How do various economic schools of thought conceptualize the functioning of the economy, and how do they view the ultimate goals of economy? The following questions and criteria will help us to differentiate different economic schools.
An economy is the system that produces and distributes the goods and services needed for the well-being of its citizens. It is related to the structure of political power. Social, political, and economic goals need to align for the society to grow and prosper. Economic activity can be studied empirically, but it is always related to collective human action, and it can therefore also be analyzed from an ethical or political perspective.
"Ethics" is the philosophical discipline that studies the moral conditions under which humans can lead a good life. "Ethics" is not only about right or wrong actions, it also asks: what is good life for us? This involves questions of justice, so economic systems are deeply intertwined with ethics and its translation into politics.
Preliminary Questions for Economic Theories
Can the economy grow endlessly? What are boundaries of economics? (Ecology, politics, science, religion?
How do economists think about their project: Is it a science? Is it value-free? (Neo-classicism, Behavioral). Is it a tool related to political purposes? (Marxism, Austrian School)
To what degree is the economy constituted by classes? (Marxism)
Focus of the theory can be on production (developmental), exchange, Classical) or consumption (behavioral).
How does the economy stimulate innovation? What are the sources of new structures and practices? (Schumpeter, Keynes)
What is the motivation for work and economic activity? How much work also happens without economic motive? (Behaviorist). What is truly creative human work?
Does it have a theory of wages?
How do you explain market fluctuations, market failures, and government failures?
How does the theory deal with externalities?
To what degree do economic actors act rationally?
Interface with other social systems: Developmental and institutional aspects.
Interface with human psychology: behaviorist school.
Economic Schools
Classical School: (C)
Focus on free markets, competition, self-interested agents.
Free trade between nations
Economic class-structure.
Micro-economic theory, not good for macro-economics.
Austrian School (A)
No one knows enough, so leave everyone alone.
Individuals are important, but they are not rational.
The adherents of the Austrian school are even more ardent supporters of the free market than most followers of the Neoclassical school.
The Austrian school was started by Carl Menger (1840–1921) in the late nineteenth century. Ludwig von Mises (1881–1973) and Friedrich von Hayek (1899–1992) extended the school’s influence beyond Austria. It has a major influence on Libertarianism today.
Keynesian School: (K)
Macroeconomic focus. Focuses on the government's role.
What is good for individuals, may not be good for the whole economy.
Developmentalist School (D)
How do economies catch up? what are the ingredients of economic development?
Backward economies cannot develop if they leave things entirely to the market.
Institutionalist School (I)
Individuals are products of their society, even though they may change its rules.
From the late nineteenth century, a group of American economists challenged the then dominant Classical and Neoclassical schools for underplaying, or even ignoring, the social nature of individuals – that is, the fact that they are products of their societies. They argued that we need to analyse the institutions , or social rules, that affect, and even shape, individuals.
Schumpeterian School (S)
Creative destruction: Capitalism is a powerful vehicle of progress, but it will atrophy, as firms become larger and more bureaucratic.
In Capitalism, Socialism, and Democracy (1942), the Austrian economist Schumpeter wrote: The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.
Schumpeter Waves:
Neo-Classical School (N)
Not classes, but individuals make economic decisions.
Individual know what they are doing; "sovereign consumers"
Classical economists believed that the value of a product is determined by supply conditions, that is, the costs of its production. They measured the costs by the labour time expended in producing it – this is known as the "labour theory of value" Neoclassical economists emphasized that the value (which they called the price) of a product also depends on how much the product is valued by potential consumers; the fact that something is difficult to produce does not mean that it is more valuable.
maximization of pleasure/minimization of pain
economy is web of exchanges, focus on consumption
market failure approach: welfare economics. But governments can also fail.
externalities: how to price them?
Marxist School (M)
value theory: from human labor only. (Capital versus work)
Class view of the economy (w-m-w, or: m-w-m. )
Exploitation, commodification
means of productions - production relations.
Government as superstructure.
Hierarchical structure in the economy versus free spontaneous order of market.
Economic sequencing of history.
Predicts collapse of capitalism
Behaviorist School (B)
We are not smart enough, so we need to deliberately constrain our own freedom of choice through rules.
The Behaviouralist school tries to model human behaviours as they actually are, rejecting the dominant Neoclassical assumption that human beings always behave in a rational and selfish way. The school extends this approach to the study of economic institutions and organizations – for example, how best to organize a firm or how to design financial regulation. The school thus has a fundamental affinity, and some overlap in membership, with the Institutionalist school.
