Wednesday, March 7, 2012

Overview of the Schools of Economic Thought

The Concise Guide To Economics

by Jim Cox

1. Overview of the Schools of Economic Thought

There are four major schools of economic thought today. An understanding of these four schools of thought is necessary for an understanding of economics. The four schools are Marxist, Keynesian, Monetarist, and Austrian.

Marxist economic thought is based on the writings of Karl Marx and Friedrich Engels, who wrote in the mid to late 1800's. Essentially, Marxist thought is based on economic determinism wherein societies go through the developmental stages of primitive communism, slave systems, feudalism, capitalism, socialism and finally communism. In each of these stages the economic system determines the views of those living during that system. Each includes a class struggle which leads inevitably to the next stage of societal development. Thus feudalism has a class struggle between landlord and serf which produces the next stage, capitalism. In capitalism the two classes are capitalist and worker. The conflict between capitalist and worker results in the overthrow of capitalism by the working class thus ushering in socialism and ending class conflicts. Socialism leads to the ultimate fate of humanity--communism.

Keynesian views are named for the writings of John Maynard Keynes, particularly his 1936 book The General Theory. In this incredibly difficult book Keynes set forth an aggregated view of economic variables--total supply, total demand--working directly upon one another with no necessary tie to the actions of the individual decision-maker. Thus a "macro" economics was established. Keynesians call for government to manage total demand--too little demand leads to unemployment while too much demand leads to inflation. Thus a dichotomy was established in theory: either the problem of inflation would attend or the problem of unemployment, but never both simultaneously. Keynes viewed the free market as generating either too much or too little demand, inherently. Thus the need (ever so conveniently for the job prospects of Keynesian economists!) for demand management by government informed by the wisdom of the Keynesians.

Monetarist views are best represented by Milton Friedman and his followers who retained the Keynesian "macro" approach. However, while viewing the economy in this manner Monetarists lay the emphasis not on spending so much as on the total supply of money--thus the name Monetarist. In other than the macro economic issues--inflation, unemployment and the ups and downs of the business cycle--Monetarists tend to take the individual actor as the basis of their economic reasoning in areas such as regulation, function of prices, advertising, international trade, etc.

The Austrian school was begun by Carl Menger in the late 1800's and was ultimately developed to its fullest by Ludwig von Mises--both of Austria. The Austrian school developed a body of thought with a conscious emphasis on the acting individual as the ultimate basis for making sense of all economic issues. Along with this individualist emphasis is a subjectivist view of value and an orientation that all action is inherently future-oriented. This book is written in the Austrian tradition.