Schools of economic thought describes the variety of approaches in the history of economic theory noteworthy enough to be described as a 'school of thought'. While economists do not always fit into particular schools, particularly in modern times, classifying economists into schools of thought is common. Economic thought may be roughly divided into three phases: premodern (Greco-Roman, Indian, Persian, Arab, and Chinese), early modern (mercantilist, physiocrats) and modern (beginning with Adam Smith and classical economics in the late 18th century). Systematic economic theory has been developed mainly since the beginning of what is termed the modern era.
Currently, the great majority of economists follow an approach referred to as mainstream economics (sometimes called 'orthodox economics'). Within the mainstream, distinctions can be made between the Saltwater school (associated with Berkeley, Harvard, MIT, Pennsylvania, Princeton, and Yale), and the more laissez-faire ideas of the Freshwater school (represented by the Chicago school of economics, Carnegie Mellon University, the University of Rochester and the University of Minnesota. Both of these schools are associated with the neoclassical synthesis. Some influential approaches of the past, such as the historical school of economics and institutional economics, have become defunct or have declined in influence, and are now considered heterodox approaches.
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Main article: Ancient economic thought |
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Main articles: Islamic economic jurisprudence and Islamic economics in the world |
Islamic economics is the practice of economics in accordance with Islamic law. The origins can be traced back to the Caliphate,[1] where an early market economy and some of the earliest forms of merchant capitalism took root between the 8th–12th centuries, which some refer to as "Islamic capitalism".[2]
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 both Zakat and Jizya), 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 on use 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 of trust.
It saw innovations such as trading companies, big businesses, contracts, bills of exchange, long-distance international trade, the first forms of partnership (mufawada) such as limited partnerships (mudaraba), and the earliest forms of credit, debt, profit, loss, capital (al-mal), capital accumulation (nama al-mal),[3] circulating capital, capital expenditure, revenue, cheques, promissory notes,[4] trusts (see Waqf), startup companies,[5] savings accounts, transactional accounts, pawning, loaning, exchange rates, bankers, money changers, ledgers, deposits, assignments, the double-entry bookkeeping system,[6] lawsuits,[7] and agency institution.[8][9]
This school has seen a revived interest in development and understanding since the later part of 20th century.
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Main article: Scholasticism |
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Main article: Mercantilism |
Economic policy in Europe during the late Middle Ages and early Renaissance treated economic activity as a good which was to be taxed to raise revenues for the nobility and the church. Economic exchanges were regulated by feudal rights, such as the right to collect a toll or hold a faire, as well as guild restrictions and religious restrictions on lending. Economic policy, such as it was, was designed to encourage trade through a particular area. Because of the importance of social class, sumptuary laws were enacted, regulating dress and housing, including allowable styles, materials and frequency of purchase for different classes. Niccolò Machiavelli in his book The Prince was one of the first authors to theorize economic policy in the form of advice. He did so by stating that princes and republics 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.
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Main article: Physiocrats |
In his Austrian Perspective on the History of Economic Thought, Murray Rothbard argued that the modern history of economics should properly begin with the physiocrats rather than with Adam Smith.
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Main article: Classical economics |
Classical economics, also called classical political 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 being utilitarian in its value theory and using marginal theory as the basis of its models and equations. Marxist economics also descends from classical theory. Anders Chydenius (1729–1803) was the leading classical liberal of Nordic history. A Finnish priest and member of parliament, he published a book called The 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 of liberalism, all of this eleven years before Adam 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.
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Main article: American School (economics) |
The American School owes its origin to the writings and economic policies of Alexander Hamilton, the first Treasury Secretary of the United States. It emphasized high tariffs on imports to help develop the fledgling American manufacturing base and to finance infrastructure projects, as well as National Banking, Public Credit, and government investment into advanced scientific and technological research and development. Friedrich List, one of the most famous proponents of the economic system, named it the National System, and was the main impetus behind the development of the German Zollverein and the economic policies of Germany under Chancellor Otto Von Bismarck beginning in 1879.
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Main article: French Liberal School |
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Main article: Historical school of economics |
The Historical school of economics was an approach to academic economics and to public administration that emerged in 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 also preferred reality, historical, political, and social as well as economic, 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 by Wilhelm Roscher, Karl Knies, and Bruno Hildebrand; the Younger, led by Gustav von Schmoller, and also including Etienne Laspeyres, Karl Bücher, Adolph Wagner, and to some extent Lujo Brentano; the Youngest, led by Werner Sombart and including, to a very large extent, Max Weber.
Predecessors included Friedrich List. 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 the Methodenstreit ("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 the social market economy, for many decades the dominant economic paradigm in most countries of continental Europe. The Historical school is also a source of Joseph 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 included Francis Bacon, Auguste Comte, and Herbert Spencer. It was this school that heavily critiqued the deductive approach of the classical economists, especially the writings of David Ricardo. This school revered the inductive process and called for the merging of historical fact with those of the present period. Included in this school are: William Whewell, Richard Jones, Walter Bagehot, Thorold Rogers, Arnold Toynbee, and William Cunningham just to name a few.
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Main article: English historical school of economics |
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Main article: Marxian economics |
Marxian economics descended from the work of Karl Marx and Fredrich Engels. This school focuses on the labor 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.[10][11]
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Main article: Socialist economics |
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Main article: Ricardian socialism |
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Main article: Christian socialism |
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Main article: Anarchist economics |
Anarchist economics is a set of theories which seeks to outline modes of production and exchange that are not governed by coercive social institutions. Anarcho-capitalists desire a society where the dynamics of competitive free markets are allowed to operate free of compulsory state control; many other anarchist economists, on the other hand, believe economies cannot be truly free unless capitalist property and the capitalist mode of production are abolished.
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Main article: Distributism |
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 encyclical Rerum Novarum, and Pope Pius's XI encyclical Quadragesimo 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.
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Main article: Institutional economics |
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Main article: New institutional economics |
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Main article: Neoclassical economics |
Neoclassical economics is the dominant form of economics used today and has the highest amount of adherents among economists. It is often referred to by its critics as Orthodox Economics. The more specific definition this approach implies was captured by Lionel Robbins in 1932: "the science which studies human behavior as a relation between scarce means having alternative uses." Scarcity means 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 no economic problem.
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Main article: Lausanne School |
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Main article: Austrian School |
The Austrian economic school rejects some important (and other minor) classical and neo-classical theories such as the labor theory of value, induction of theory from statistical data, 'loose money,' the importance of mathematics and economic modeling, and the desirability of government intervention in the market outside of the preservation of private property and the force of contract. They explain the choices and actions of human beings through subjective evaluations and marginal utility (contributing this idea to neo-classical economics). They follow deductive chains of causal reasoning to discover theories of action. They hold that the entrepreneur is the driving force of economic growth.
One of the main thrusts of the Austrian School is the rejection of the Boom-Bust cycle as a normal economic pattern, holding that such cycles are symptomatic of currency manipulation by central planners.
The school, although often controversial, has been historically influential, drawing praise (for example) from former Federal Reserve Chairman Alan Greenspan during his earlier years, though the predominance of Austrian economists generally agree that Greenspan later rejected Austrian economic principles. Perhaps the best known Austrian economist is Friedrich von Hayek, who was awarded the Nobel Prize in Economics "for pioneering work in the theory of money and economic fluctuations and for penetrating analysis of the interdependence of economic, social and institutional phenomena."
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Main article: Stockholm School |
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Main articles: Keynesian economics, Post Keynesian economics, and New-Keynesian economics |
Keynesian economics has developed from the work of John 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 on macroeconomics. 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 with Cambridge, England and the work of Joan Robinson (see Post-Keynesian economics). New-Keynesian economics is the other school associated with developments in the Keynesian fashion. These researchers tend to share with other Neoclassical 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 (see New-Keynesian economics).
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Main article: Chicago school (economics) |
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Main article: Carnegie School |
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Main article: Neo-Ricardianism |
In the late 19th century, a number of heterodox schools contended with the neoclassical school that arose following the marginal revolution. Most survive to the present day as self-consciously dissident schools, but with greatly diminished size and influence relative to mainstream economics. The most significant are Institutional economics, Marxian economics and the Austrian School.
The development of Keynesian economics was a substantial challenge to the dominant neoclassical school of economics. Keynesian views eventually entered the mainstream as a result of the Keynesian-neoclassical synthesis developed by John 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 orthodox economics formed a school of Post-Keynesian economics.
More recent heterodox developments include evolutionary economics (though this term is also used to describe institutional economics), feminist, Green economics, Post-autistic economics, and Thermoeconomics
Most heterodox views are politically left-wing and critical of capitalism. The most notable exception is Austrian economics, which is politically aligned with libertarianism.
Georgescu-Roegen reintroduced into economics, the concept of entropy from thermodynamics (as distinguished from what, in his view, is the mechanistic foundation of neoclassical economics drawn from Newtonian physics) and did foundational work which later developed into evolutionary economics. His work contributed significantly to Thermoeconomics and to ecological economics.[12][13][14][15][16]
Famous schools or trends of thought referring to a particular style of economics practiced at and disseminated from well-defined groups of academicians that have become known worldwide, may be generally summarized as follows:
In the late 20th Century three of the areas of study which are producing change in economic thinking are: risk-based rather than price-based models, imperfect economic actors, and treating economics as a biological science, based on evolutionary norms rather than abstract exchange. The study of risk has been influential, which viewed variations in price over time as more important than actual price. This particularly applies to financial economics where risk-return tradeoffs are the crucial decisions to be made. The most important area of growth has been in the study of information and decision. Examples of this school include the work of Joseph Stiglitz. Problems of asymmetric information and moral hazard, both based around information economics, profoundly affect modern economic dilemmas like executive stock options, insurance markets, and Third-World debt relief. Finally, there are 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, and the use of fractal geometry to create economic models. (See Energy Economics.) In its infancy is the application of non-linear dynamics to economic theory, as well as the application of evolutionary psychology. So far the most visible work has been in the area of applying fractals to market analysis, particularly arbitrage. (See Complexity economics.) Another infant branch of economics is neuroeconomics. This combines neuroscience, economics, and psychology to study how we make choices.
Mainstream economics encompasses a wide (but not unbounded) range of views. Politically, most mainstream economists hold views ranging from laissez-faire to modern liberalism. There are also divergent views on particular issues within economics, such as the effectiveness and desirability of Keynesian macroeconomic policy. Although, historically, few mainstream economists have regarded themselves as members of a "school", many would identify with one or more of neoclassical economics, monetarism, Keynesian economics, new classical economics, Austrian School, or behavioral economics.
Other viewpoints on economic issues from outside economics include dependency theory and world systems theory. An example of another economic system which has recently been advocated is the participatory economics model. This uses neither market methods nor centralised methods for allocation, but incorporates many local positive and negative feedback loops in order to respond to the most positive human values. One example of this school of thought is the Post Autistic Economics movement.