Economic Schools of Thought to Know for Principles of Economics

Economic schools of thought shape our understanding of how economies function. From classical ideas of free markets to Keynesian views on government intervention, these theories provide different lenses to analyze economic behavior and policy decisions.

1. Classical Economics

   • Emphasizes the idea of free markets and the self-regulating nature of the economy.
   • Key figures include Adam Smith, David Ricardo, and John Stuart Mill.
   • Focuses on the long-term growth of the economy driven by supply and demand.
   • Introduces the concept of the "invisible hand" guiding economic activity.
   • Advocates for limited government intervention in economic affairs.

2. Neoclassical Economics

   • Builds on classical economics by incorporating marginal utility and consumer choice.
   • Emphasizes the role of rational decision-making by individuals and firms.
   • Focuses on equilibrium in markets where supply equals demand.
   • Introduces mathematical models to analyze economic behavior.
   • Highlights the importance of competition in promoting efficiency.

3. Keynesian Economics

   • Developed by John Maynard Keynes during the Great Depression.
   • Argues that aggregate demand is the primary driver of economic activity.
   • Advocates for government intervention to manage economic cycles and stimulate demand.
   • Emphasizes the importance of fiscal policy, such as government spending and taxation.
   • Challenges the classical view of self-correcting markets.

4. Monetarism

   • Associated with economist Milton Friedman, focusing on the role of money supply in the economy.
   • Argues that inflation is primarily a monetary phenomenon.
   • Advocates for controlling the money supply to manage economic stability.
   • Critiques Keynesian policies, emphasizing long-term over short-term solutions.
   • Supports the idea of a natural rate of unemployment.

5. Austrian School

   • Emphasizes individual choice and the subjective nature of value.
   • Key figures include Carl Menger, Ludwig von Mises, and Friedrich Hayek.
   • Critiques central planning and advocates for free-market capitalism.
   • Focuses on the importance of entrepreneurship and market processes.
   • Argues against the use of mathematical models in economics.

6. Marxian Economics

   • Based on the ideas of Karl Marx, focusing on class struggle and the critique of capitalism.
   • Analyzes the dynamics of capital accumulation and labor exploitation.
   • Emphasizes the role of historical materialism in shaping economic systems.
   • Advocates for the eventual transition to socialism and communism.
   • Critiques the neoclassical focus on individualism and market equilibrium.

7. Behavioral Economics

   • Integrates insights from psychology into economic decision-making.
   • Challenges the assumption of rationality in traditional economic models.
   • Explores how cognitive biases and emotions influence economic behavior.
   • Highlights the importance of social and contextual factors in decision-making.
   • Aims to improve economic models by incorporating human behavior.

8. New Institutional Economics

   • Focuses on the role of institutions in shaping economic behavior and outcomes.
   • Examines how legal, social, and political factors influence economic performance.
   • Key figures include Douglass North and Oliver Williamson.
   • Emphasizes transaction costs and property rights in economic analysis.
   • Aims to understand the evolution of institutions over time.

9. Chicago School

   • Associated with the University of Chicago, emphasizing free markets and minimal government intervention.
   • Key figures include Milton Friedman and George Stigler.
   • Advocates for the efficiency of markets and the importance of competition.
   • Critiques government regulation and promotes deregulation.
   • Emphasizes empirical research and the use of economic models.

10. New Keynesian Economics

    • Builds on Keynesian principles while incorporating microeconomic foundations.
    • Emphasizes price and wage stickiness as reasons for market failures.
    • Advocates for the use of monetary policy to manage economic fluctuations.
    • Incorporates rational expectations into economic models.
    • Aims to reconcile Keynesian and classical views on market behavior.