services, the capital market and the labor market. The Market for Lemons was initially rejected three times, including by the American Economic Review because people thought that, if Akerlof was right, the market wouldn’t exist, and since millions of used cars are sold every year, there was probably something wrong with his theory. Turns out that the market itself has some forms of fighting back asymmetric information (something that Akerlof acknowledged), and government regulation also prevents some of the worst outcomes. But the problem still exists, and it’s still widely regarded as one of the most important failures of the market economy.

Some may question: how about Joseph Stiglitz? He made similar research around the same time and won the Nobel Prize on the same year as Akerlof. Why isn’t he here? Well, if the list was a tad longer (say, 35 names) I’d put him here too. Since he is higher on RePEc and Google Scholar than Akerlof, maybe he should in fact be here. He is also a much more versatile and prolific economist than Akerlof (I especially love his book Whither Socialism?). But much of his work is political (and of questionable quality). There is some economics in some of his most famous books, like Globalization and its discontents and The Price of Inequality, but just like The Road to Serfdom they are political works. Additionally, Akerlof does have other contributions too, like the concepts of menu costs and identity economics. But more importantly, when it comes to the impact of the economics of information, I think that he was more important than Stiglitz, even if by a small margin, and most textbooks I’ve checked teach this problem based on his study. I hope this is enough to at least explain why Stiglitz is not here.

26 James Buchanan[edit]

If the mainstream economic theory is so awesome as you believe, what is wrong with the world, Gee?James M. Buchanan,[note 3] the man that put political economy on the map again, perhaps found the answer.

Buchanan was the greatest name of the public choice theory, or “politics without romance”, the branch of economics and political science that deals with the way that governments make choices and direct the economy. He analyzed the incentives that politicians have and introduced the concept of government failures, pointing out issues such as the short time horizons of elected representatives, the lack of a hard budget constraint and the role of money in financing elections.

When we study consumer behavior, we assume that a consumer buys the goods and services that gives him the greatest level of satisfaction. What should we assume when we study the behavior of bureaucrats and politicians then? Politicians, Buchanan argued, are people, just like you. They aren’t omnibenevolent beings that always look out for the progress of society. They are self-interested individuals, and their main objective is often not losing their job (i.e. Getting elected and re-elected). Just like many businessmen don’t care if their companies are polluting or producing any form of negative externality, most politicians are willing to sacrifice the national interest to in order to get more voters. [note 4] Take for instance the agriculture subsidies and trade barriers in the US. They cost a lot to the voters, but they are still rock-solid in the government budget. Why? Because of political interests. Some groups are good at lobbying and make you pay for their privileges. To make matters worse, most voters just don’t care or aren’t well-informed about those issues. We can’t blame them: acquiring information about a certain public policy takes time, can be boring and sometimes even expensive, and even if it wasn’t the case, knowing the good and bad about every policy is impossible. Another example of Buchanan’s theory: why is it so hard to cut spending, but so easy to lower taxation? Because one policy is popular, while the other isn’t. These are, according to Buchanan, the main reason why economic policies fail to resemble the ideals derived in economics textbooks so often. Buchanan also continues a tradition that goes all the way back to Adam Smith: being strongly pro-market often does not mean that you are pro-business – in fact in order to favor markets, you often need to be very skeptic of big companies, since they are the ones that have politicians on their pokets.

So, what are the options? One of them is to downsize the government. If the government does less stuff, it can also make less harm. The other solution that is implementing institutional solutions for institutional problems. Buchanan argued that governments should be restrained. For instance, in order to fight the public debt and balance the government’s budget, Buchanan suggested a constitutional spending cap. This solution might look contradictory at first: such cap could only be created by politicians after all. However, in practice, it seems to work well: some countries have adopted constitutional spending caps, and they had overall managed to fight the deficit at least to some extent. Buchanan also argued for a strong political reform, claiming that decisions should often rely more on supermajorities.

More recently, Buchanan came under attack by the historian Nancy MacLean, who wrote Democracy in Chains. In the book, MacLean claims sthat Buchanan was an “evil genius”[note 5] that wanted to destroy the democracy in America. I read the book, and I can say: she is a hack. Writing the reasons would probably take some time, maybe I’ll write an article debunking her book. While confronted with the most obvious question, why would Buchanan want to undermine the democracy in his own country, MacLean claimed that Buchanan was autistic[note 6] and that people with this condition are “incapable of feeling empathy”. I think this may convince people to take this criticism with a grain of salt. In any case, supposing that she had a point, this is politics, and not the focus here.

25 John Bates Clark[edit]

The second most important prize in Economics is called John Bates Clark Medal for a good reason: He was probably the first great American economist.

Clark’s most important contribution is his theory of distribution, which he developed on his books The Distribution of Wealth and The Philosophy of Wealth. The remuneration of factors of production (labor and capital), Clark argued, is determined by their marginal productivity. In other words, workers' wages and capitalists' profits[note 7] are determined by the additional contribution that each unit of labor or capital makes to production. In practice, that means that each person receives the value of their marginal contribution.

While this is a positive conclusion, it also has strong normative implications: the market economy measures the value that society, not just a single individual places in goods and services. As a result, not only the market was efficient, but it is also fair, as people received what society think they produce.[note 8] This normative conclusion can be disputed on many grounds, for instance, with a Rawlsian approach. It also comes without saying that under realistic assumptions, markets are often imperfect, and as we saw in Buchanan’s entry, it is common for people to get rich because of their political connections. But the positive part of the theory is still impeccable.

24 Irving Fisher[edit]

Possibly the second great American economist after J. B. Clarke was Irving Fisher. He had many contributions, but is especially here because of his developments on the Quantitative theory of money (QTM), especially by creating the famous equation MV = PT, where M equals the stock of money; V equals velocity, (how quickly money circulates in an economy); P equals the price level; and T equals the total volume of transactions. This is somehow outdated: modern economists usually use the variation MV = Py, where y stands for real income. Indeed, we now know that there are more factors that cause inflation rather than the money supply. However, it’s still hard to argue that it is the most prominent of them all, especially in the long term. Fisher didn’t stop there, he’s also one of the fathers of the neutrality of the money, the idea that, in the long term, a larger supply of money won’t cause any meaningful difference in the economy – except in the higher inflation rates.

Only a few days before the Great Crash during the Great Depression, Fisher believed that recessions were over. This of course ruined much of his reputation. However, while he failed to predict the onset of the Great Depression—famously proclaiming that stock prices had reached a "permanently high plateau" just before the crash—he later provided a significant contribution to understanding its causes through his debt-deflation theory. I wrote about it in our article on the Greate Depression, so I won’t repeat myself here.

23 Vifrido Pareto[edit]

One of the leaders of the Lausanne School, Pareto is a major influence not only in economics, but in social sciences in general. The concept of Pareto efficiency (also known as Pareto optimality), the idea that the resources are allocated to the maximum level of efficiency and it’s impossible to make someone better off without making someone worse off is one of the most fundamental concepts not only in theoretical economics, but also in public policy, even if it is hard to imagine a situation where Pareto efficiency is achieved. Of course, Pareto efficiency doesn’t say anything about justice or equality. After all, according to this concept, it’s possible that someone gets 100% of all the wealth available, and that would be efficient. What the normative part of economics has to say about this is still subject to much debate, but thanks to Pareto we at least have a tool to measure efficience..

22 John Nash[edit]

Here we are, the guy that you probably know because you watched the movie. Nash is one of the main theorists behind the game theory. Especially, he is one of the fathers of the Nash equilibrium, a situation in which a player, taking the other players' strategies as given, has no incentive to change their own strategy. Game theory is a subject that I really love, though it is also an overall complex subject (I had to study for like, six months to fully grasp it) and we already have a (mediocre) article on game theory, even if it doesn’t mention Nash, so I’ll be brief. The most famous example of the Nash equilibrium is the “Prisoner dilemma”, a situation that we also have an article.[note 9]

But why does this situation matter in practice? Nash’s theory is especially useful to analyze oligopolies and duopolies. Let’s consider, for example, two firms, A and B, that sell two similar products. The best thing that each of them can do is to exploit their market power together, basically working as a cartel[note 10] where both charge a high price, say 15 for their product. However, if firm A sets a competitive low price, say, 10, it will win a lot of customers from firm B, which is charging 15. As a result, the likely result is that both tend to set relatively low prices, say 12. Mutatis mutandis it is the same situation as the Prisoner dilemma.[note 11] Another situation where Nash equilibrium can be useful are bank runs, I already wrote about it in our article on the Great Depression.

21 Clive Granger[edit]

Most educated people know that Correlation does not imply causation, but how to find causation on social sciences? Perhaps the greatest recent contribution came from the English economist Clive Granger and his causality test. In essence, the test evaluates if past values of a variable are capable of predicting the current or future values of another variable. If the past values of variable X help predict variable Y better than just using the past values of Y alone, then X is said to "Granger-cause" Y. This implies that X provides some useful information in forecasting Y. The Granger causality test is not perfect, and it does not establish causality in the strict sense; rather, it assesses whether one variable helps predict another variable's behavior. However, it is, to my knowledge, one of the best methodologies we have on social sciences.

20 Douglass North[edit]

Why some countries become prosperous democracies and others remain poor dictatorships? Some say it’s geography. Some say it’s culture. There are strong empirical and theoretical arguments for both, but according to the economic historian Douglass North, none of them are as strong as the case for institutions. Nothing provides an incentive or reduces transaction costs as having the right institutions.

And what are the right institutions? According to North, a liberal democracy where all citizens are accountable to the same legislation, a legislation that is fair and easy to understand is, are some of the keys to development. Openness to trade is also vital, and the government should protect property rights, but also provide goods that cannot be adequately provided by the market. That’s how nations become rich. But more importantly how do we build these institutions? Sometimes it is purely random: a catastrophe as the Black Death is often regarded as one of the reasons on why Western Europe took over, for instance, but there is more than that and there are many historical examples of nations that managed to break the mold not by historical accidents, but by making the right choices, showing that the change from “bad” to “good” institutions is often slow, but possible. There is still much debate on this area, but it’s hard to argue that North is the father of the modern institutionalist theory, that dominates the field of development today.

19 Friedrich Hayek[edit]

Seeing Hayek on a relatively low spot might be surprising for some people. He is, after all, one of the most recognizable and influential thinkers of all time. Indeed, if this list included political influence, he would be in the top 5. If we ever make a list of the deepest economist, he would probably be on the top 3. If blunders were taken into account on this list, I would drop him off the list. As a result, this will be a long entry, as I’ll have to justify myself a lot, and even I am not sure if I’m being compelling enough. As I intend to overhaul Hayek’s page, I won’t be very specific about his contributions. Since they are mostly political works, with little economics, I won’t talk about The Road to Serfdom here, despite being his most famous book, nor about The Constitution of Liberty and Law, Legislation and Liberty, widely regarded as his most important books.

When you open an economics textbook, even those written by economists on the left such as Paul Krugman, you will learn in the first pages that markets are an efficient way to allocate resources for the reason Hayek explained in his most famous article: The Use of Knowledge in Society, even though most of them don’t mention Hayek’s name.[note 12] According to Hayek, as individuals only know tiny fraction of all that is known collectively, it is impossible for a central planner to replicate the work of the invisible hand. But why a market economy can allocate resources then? Because prices work as transmitters of information about scarcity, consumer preferences, and production costs. If something is expensive, sellers will produce more, while buyers will seek substitutes. This is a very simple, albeit powerful insight. But is it as powerful as Hayek and his followers believe? I’d say it’s at least not as defining as they think, and the argument didn’t age that well. China and Vietnam were two of the fastest growing countries in the world in the last four decades. While it’s true that these countries only start to grow after they adopted a more market-oriented economy,[note 13] it is also unquestionable that their governments still play an important part of their economic system. This isn’t, of course, evidence that a mixed economy is the best economic system. But it directly contradicts the Hayekian predicament that unrestrained capitalism will lead to more growth and development than an economy where the government does indeed still have an important role on planning and controlling the economy.

Does Hayek have anything else to offer that modern usually economists agree? Yes. One of them is the concept of spontaneous order, the idea that complex systems and structures can emerge naturally not by human design, but by human action from the interactions of individual agents, without central planning or external direction. The most obvious example are the languages that we speak. No one designed them (or at least most of them), and yet they are a very efficient way to communicate. This is overall a very well-regarded insight among economists, but I feel like it’s more important to legal scholars,[note 14] and I’m not aware of many modern studies on economics on the subject.

Even though mistakes weren’t considered on the methodology of the list, I still find important to talk about what Hayek got wrong. As a macroeconomist,[note 15] Hayek leaves a lot to be desired. His theories on credit and monetary policy are abyssal. His theory of business cycles has many theoretical shortcomings and little empirical evidence (even if it’s not completely wrong). There was never a “debate” between Keynes and Hayek, this is an Internet meme, the former was always on the lead, and wasn't Hayek the person that shifted the paradigm in the 1970s. And these are not the only way that Hayek hindered the development of economics as a science: unlike Mises, Hayek was an empiricist, but he mostly rejected the usage of math and econometrics in social sciences, supporting a more subjective approach. To make matters worse, he never acknowledged any of these mistakes.

People will probably remember Hayek for much longer than almost every other name on this list due to his work as a political thinker. But as an economist, I find him overrated, even if I can respect him those that admire him.

Notes[edit]

  1. As a result, while I’m checking some sources, I’m writing most of this out of my mind, so I won’t add any sources. Thus, there are probably some mistakes in this essay. If you want to know more about some specific information, ask me and I’ll do my best to find the source, though I can’t guarantee anything.
  2. As we’ll see, Akerlof was writing about microeconomics, and I personally see the Keynesianism as a macroeconomic position, so maybe this classification is not very relevant. Still, he was showing a major imperfection of the market economy when its superiority was in fashion.
  3. I consider Buchanan a mainstream economist, but he said himself that he was fine if someone called him an Austrian economist
  4. This is not a completely fair comparison. Politicians have a much lower time horizon than businessmen, and as a result as much more susceptible to these limitations, which helps to explain why private companies are usually more efficient than SOEs.
  5. She uses this sort loaded language all the time.
  6. I don’t think Buchanan was ever diagnosed with autism, she was just playing the armchair psychiatrist.
  7. Clark also noticed that, unlike Marxism seems to believe, the distinction between labor and capital is far from perfect, and in a market economy, most people are a combination of these two categories.
  8. While Clark was originally a socialist, and despite the fact that he changed his mind, he was still a major advocate of antitrust laws, not being therefore a free market fundamentalist.
  9. Contrary to popular belief, this thought experiment wasn’t created by Nash, it’s just an expansion of his work.
  10. Of course, here we’re ignoring the legal consequences of firms operating as cartels.
  11. In real life, oligopolies are much more complex, and there are many different models, such as the Cournot, Stackelberg and Bertrand oligopolies
  12. Modern Principles of Economics, written by the two GMU scholars and Hayek fanboys Tyler Cowen and Alex Tabarrok, is one of the few exceptions.
  13. And indeed, as China reversed this trend under Xi Jinping, we’re now having doubts on whether they will be able to keep growing, despite still being a middle-income country.
  14. The Hayekian concept of natural law is extremely complex, and I won’t write about it here as it has little relationship with modern mainstream economics. Those that want to know more can read his book Law, Legislation and Liberty.
  15. I think Hayek denied the very existence of macroeconomics, though I'm not sure.