In thehistory of economic thought, aschool of economic thought is a group ofeconomic thinkers who share or shared a mutual perspective on the wayeconomies function. Whileeconomists do not always fit within particular schools, particularly in the modern era, classifying economists intoschools of thought is common. Economic thought may be roughly divided into three phases: premodern (Greco-Roman,Indian,Persian,Islamic, andImperial Chinese), early modern (mercantilist,physiocrats) and modern (beginning withAdam Smith andclassical economics in the late 18th century, andKarl Marx andFriedrich Engels'Marxian economics in the mid 19th century). Systematic economic theory has been developed primarily since the beginning of what is termed themodern era.
Currently, the great majority of economists follow an approach referred to asmainstream economics (sometimes called 'orthodox economics'). Economists generally specialize into either macroeconomics, broadly on the general scope of the economy as a whole,[1] or microeconomics, on specific markets or actors.[2]
Within the macroeconomic mainstream in the United States, distinctions can be made betweensaltwater economists[a] and the morelaissez-faire ideas of freshwater economists.[b] However, there is broad agreement on the importance of general equilibrium, the methodology related to models used for certain purposes (e.g. statistical models for forecasting,structural models forcounterfactual analysis, etc.), and the importance of partial equilibrium models for analyzing specific factors important to the economy (e.g. banking).[3]
Some influential approaches of the past, such as thehistorical school of economics andinstitutional economics, have become defunct or have declined in influence, and are now consideredheterodox approaches. Other longstanding heterodox schools of economic thought includeAustrian economics. Some more recent developments in economic thought such asfeminist economics andecological economics adapt and critique mainstream approaches with an emphasis on particular issues rather than developing as independent schools.
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Mainstream economics is distinguished in general economics fromheterodox approaches and schools within economics. It begins with the premise that resources are scarce and that it is necessary to choose between competing alternatives. That is, economics deals withtradeoffs. With scarcity, choosing one alternative implies forgoing another alternative—theopportunity cost. The opportunity cost expresses an implicit relationship between competing alternatives. Such costs, considered as prices in a market economy, are used for analysis ofeconomic efficiency or for predicting responses to disturbances in a market. In aplanned economy comparableshadow price relations must be satisfied for the efficient use of resources, as first demonstrated by the Italian economistEnrico Barone.
Economists believe that incentives and costs play a pervasive role in shapingdecision making. An immediate example of this is theconsumer theory of individual demand, which isolates how prices (as costs) and income affect quantity demanded. Modern mainstream economics has foundations inneoclassical economics, which began to develop in the late 19th century. Mainstream economics also acknowledges the existence ofmarket failure and insights fromKeynesian economics, most contemporaneously in the macroeconomicnew neoclassical synthesis.[4] It uses models ofeconomic growth for analyzing long-run variables affectingnational income. It employsgame theory for modeling market or non-market behavior. Some important insights on collective behavior (for example,emergence oforganizations) have been incorporated through thenew institutional economics. A definition that captures much of modern economics is that ofLionel Robbins in a1932 essay: "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses."Scarcity means that availableresources are insufficient to satisfy all wants and needs. Absent scarcity and alternative uses of available resources, there is noeconomic problem. The subject thus defined involves the study ofchoice, as affected by incentives and resources.
Mainstream economics encompasses a wide (but not unbounded) range of views. Politically, most mainstream economists hold views ranging fromlaissez-faire tomodern liberalism. There are also differing views on certain empirical claims within macroeconomics, such as the effectiveness of expansionaryfiscal policy under certain conditions.[5]
Disputes within mainstream macroeconomics tend to be characterised by disagreement over the convincingness of individual empirical claims (such as the predictive power of a specific model) and in this respect differ from the more fundamental conflicts over methodology that characterised previous periods (like those betweenMonetarists andNeo-Keynesians), in which economists of differing schools would disagree on whether a given work was even a legitimate contribution to the field.[4]
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In the late 19th century, a number of heterodox schools contended with theneoclassical school that arose following themarginal revolution. Most survive to the present day as self-consciously dissident schools, but with greatly diminished size and influence relative tomainstream economics. The most significant areInstitutional economics, and theAustrian School.
The development ofKeynesian economics was a substantial challenge to the dominant neoclassical school of economics. Keynesian views entered the mainstream as a result of theneoclassical synthesis developed byJohn Hicks. The rise of Keynesianism, and its incorporation into mainstream economics, reduced the appeal of heterodox schools. However, advocates of a more fundamental critique of neoclassical economics formed a school ofpost-Keynesian economics.
Heterodox approaches often embody criticisms of perceived "mainstream" approaches. For instance:
Other viewpoints on economic issues from outside mainstream economics includedependency theory andworld systems theory in the study ofinternational relations.
Modern macro- and microeconomics are young sciences.[7] But many in the past have thought on topics ranging from value to production relations. These forays into economic thought contribute to the modern understanding, ranging from ancient Greek conceptions of the role of the household and its choices[8] to mercantilism and its emphasis on the hoarding of precious metals.
Austrian economists advocatemethodological individualism in interpreting economic developments, thesubjective theory of value, that money isnon-neutral, and emphasize theorganizing power of theprice mechanism (seeEconomic calculation debate) and alaissez faire approach to the economy.[9]
Islamic economics is the practice of economics in accordance withIslamic law. The origins can be traced back to theCaliphate,[10] where an earlymarket economy and some of the earliest forms ofmerchant capitalism took root between the 8th–12th centuries, which some refer to as "Islamic capitalism".[11]
Islamic economics seeks to enforce Islamic regulations not only on personal issues, but to implement broader economic goals and policies of an Islamic society, based on uplifting the deprived masses. It was founded on free and unhindered circulation of wealth so as to handsomely reach even the lowest echelons of society. One distinguishing feature is the tax on wealth (in the form of bothZakat andJizya), and bans levying taxes on all kinds of trade and transactions (Income/Sales/Excise/Import/Export duties etc.).Another distinguishing feature is prohibition of interest in the form of excess charged while trading in money. Its pronouncement onuse of paper currency also stands out. Though promissory notes are recognized, they must be fully backed by reserves.Fractional-reserve banking is disallowed as a form of breach oftrust.
Trade in Islamic societies saw innovations such astrading companies,big businesses,contracts,bills of exchange, long-distanceinternational trade, the first forms ofpartnership (mufawada) such aslimited partnerships (mudaraba),credit,debt,profit,loss,capital (al-mal), andcapital accumulation (nama al-mal),[12]circulating capital,capital expenditure,revenue,cheques,promissory notes,[13]trusts (seeWaqf),startup companies,[14]savings accounts,transactional accounts,pawning,loaning,exchange rates,bankers,money changers,ledgers,deposits,assignments, thedouble-entry bookkeeping system,[11]lawsuits,[15] andagency institution.[16][17]
This school has seen a revived interest in development and understanding since the later part of the 20th century.[citation needed]
Economic policy in Europe during the late Middle Ages and earlyRenaissance treated economic activity as a good which was to betaxed to raise revenues for thenobility and thechurch. Economic exchanges were regulated byfeudal rights, such as the right to collect atoll or hold afair, as well asguild restrictions and religious restrictions onlending. Economic policy, such as it was, was designed to encourage trade through a particular area. Because of the importance ofsocial class,sumptuary laws were enacted, regulating dress and housing, including allowable styles, materials and frequency of purchase for different classes.Niccolò Machiavelli in his bookThe Prince was one of the first authors to theorize economic policy in the form of advice. He did so by stating that princes andrepublics should limit their expenditures and prevent either the wealthy or the populace from despoiling the other. In this way a state would be seen as "generous" because it was not a heavy burden on its citizens.
The Physiocrats were 18th century French economists who emphasized the importance of productive work, and particularly agriculture, to an economy's wealth. Their early support of free trade and deregulation influencedAdam Smith and the classical economists.
Classical economics, also called classicalpolitical economy, was the original form of mainstream economics of the 18th and 19th centuries. Classical economics focuses on the tendency of markets to move to equilibrium and on objective theories of value. Neo-classical economics differs from classical economics primarily in beingutilitarian in its value theory and using marginal theory as the basis of its models and equations. Marxian economics also descends from classical theory.Anders Chydenius (1729–1803) was the leadingclassical liberal ofNordic history. Chydenius, who was aFinnish priest andmember of parliament, published a book calledThe National Gain in 1765, in which he proposes ideas of freedom of trade and industry and explores the relationship between economy and society and lays out the principles ofliberalism, all of this eleven years beforeAdam Smith published a similar and more comprehensive book,The Wealth of Nations. According to Chydenius, democracy, equality and a respect for human rights were the only way towards progress and happiness for the whole of society.
The American School owes its origin to the writings and economic policies ofAlexander Hamilton, the firstTreasury Secretary of the United States. It emphasized hightariffs on imports to help develop the fledgling American manufacturing base and to finance infrastructure projects, as well asNational Banking,Public Credit, andgovernment investment into advanced scientific and technological research and development.Friedrich List, one of the most famous proponents of theeconomic system, named it the National System, and was the main impetus behind the development of the GermanZollverein and the economic policies of Germany under ChancellorOtto Von Bismarck beginning in 1879.
The French Liberal School (also called the "Optimist School" or "Orthodox School") is a 19th-century school of economic thought that was centered on the Collège de France and the Institut de France. The Journal des Économistes was instrumental in promulgating the ideas of the School. The School voraciously defended free trade and laissez-faire capitalism. They were primary opponents of collectivist, interventionist and protectionist ideas. This made the French School a forerunner of the modern Austrian School.
TheGerman historical school of economics was an approach to academic economics and to public administration that emerged in the 19th century in Germany, and held sway there until well into the 20th century. The Historical school held that history was the key source of knowledge about human actions and economic matters, since economics was culture-specific, and hence not generalizable over space and time. The School rejected the universal validity of economic theorems. They saw economics as resulting from careful empirical and historical analysis instead of from logic and mathematics. The School preferred historical, political, and social studies to self-referential mathematical modelling. Most members of the school were also Kathedersozialisten, i.e. concerned with social reform and improved conditions for the common man during a period of heavy industrialization. The Historical School can be divided into three tendencies: the Older, led byWilhelm Roscher,Karl Knies, andBruno Hildebrand; the Younger, led byGustav von Schmoller, and also includingÉtienne Laspeyres,Karl Bücher,Adolph Wagner, and to some extentLujo Brentano; the Youngest, led byWerner Sombart and including, to a very large extent,Max Weber.
Predecessors includedFriedrich List andAdam Müller. The Historical school largely controlled appointments to Chairs of Economics in German universities, as many of the advisors of Friedrich Althoff, head of the university department in the Prussian Ministry of Education 1882–1907, had studied under members of the School. Moreover, Prussia was the intellectual powerhouse of Germany and so dominated academia, not only in central Europe, but also in the United States until about 1900, because the American economics profession was led by holders of German Ph.Ds. The Historical school was involved in theMethodenstreit ("strife over method") with the Austrian School, whose orientation was more theoretical and a prioristic. In English speaking countries, the Historical school is perhaps the least known and least understood approach to the study of economics, because it differs radically from the now-dominant Anglo-American analytical point of view. Yet the Historical school forms the basis—both in theory and in practice—of thesocial market economy, for many decades the dominant economic paradigm in most countries of continental Europe. The Historical school is also a source ofJoseph Schumpeter's dynamic, change-oriented, and innovation-based economics. Although his writings could be critical of the School, Schumpeter's work on the role of innovation and entrepreneurship can be seen as a continuation of ideas originated by the Historical School, especially the work of von Schmoller and Sombart.
Although not nearly as famous as its German counterpart, there was also an English Historical School, whose figures includedWilliam Whewell,Richard Jones,Thomas Edward Cliffe Leslie,Walter Bagehot,Thorold Rogers,Arnold Toynbee,William Cunningham, andWilliam Ashley. It was this school that heavily critiqued the deductive approach of the classical economists, especially the writings ofDavid Ricardo. This school revered the inductive process and called for the merging of historical fact with those of the present period.
Georgism or geoism is an economic philosophy proposing that both individual and national economic outcomes would be improved by the utilization ofeconomic rent resulting from control over land and natural resources through levies such as aland value tax.
Ricardian socialism is a branch of early 19th century classical economic thought based on the theory that labor is the source of all wealth and exchange value, and rent, profit and interest represent distortions to a free market. The pre-Marxian theories of capitalist exploitation they developed are widely regarded as having been heavily influenced by the works ofDavid Ricardo, and favoured collective ownership of themeans of production.
Marxian economics descended from the work ofKarl Marx andFriedrich Engels. This school focuses on thelabor theory of value and what Marx considered to be the exploitation of labour by capital. Thus, in Marxian economics, the labour theory of value is a method for measuring the exploitation of labour in a capitalist society rather than simply a theory of price.[18][19]
Anarchist economics comprises a set of theories which seek to outline modes of production and exchange not governed by coercive social institutions:
Thinkers associated with anarchist economics include:
Distributism is an economic philosophy that was originally formulated in the late 19th century and early 20th century by Catholic thinkers to reflect the teachings of Pope Leo XIII's encyclicalRerum Novarum and Pope Pius's XI encyclicalQuadragesimo Anno. It seeks to pursue a third way between capitalism and socialism, desiring to order society according to Christian principles of justice while still preserving private property.
Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behaviour. Its original focus lay inThorstein Veblen's instinct-oriented dichotomy between technology on the one side and the "ceremonial" sphere of society on the other. Its name and core elements trace back to a 1919American Economic Review article byWalton H. Hamilton.[20][21]
Neoclassical economics is often referred to by its critics asOrthodox Economics. The more specific definition this approach implies was captured byLionel Robbins in a1932 essay: "the science which studies human behavior as a relation between scarce means having alternative uses." The definition of scarcity is that available resources are insufficient to satisfy all wants and needs; if there is no scarcity and no alternative uses of available resources, then there is noeconomic problem.
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The Lausanne School of economics is an extension of theneoclassical school of economic thought, named after theUniversity of Lausanne inSwitzerland. The school is primarily associated withLéon Walras andVilfredo Pareto, both of whom held successive professorships in political economy at the university, in the latter half of the 19th century.[22] Beginning with Walras, the school is credited with playing a central role in the development ofmathematical economics. For this reason, the school has also been referred to as the Mathematical School.[23] A notable work of the Lausanne School is Walras' development of thegeneral equilibrium theory[24] as a holistic means of analysing the economy, in contrast topartial equilibrium theory, which only analyses single markets in isolation.[25] The theory shows how a general equilibrium is reached through the interaction between demand and supply in an economy consisting of multiple markets operating simultaneously.
The Lausanne School is also largely credited with the foundation ofwelfare economics, through which Pareto sought to measure the welfare of an economy.[26] Contrary toutilitarianism, Pareto found that the welfare of an economy cannot be measured by aggregating the individual utilities of its inhabitants. Since individual utilities are subjective, their measurements may not be directly comparable. This led Pareto to conclude that if at least one person's utility increased, while nobody else was any worse off, then the welfare of the economy would increase. Conversely, if a majority of people experienced an increase in utility while at least one person was worse off, there could be no definitive conclusion about the welfare of the economy.[27] These observations formed the basis ofPareto efficiency, which describes a situation or outcome in which nobody can be made better off without also making someone else worse off.[28] Pareto efficiency is still widely used in contemporary welfare economics as well asgame theory.[29]
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The Stockholm School is a school of economic thought. It refers to a loosely organized group of Swedish economists that worked together, in Stockholm, Sweden primarily in the 1930s.
The Stockholm School had—like John Maynard Keynes—come to the same conclusions in macroeconomics and the theories of demand and supply. Like Keynes, they were inspired by the works of Knut Wicksell, a Swedish economist active in the early years of the twentieth century.
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Keynesian economics has developed from the work ofJohn Maynard Keynes and focused on macroeconomics in the short-run, particularly the rigidities caused when prices are fixed. It has two successors.Post-Keynesian economics is an alternative school—one of the successors to the Keynesian tradition with a focus onmacroeconomics. They concentrate on macroeconomic rigidities and adjustment processes, and research micro foundations for their models based on real-life practices rather than simple optimizing models. Generally associated withCambridge, England, and the work ofJoan Robinson (seePost-Keynesian economics).New-Keynesian economics is the other school associated with developments in the Keynesian fashion. These researchers tend to share with otherNeoclassical economists the emphasis on models based on micro foundations and optimizing behavior, but focus more narrowly on standard Keynesian themes such as price and wage rigidity. These are usually made to be endogenous features of these models, rather than simply assumed as in older style Keynesian ones (seeNew-Keynesian economics).
The Chicago School is a neoclassical school of economic thought associated with the work of the faculty at the University of Chicago, notable particularly in macroeconomics for developingmonetarism as an alternative to Keynesianism and its influence on the use ofrational expectations in macroeconomic modelling.
New institutional economics is a perspective that attempts to extend economics by focusing on thesocial andlegalnorms and rules (which areinstitutions) that underlie economic activity and with analysis beyond earlierinstitutional economics andneoclassical economics.[30][31] It can be seen as a broadening step to include aspects excluded in neoclassical economics. It rediscovers aspects of classicalpolitical economy.
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Notable schools or trends of thought in economics in the 20th century were as follows. These were advocated by well-defined groups of academics that became widely known:
In the late 20th century, areas of study that produced change in economic thinking were: risk-based (rather than price-based models), imperfect economic actors, and treating economics as abiological science (based onevolutionary norms rather than abstract exchange).
The study ofrisk was influential, in viewing variations in price over time as more important than actual price. This applied particularly to financial economics, where risk/return tradeoffs were the crucial decisions to be made.
An important area of growth was the study of information and decision. Examples of this school included the work ofJoseph Stiglitz. Problems of asymmetric information andmoral hazard, both based around information economics, profoundly affected modern economic dilemmas like executivestock options,insurance markets, andThird-Worlddebt relief.
Finally, there were a series of economic ideas rooted in the conception of economics as a branch of biology, including the idea that energy relationships, rather than price relationships, determine economic structure. The use offractalgeometry to create economic models (seeEnergy Economics). In its infancy the application ofnon-linear dynamics to economic theory, as well as the application ofevolutionary psychology explored the processes of valuation and the persistence of non-equilibrium conditions. The most visible work was in the area of applying fractals tomarket analysis. Another infant branch of economics wasneuroeconomics. The latter combinesneuroscience, economics, andpsychology to study how we make choices.
{{cite journal}}:line feed character in|journal= at position 27 (help);line feed character in|title= at position 44 (help)despite the particular policy views of its founders ..., Austrianism was perceived as the economics of the free market.
