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Introduction:

Economics as a science was developed when capitalist industrialization began in England in the late 1700s. 
One of the most famous economy books ever is Adam Smith&rsquo;s &ldquo;An inquiry into the nature and causes of the wealth of nation&rdquo; from 1778. Adam Smith explains how the capitalist market economy works and how competition between capitalists force all to do their best. He gives an example of two bakers in a town. One is making better bread at a lower price, therefore people will buy from him unless the other baker pulls himself together and live up to or do better than the competitor. In this way capitalist competition improves quality and reduce prices. Adam Smith called this &ldquo;the invisible hand of the market&rdquo;. 
His economic theory is called &ldquo;liberalism&rdquo; and the modern day &ldquo;neo-liberalism&rdquo; claims to build on his principles, when they talk about the blessings of the free marker and argue for low taxes, few government services for people and no restrictions on business because which they claim will ensure economic growth that benefits all people. 
In todays neo-liberal capitalism, however, competition is often limited because a very few extremely large and powerful multinational companies control the economy of nations. 
Adam Smith would probably not have agreed with the neo-liberals who claim to be his intellectual descendents, because he believed the state had obligations towards people and that the state should secure competion by hindering big companies from creating a monopolies that eliminate competition. 
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Adam Smith understanding of market mechanisms have been used to make mathematical models that can explain and calculate how prices are determined and how a capitalist can maximize profits, by setting the right prices and making the right investments. 
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Liberal economic theories of the market is often described as &ldquo;pure science&rdquo; much like physics, however, when the economicst make their mathematical models they start with some definitions of human behavior that are often not true. A central claim of liberal economists is that all people strive to maximize their own economic gain without little regard for others and based on a cool logic sense. Some have say that they build on the concept of &ldquo;homo economicus&rdquo; a human being who is an egoist that carefully calculates how to get the most for himself. While many people in capitalist societies behave in this manner this is not universally true, as many other people are driven by other ethics and a sense of community. 
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Karl Marx developed his major economic theories about 100 years later than Adam Smith in the 1800s. Marx had a great respect for Adam Smith and used his understanding of the capitalist market. Marx, however, saw economics not an objective science to be studied in universities but as a political tool for the oppressed, the poor workers of his time. He analyzed how capitalists exploit workers and accumulate profit for themselves. By exposing the contradictions in capitalism he was also able to show how it leads to economic crises. His main point was that when the capitalist keeps a profit for himself therefore are never enough buyers for all the products produced because the workers do not have enough money to buy all that they have produced. Only if capitalists keep investing their profits will the economic work &ndash; otherwise it will be thrown into one of the regular crisis. Marx advocated the abolition of capitalism and for a revolution where the working class took control of the state apparatus and nationalized industries for the benefit of workers. 
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After the Russian revolution in 1917, the new Bolchevic regime carried out some of the economic reforms Marx had supported in his lifetime. All industries, mines and agricultural land was nationalized and run by the socialist government. In the rest of the world this did not happen at the time. 
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In the 1929, a global economic crisis &ndash; The Great Depression &ndash; started. It created enormous unemployment in USA and Europe. Workers movements demanded change and many wanted socialist solutions such as in the Soviet Union. It was during this time that a new version of capitalist economic theory was developed so as to reform capitalism before workers overthrew their governments. The new type of economics is often called &ldquo;mixed economy&rdquo; because capitalist countries introduced socialist elemets such as nationalization of key industries, free health care, unemployment insurance, pension for old people, high taxes on business and restrictions on what big businesses could do. 
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In Germany, these reforms were carried out after 1933 by the Nazi government of Adolph Hitler who combined it with vicious suppression of labor unions and socialists. He, however, also supported large infrastructure projects organized by the government and other elements of a &ldquo;mixed economy&rdquo;. 
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In 1936, the British economist John Maynard Keynes published &ldquo;The general theory of employment, interest and money, where he outlined the modern mixed economy. Where the capitalist governments would have to take an active role in hindering crises by controling parts of the economic life of a nation. His theories won great respect and were applied by governments in most Western countries for the next 50 years. 
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