EconomicSchoolsOfThought |
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Modern economists of various schools of thought can trace their lineage back to “classical” British economics of the late 18th and early 19th centuries, especially the work of Adam Smith (1723- 1790) and David Ricardo (1772-1823). Different schools of economic thought, however, have embraced different aspects of classical economics and developed in very different directions.14
Neoclassical economics, originating in Western Europe and the United States in the late 19th century and then spreading to other parts of the world, embraced the aspects of classical economics that emphasized individual rationality and self-interest, mutually beneficial market exchanges, and the role of competitive markets in bringing about socially desirable outcomes. Neoclassical economists do not claim that, even in a world in which all markets were perfectly competitive, economic outcomes would always be optimal. They argue, however, that competitive markets are “self-correcting,” that they tend to move toward optimal outcomes through the self-interested actions of market participants-without need for any coordinating authority. When markets deviate from the perfectly competitive market model-i.e., when there are market failures - neoclassical economic theory recognizes that government interventions can at least theoretically improve on market outcomes. To a great extent, however, neoclassical economists downplay the significance of market failures, view economic policies that “distort” market outcomes with suspicion, and tend to support “free market” policies.
A second school of thought includes economists who argue that market failures- like large firms exercising market power, producers or consumers creating pollution that harms third parties, or market participants lacking complete information-are much more pervasive and important than neoclassical economists recognize. They see much greater potential for government intervention to improve economic outcomes by addressing market failures through appropriate policies. They also question whether competitive markets necessarily bring about desirable outcomes at the level of the whole economy. In their view, economic crises such as the Great Depression of the 1930s or the recent Great Recession belie the doctrine of the optimal self-correcting market. The British economist John Maynard Keynes (1883-1946), among others, argued that capitalist economies could get stuck in a vicious circle of low demand, low output, high unemployment, and low incomes, necessitating government action to boost overall demand during economic downturns. While those belonging to this second school of thought do not generally oppose the capitalist economic system, they argue that well-devised government interventions can often improve economic outcomes.
Radical economics represents a third major school of economic thought. The German philosopher and economist Karl Marx (1818-1833), the most important figure in the history of radical economics, developed aspects of classical economic thought focused on the production of wealth and its division among the different economic classes in capitalist societies. Radical economists’ description of capitalist economies does not depict individuals meeting in markets as rough equals engaging in voluntary and mutually beneficial transactions. Rather, they describe capitalist society as divided into different classes, with opposing economic interests, in conflicts ranging from immediate bargaining outcomes (wages, hours, working conditions etc.) to the overall in institutional structures governing economic life. Radical economists recognize the dynamic characteristics of capitalism (e.g., investment in expanded production, technological innovation, etc.), but also its predatory and chaotic nature—such as exploitation of labor, “boom and bust” economic cycles, global wealth and power inequalities, and environmental degradation. Radical economists see central problems of capitalist societies as inherent to the capitalist system, and therefore are skeptical that they can be fixed—by government interventions or other measures— without fundamental system change.