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Background

The origins of economic thought date back thousands of years. Greek philosophers such as Aristotle and Plato showed an early understanding of economics in their writings about wealth acquisition, the division of labor, and the debate about whether property should be held privately or publicly.

From the 1500s to the 1700s, the main form of trade in Europe was mercantilism. This type of economic system consisted of government regulation of commercial practices to increase the country’s wealth and power. The focus was on amassing precious metals, maximizing exports, and limiting imports by imposing tariffs. Mercantilists promoted the idea that nations should be economically self-sufficient and the ways to achieve this independence were by increasing domestic production and agriculture and building industries and new colonies.

Scottish philosopher Adam Smith wrote about his ideas for free-market economy as opposed to the mercantile system in his book The Wealth of Nations, published in 1776. Smith’s idea was that the natural self-interest of individuals would increase a nation’s prosperity. The ability to trade freely without government interference would open up domestic as well as international markets and increase business competition. According to Smith, thrift, hard work, and enlightened self-interest would help business operators provide better products and services, increase customers, grow profits, and raise living standards. Smith believed government should limit its focus to defense of the nation, universal education, infrastructure, and law enforcement.

Other important figures in the foundation of economic thought were Edmund Burke and John Maynard Keynes. In the 18th century, British statesman and political philosopher Edmund Burke advocated for private property and was against government monopolies. Like Smith, Burke believed that property should be owned privately and the state should not interfere with individuals.

In the 1930s, British economist and journalist John Maynard Keynes had new thoughts about studying whole economies as opposed to individual markets, which gave rise to the distinction between macroeconomics and microeconomics. This also came to be known as Keynesian macroeconomic theory. Keynes’ insights came about after the Great Depression and were a direct response to the rapid growth of unemployment and worsening economic conditions. At the time, classical economic thought was that supply created demand, and there would be no way that demand would decline. Keynes believed it was lack of economic demand that created recessions and depressions; he proposed that an increase in government spending would increase demand and therefore give rise to more jobs.

After World War II, many countries were focused on rebuilding their economies. The International Monetary Fund (IMF) was created to oversee international exchange rates and payments, in order to improve world trade, employment, and living standards. The IMF was conceived during a meeting in Bretton Woods, New Hampshire in 1944 of representatives from 45 countries, including John Maynard Keynes. Today, the IMF oversees the international monetary system and monitors the economic and financial policies of its member countries.