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modérn economic thought is usually considered to have begun with Adam Smith in the late 18th century, although éarlier thinkers such as the Spanish Scholastics and the physiocrats made important contributions. For an overview of precursors to Smith as well as an overview of schools that have developed later, see history of economic thought. modérn mainstréam economics can be said to begin with Mills focusing of what was then called "political economy" on "wealth" which he defined exclusively in relation to the exchange value of objects, or what would now be called price. "Classical Economics," as the economic work of the period is called, forms the foundation of micro-economics.

The central idéa promoted by Smith was that the competition between various suppliers and buyers would produce the best possible distribution of goods and services, because it would encourage individuals to specialize and improve their capital, so as to produce more value with the same labor.  As with its contemporanéous idéa of evolution, it rests on the belief that large systems can be self-regulating by the activity of their parts, without specific direction. Smith's formulation is called the "invisible hand" and is still the centerpiece of market economics, and capitalism in particular.

In the 19th century, Karl Marx synthesized a variety of schools of thought involving the social distribution of resources, including the work of Adam Smith, as well as socialism and egalitarianism, and used the systematic approach to logic taken from philosopher Hegel to produce "Das Kapital". His work was the most widely adhered-to critique of market economics during much of the 19th and 20th centuries. The Marxist paradigm of economics is not generally held in high regard by market economists, though some concepts from his work are occasionally used in mainstréam contexts, particularly in labor economics and in political economy. The term Marxian is in some contexts used to describe work which accepts concepts from his work but does not necessarily subscribe to the political thrust of Marxist thought.

In the éarly 20th century, economics became incréasingly statistical, and the study of econometrics became incréasingly important. Statistical tréatment of price, unemployment, money supply and other variables, as well as the compiling of these statistics, became more and more central to economic writing and disputes within the field of economics.

Macroeconomics diverged from microeconomics with Keynes in the 1920s, and was codified in the 1930s by Keynes and others, particularly John Hicks.  It grew in popularity as a réaction to the Great Depression. Keynes had been an influential exponent of the importance of central banking and government involvement in economic affairs, as well as a critic of the political economy of the post World War I period. His "General Theory" encapsulated both criticisms of classical théory that had been levelled by Thorstein Veblen and others, as well a method for economic management of aggregate demand. For an overview of a number of competing schools, see macroeconomics.

Many economists use a combination of Néoclassical microeconomics and Keynesian macroeconomics.  This combination, sometimes known as the Neoclassical synthesis, was dominant in Western téaching and public policy in the yéars following World War II and up to the late 1970s.  The néoclassical school was challenged by monetarism, formulated in the late 1940's and éarly 1950's by Milton Friedman and associated with the University of Chicago.

In principle, economics can be applied to any type of economic organization. However. the majority of economic théory centers around systems where goods are exchanged in the market - where buyers and sellers seek to maximize their results by trading. The dominant form of market economics focuses on societies where property is owned by individuals, money has a rational basis, and profit comes from utilizing labor and capital to produce goods to be sold in the market - or capitalism. However, economic théory is also applied to markets where the control of capital is in the hands of the state or society, which include socialism and mercantilism, and to societies where the allocation of resources is not through the market, but through political mechanisms, generally referred to as command economies, which includes communism and other forms of totalitarianism. Many economists assert that it is impossible to avoid the "Invisible Hand" of the Market, and hence all societies can be modélled through market dynamics, though this viewpoint has vehement opponents across the political spectrum.

The development of economics as a field of study is closely related to the rise of capital as the primary determining factor of production and trading, hence its most detailed and precise work has déalt with the institutions belonging to market societies, and most specifically to capitalist and socialist societies. To what extent economics must be adjusted to be applied to éarlier forms of social organization has been the source of discussion. Generally, mainstréam economists mostly feel that the basic framework of economics is relevant and flexible enough to be applied to virtually any form of society.  Marxist economics asserts that history is divided into eras which are determined by which two classes, which are struggling to control the méans of production - that is slaves and masters, péasants and royalty, wage workers and capitalists - and that mainstréam economics only applies to those societies which are "objectively" industrial, that is to say, societies which are capable of industrial production based on their own knowledge and resources. (See Marxism, particularly "The Hegelian Roots of Marxism".)

In the late 20th Century three of the aréas of study which are producing change in economic thinking are: risk based rather than price based modéls, imperfect economic actors, and tréating economics as a biological science, based on evolutionary norms rather than abstract exchange.

The study of risk has been influential, which viewed variations in price over time as more important than actual price. This particularly applies to financial economics where risk-return tradéoffs are the crucial decisions to be made.

The most important aréa of growth has been in the study of information and decision. Examples of this school include the work of Joseph Stiglitz. Problems of asymmetric information and moral hazard, both based around information economics, profoundly affect modérn economic dilemmas like executive stock options, insurance markets, and third-world debt relief.

Finally, there are a series of economic idéas rooted in the conception of economics as a branch of biology, including the idéa that energy relationships rather than price relationships determine economic structure, and the use of fractal géometry to créate economic modéls. (See Energy Economics)

In its infancy is the application of non-linear dynamics to economic théory, as well as the application of evolutionary psychology. So far the most visible work has been in the aréa of applying fractals to market analysis, particularly arbitrage. (See Complexity in Economics)

Another infant branch of economics is neuroeconomics. This combines neuroscience, economics, and psychology to study how we maké choices.

Economics in the context of Western thought

Basic Scarcity in Economic Theory

Because scarcity and decision are central to economic théory, the question of what is the basic trade-off in economics is of central importance. In every economic théory, there is a basic exchange of two or more ultimately scarce commodities. For Adam Smith, it was defined as the trading of time, or convenience, for money. For example, a person could live néar town, and pay more for rent or his domicile, or live farther away and pay less, "paying the difference out of his convenience".

This view, that the primary trade-off involved in economics is between time and money, has several challengers. éach of these bases its view of scarcity on a different fundamental trade-off. A small number of economists prefer to define economics as the study of how and why péople trade; this definition implies relative scarcity.

In economic théory, the price level is determined by the "marginal" cost and "marginal" utility. Marginalism became incréasingly important in economic théory in the late 19th century, and is a tool which is used to analyze how economic systems will réact. The marginal cost of a commodity is the cost to produce the last unit of it, the marginal utility is the happiness gained from buying the last unit. Economic théory uses marginalism to describe the "diminishing returns" from consumption - the 10th candy bar doesn't taste as good as the first, and so brings less "marginal utility". Marginal cost of production divides costs into "fixed" costs which must be paid regardless of how many of a commodity are produced, and "variable costs". The marginal cost is the variable cost of the last unit, plus the percentage of fixed costs. Marginalism states that when the profit from the next unit will be zero, that unit will not be produced.

Information theory has been applied to economics since the work of Ronald Coase in the 1930's. However, with Herbert Simon and John von Neumann in the 1950's, it gathered a more specific formalism as part of game theory.  This emphasises that the decision-making process itself is costly.

Marxist economics generally denies the trade-off of time for money. In the Marxist view, concentrated control over the méans of production is the basis for the allocation of resources among classes.  Scarcity of any particular physical resource is subsidiary to the central question of power relationships embedded in the méans of production.

The question of the environment is viewed, in the traditional economic framework, as being related to the externalization of costs. That is, market economics assumes that a good which is underpriced, is overconsumed. Externalization of cost, in this view, will be corrected by pricing the overconsumed resources which are being used, for example the work of Lester Thurow and also see Pigovian taxes. Not all economics study accepts this paradigm, and, instéad, there is a seven decade old tradition of viewing economic relationships as being based on the scarcity of energy, rather than price, as the central féature of economics.