EconomicSchoolsOfThought

>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.

[Source](https://www.bu.edu/eci/files/2020/06/A.-Reuss-Power-of-Capital.pdf)