Major Schools of Economic Thought

By Taliamoney

  • The Classical School

    • Founder: Adam Smith (1776, An Inquiry into The Wealth of Nations)
    • Belief: The Economy works best when markets are left alone
    • Prices allocate resources efficiently (“invisible hand”).
    • Advocated: Free trade, Specialization, Division of labor
    • Unemployment - Temporary problem, markets will self-correct through price mechanisms.
    • Minimal government role in the economy. (laissez-faire)
    • Famous Classical Economists: Thomas Malthus, David Ricardo, Jean-Baptiste Say, John Stuart Mill

  • The Marxist School

    • Karl Marx Friedrich Engels (The Communist Manifesto, 1848).
    • Criticism: Capitalism is flawed and will be replaced by socialism, then communism.
    • The value of a good derives from the labor required to produce it.
    • 1867 (Capital: Critique of Political Economy, Marx) - The capitalist system is built entirely upon the exploitation of labor.
    • Ultimate Goal is public ownership of the stages of production, distribution, and exchange.
    • Tightly controlled markets or no markets at all

  • The Neoclassical School

    • Stanley Jevons
    • Emerged around 1870.
    • Supply demand determine prices and output.
    • Marginal analysis (comparing additional cost and additional benefits)
    • Assumes individuals are rational decision-makers maximizing utility.

  • The Austrian School

    • Founded by Carl Menger, (prominent economists: Ludwig von Mises, Murray Rothbard, Friedrich Hayek)
    • Related/subcomponent of the Neoclassical school of thought
    • Closely aligned with the Libertarian Party (CO,1970s)
    • Believe in free markets/no government involvement
    • The Road to Serfdom, Hayek (Nobel Prize in Economics)

  • The Behavioralist School

    • John Watson (Psychology as the behaviorist views it)
    • Borrows a lot from psychology
    • Disagrees with the neoclassical belief that people will behave rationally
    • Conducted lab studies that showed results of systemic irrationality
    • Contains different subfields (Psychological Economics, Experimental Economics, Behavioral Economics)

  • The Keynesian School

    • Founded by John Maynard Keynes (1930s, The General Theory).
    • During the great depression, the classical school failed to explain unemployment.
    • Markets do not always self-correct.
    • The government must step in during recessions and have an active role in managing the economy.
    • Employment demand are more important than the long-run balance.

  • The Monetarist School

    • Milton Friedman (1976 Nobel Prize in Economics), blamed the Federal Reserve for the Great Depression
    • Free markets
    • Macroeconomy centric
    • Believes that the money supply determines GDP believe we need a steady money supply growth from the Federal Reserve

  • The New Institutional School

    • Focused on the role of legal and social norms (institutions)
    • Extension of the Neoclassical School
    • Created the concept of transactional cost( searching for products, negotiating terms, etc.)
    • Ronald Coase believed that economists should study real markets and not theoretical ones.