Major Schools of Economic Thought to Know for History of Economic Ideas

Major schools of economic thought shape our understanding of how economies function. From Classical to Behavioral Economics, each school offers unique insights on market dynamics, government roles, and human behavior, reflecting the evolving history of economic ideas over time.

1. Classical Economics

   • Founded in the late 18th and early 19th centuries, primarily by Adam Smith, David Ricardo, and John Stuart Mill.
   • Emphasizes the idea of free markets and the "invisible hand" guiding economic activity.
   • Advocates for limited government intervention, believing that markets are self-regulating.
   • Focuses on long-term growth driven by capital accumulation and labor productivity.
   • Introduced concepts such as comparative advantage and the labor theory of value.

2. Neoclassical Economics

   • Emerged in the late 19th century, building on classical ideas while incorporating marginalism.
   • Focuses on individual decision-making and the role of supply and demand in determining prices.
   • Introduces the concept of utility maximization and profit maximization as key drivers of economic behavior.
   • Emphasizes equilibrium in markets, where supply equals demand.
   • Critiques classical economics for its lack of mathematical rigor and empirical validation.

3. Keynesian Economics

   • Developed by John Maynard Keynes during the Great Depression in the 1930s.
   • Argues that aggregate demand is the primary driver of economic activity and employment.
   • Advocates for active government intervention to manage economic cycles and stimulate demand.
   • Introduces concepts such as the multiplier effect and liquidity preference.
   • Challenges the classical view of self-correcting markets, emphasizing the importance of fiscal and monetary policy.

4. Marxian Economics

   • Based on the ideas of Karl Marx and Friedrich Engels, focusing on the critique of capitalism.
   • Emphasizes the role of class struggle and the exploitation of labor in capitalist societies.
   • Introduces the labor theory of value, arguing that value is derived from labor input.
   • Analyzes the dynamics of capital accumulation and the tendency of the rate of profit to fall.
   • Advocates for revolutionary change to achieve a classless society and the abolition of private property.

5. Austrian School

   • Originated in the late 19th century with economists like Carl Menger, Ludwig von Mises, and Friedrich Hayek.
   • Emphasizes individualism, subjective value, and the importance of entrepreneurship.
   • Critiques central planning and advocates for free markets as the best means of resource allocation.
   • Focuses on the role of time and uncertainty in economic decision-making.
   • Highlights the limitations of mathematical modeling in economics, favoring qualitative analysis.

6. Institutional Economics

   • Emerged in the early 20th century, with key figures like Thorstein Veblen and John R. Commons.
   • Emphasizes the role of institutions—laws, norms, and social practices—in shaping economic behavior.
   • Analyzes how institutions evolve and impact economic performance and social welfare.
   • Critiques the neoclassical focus on individual rationality, advocating for a broader view of human behavior.
   • Highlights the importance of historical context in understanding economic systems.

7. Monetarism

   • Developed by Milton Friedman in the mid-20th century as a response to Keynesian economics.
   • Emphasizes the role of money supply in determining economic activity and inflation.
   • Argues that controlling the money supply is crucial for managing economic stability.
   • Critiques fiscal policy as often ineffective and advocates for a rules-based monetary policy.
   • Introduces the concept of the natural rate of unemployment and the long-term neutrality of money.

8. New Keynesian Economics

   • Emerged in the 1980s as a response to critiques of traditional Keynesianism and monetarism.
   • Incorporates microeconomic foundations to explain price stickiness and market imperfections.
   • Emphasizes the importance of expectations and how they influence economic decisions.
   • Advocates for the use of monetary policy to stabilize the economy in the face of shocks.
   • Integrates elements of rational expectations theory while maintaining a Keynesian perspective.

9. Behavioral Economics

   • Developed in the late 20th century, integrating insights from psychology into economic theory.
   • Challenges the assumption of rationality in traditional economic models, highlighting cognitive biases.
   • Examines how social, emotional, and psychological factors influence economic decision-making.
   • Introduces concepts such as bounded rationality and prospect theory.
   • Aims to improve economic models by incorporating more realistic assumptions about human behavior.

10. Chicago School

    • Associated with economists like Milton Friedman and George Stigler, emerging in the mid-20th century.
    • Advocates for free markets and minimal government intervention in the economy.
    • Emphasizes the efficiency of markets and the importance of competition.
    • Critiques regulation and government policies that distort market outcomes.
    • Contributes to the development of monetarism and public choice theory, focusing on the role of incentives in policy-making.