Classical Economists After Adam Smith

 I am writing a new series where I discuss famous economists, their contributions to the field of economics and broader literature, and summarize key ideas. This will also serve as a repository if I want to refer in future. Apologies for typos and grammatical mistakes since production is more important than perfection for this post.

1. Marquis de Condorcet (con-door-say)

Portrait of Condorcet

The most important contribution of Condorcet was in democratic process of voting -- and rightfully called, father of social choices. Condorcet was an 18th century French economist who explored the questions like (a) Is democracy the best form of choosing a government? (2) If yes, which type of voting system elects the most competent leader? 

a. Condorcet Jury Theorem

Condorcet developed a mathematical model, known as the Condorcet Jury Theorem, that showed a sufficiently large group of people with more than average competence are likely to choose the correct leader. This is also known as the 'wisdom of crowds.' 

Figure 1: How the likelihood of voters choosing the right candidate varies with sample size

The top graphs within each box in Figure 1 has 'probability of individual voters for correct choice' on x-axis and 'probability that correct choice wins' on the y-axis. In other words, the graphs shows the distribution of win probability of correct leader depending on the probability of voters to make the correct choices. In each case, if 50% of voters are likely to choose the correct leader, there is a 50% chance that correct leader is elected. This is straightforward. 

However, if 60% of voters are likely to choose the correct leader, then likelihood of correct leader winning increases dramatically from ~60% when number of voters is 31 to ~95% when the number of voters increases to 162. Condorcet was convinced that as long as the majority of the voters make the correct choice, the outcome is likely to be correct as well. 

b. Mathematical Analysis of Voting

 This should have convinced Condorcet that democracy is the best form of electing a leader. However, Condorcet analyzed voting system and realized several flaws -- and somehow contradicted his earlier theory. 

b.1 Condorcet Paradox 

Condorcet paradox occurs when collective preference of voters can be cyclical even though if the preferences of the individual are not cyclic. This occurs when voters rank their preferred candidate in such a manner that no candidate is preferred over all the candidates.

In Table 1, we can see that Amar is preferred to Akbar by the majority (2 out of 3 voters). Similarly, Akbar is preferred to Anthony and Anthony is preferred to Amar by the majority of voters. In this case, there is no clear winner and thus the paradox of identifying the 'correct' candidate. 

b.2 Independence of Irrelevant Alternatives

Independence of Irrelevant Alternatives (IIA) occurs when best or most popular candidate wins the election irrespective whether a third candidate fights the election or not. For example, 55% of the people like Amar while 45% like Akbar. If Anthony decides to fight the election, IIA theory states that Amar should win irrespective. 

If 11% of people decide to shift their votes from Amar to Anthony, however, Amar ends up with 44%, Akbar with 45% and Anthony with 11%. Thus, Akbar ends up winning the election despite being less popular than A. In this case, IIA is violated. So, Anthony ends up becoming the spoiler candidate.

By providing examples where voting system could choose a less popular candidate, Condorcet ended up refuting Condorcet Jury Theorem. So, what is the best voting system? Just like in life, there is not one best voting system.

2. Jean Baptiste Say (con-door-say)

 Jean Baptiste Say, a French economist who lived in the 18th and 19th century, was most famous his book, Treatise of Political Economy. He is best know for Say’s Law which states that in order to create demand, there needs to be supply. This law has been much scrutinized and criticized by some while others have defended it. 

Critics like John Maynard Keynes argued that Baptiste Say is suggesting that supply creates its own demand and total aggregate supply equals total aggregate demand. If Keynes interpretation is correct, then Say's laws suggests people are beholden to buy something as long as there is a supply for a product. But we know that is not true. Lets take an example of the great depression in 1920s. People lost faith in the economy and stopped buying. This created excess supply while reduced demand. In other times, people save money or even horde money which creates imbalance.

But there are others that argue that the Jean Baptiste Say’s work is misconstrued. They defend Say by explaining that Say meant that if you have problem with demand, you must relook at the supply. During the great depression, if people are not interested in buying cars, one should look to supply them with things that they need — like savings banks accounts, breads and other essential goods. 

Only Jean Baptiste Say knows which interpretation is correct. Or maybe even he wasn't sure what he said (pun intended). 

3. Thomas Malthus

Thomas Malthus or Reverent Thomas Malthus was a economist from 18-19th century known for this essay, An Essay on the Principle of Population, where he argued that food supply wouldn't be able to keep with the growth of population. He believed population increased in geometric progression while food supply grew in arithmetic progress. This could lead to widespread famine unless birth rate came down.