Economics

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Schools of Economic Thought:

The following are the five major schools of economic thought:

  • Classical Economics
  • Marxian Economics
  • Keynesian Economics
  • Neoclassical Economics
  • New classical Economics

Classical economics

Classical economics is widely regarded as the first modern school of economic thought. It generally regarded market as the principle institution in distributing resources equitably in the society. The publication of Adam Smith's the Wealth of Nations in 1776 is considered to be the birth of the classical economics school of thought. The major economists include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill.

These men developed theories about the way markets and economies work. Their works and studies were primarily concerned with the fundamentals of economic growth. Their works laid stress on economic freedom and promoted ideas such as laissez-faire and free competition.

Marxian economics

Marxian economics refers to the branch of economics that is based on the theories created and advocated by Karl Marx, a highly influential thinker.

Marx propounded a very critical theory known as the labour theory of value.                 This theory assumes that the value of any item can be known by determining the amount of time it takes to make it. He believed that the commodity being sold was the labour of the employee for the price of a wage. Capitalists never pay workers the full value of the commodities they produce, but pay them the necessary labour only i.e. the worker's wage only, which suffice only for the basic necessities to live.            Marx advocated that this necessary labour is, in fact, only a fraction of a full working day, and the rest, the surplus-labour, is captured by the capitalist. Now, the gap between the value of a commodity produced by a worker and his wage is a form of unpaid labour, which is known as surplus value.

Keynesian economics

Keynesian economics is a modern macroeconomic theory based on the ideas of 20th century British economist John Maynard Keynes. Keynesian economics advocated a mixed economy which is predominantly private sector, but with a large role of government and public sector and served as the economic model during the latter part of the Great Depression and up to as late as 1970s.

In Keynes' theory, one person's spending goes towards another’s earning, and the circle goes on, thus supporting a normal functioning of the economy. When the Great Depression hit, people's natural reaction was to hoard their money. This stopped the circular flow of money, keeping the economy at a standstill. In this situation, Keynes argued that the government should step in to increase spending, either by increasing the money supply or by actually buying things on the market itself.

Here, Keynesian economics differs from popular economic thought of Laissez-fair capitalism as Laissez-fair capitalism supported the exclusion of the public sector in the market.

Keynesian economics supports redistribution of wealth, when needed. Keynesian economics holds a realistic and sensible reason for the massive redistribution of wealth: if the poorer segments of society are given money, it is very likely that they will spend it, rather than save it, thus promoting economic growth. Keynesian economics, also called macroeconomics for its wide look at the economy as a whole, still remains one of the important schools in economic thought in today’s times as reflected lately in the US and the UK by the former British Prime Minister Gordon Brown, former President of the United States George W. Bush, President Barack Obama, and other world leaders who have used Keynesian economics through various programs in an attempt to improve the economic state of their countries.

Neoclassical Economics

The neoclassical approach in economics was developed mainly by William Stanley Jevons, Carl Menger and Leon Walras in the latter half of the 19th century. Neo-classical economics begins with the premise that resources are scarce and that it is necessary to choose between competing alternatives. That is, economics deals with tradeoffs. With scarcity, choosing one alternative implies forgoing another alternative - the opportunity cost. Understanding choices by individuals and groups is central. Economists believe that incentives and desires play an important role in shaping decision making.

Neoclassical economics also increased the use of mathematical equations in the study of various aspects of the economy.

Neoclassical economics is now the most widely taught form of modern-day economics. Neoclassical economics dominates microeconomics, and together with Keynesian economics forms the neoclassical synthesis around which the mainstream economics of today revolve.

New classical economics

New classical economics is also known as new classical macroeconomics as it is a school of thought in macroeconomics that builds its analysis entirely on neoclassical framework. New classical macroeconomics strives to provide neoclassical microeconomic foundations for macroeconomic analysis.

The new classical school emerged in the 1970s as a response to the failure of Keynesian economics to explain the stagflation because of rising oil prices and high inflation leading to sudden economic downturn. The new concepts and ideas which emerged from new classical economics such as rational expectations were accepted by the opposing new Keynesian school.

New classical economics is based on Walrasian assumptions. All agents are assumed to maximize utility on the basis of rational expectations. Lucas and Rapping applied the rule that equilibrium in a market occurs when quantity supplied equals quantity demanded.

Edward C. Prescott and Finn E. Kydland developed the most famous new classical models known as the real business cycle model.