What are the schools of economic thought?

You may have never heard of the term economic schools of thought, but you have certainly heard of one of these schools. What happens is that the economy has presented different interpretations of the economic environment along the history.

In this way, the economic thinking and models, which are used to understand economic interactions. In this article I will show you the major schools of economic thought and the influence of each on the way economists view the economy.

However, the economics of mercantilism are said to have started with Adam Smith in 1776. Before that, no one thought of the economy or markets as an object of study. It was all impromptu intuition and political proposals from a myriad of merchants, government officials, and journalists, primarily in Britain. It is common to denote the period before 1776 as "mercantilism.".

Mercantilism

It was not a coherent school of thought, but a hodgepodge of diverse ideas on how to improve income taxes, the value and movements of gold and how nations competed for trade and colonies international Mostly protectionist, "warrior-minded," and all discussed at random.

There was some opposition to mercantilist doctrines, especially among French and Scottish thinkers (for example, Pierre de Boisguilbert, Francois Quesnay, Jacques Turgot, and David Hume)

Schools of economic thought

1.- Classic

The first serious attempt to study and systematically search for "laws" in the marketplace was the Scottish philosopher Adam Smith in his Wealth of Nations (1776). It didn't do everything right, but at least it opened the door to a new field of study. It is for this reason that Adam Smith is commonly regarded as the "father of economics.".

Followers of Smith's original principles are commonly referred to as the "classical school" of economics. They dominated thought at least in the first half of the nineteenth century. The most important figure here is probably David Ricardo, a Dutch-born London stockbroker who was perhaps the most systematic thinker of the bunch.

Ricardo was the one who turned Smith's "first draft" of ideas and propositions into a coherent, clear, and rigorous theory. It became the dominant school of thought in the 19th century, particularly in Britain. As a result, the classical school is sometimes also called the "Ricardian" or "British" school.

2.- Marxist

Karl Marx built his economic analysis on Ricardo's theories. As a result, Marxist economics is generally considered part of the tradition of the classical school.

He advocated for state intervention in the economy to reduce social inequalities and combat the instability of capitalism. For him, it was necessary to stop all means of production and end private property in order to distribute resources more equitably among the population.

3.- Neoclassical

In 1871, what has been called the "Marginalist Revolution" was launched. Independent of each other, three different economists, William Stanley Jevons (British), Carl Menger (Austrian) and Léon Walras (French), proposed an entirely new theory that completely discarded the central Ricardian principles of classical economics.

This new theory was the "supply and demand" theory with which we are so familiar. The "marginalist" school is often also called the "neoclassical" school. The neoclassical school encompasses many variants within itself ("Marshallian", "Walrasian", "Austrian", etc.), but they all have the same underlying theoretical principles.

The neoclassical school quickly managed to displace the classical school as the dominant theoretical school. But it was also found as the new target of the historical-institutionalist challengers. From the 1870s to the 1930s, the economic world was basically (and bitterly) divided between neoclassicals and institutionalists, with the smaller Marxists (the last remnant of the classical school) on their heels.

The neoclassicals won a complete and final victory over the institutionalists in the 1930s. This was achieved with the rise of econometrics, the application of new statistical tools to economic analysis.

5.- Keynesian

Despite rejecting the institutionalists, the neoclassicals had little reason to celebrate in the 1930s. The world was caught in the grip of a Great Depression and they couldn't explain how it happened or how to solve it.

It's important pointing that Keynes did not set out to displace neoclassical theory. The theoretical principles of neoclassicism remained true. But it was, Keynes argued, incomplete.

The postwar years (1945-1970) saw the world of economics slide on two tracks: in microeconomics, neoclassicism reigned; in macroeconomics, Keynesianism reigned. In the 1960s and 1970s, multiple efforts were made to reconcile the theory neoclassical micro-level with Keynesian macro-level theory, to reduce the two rails to "One Way".

6.- Monetarist

The University of Chicago, where monetarism was developed, clings to a free market tradition that restricts the intervention of the Government must be kept to a minimum and seeks to explain the main economic phenomena through a single variable, the supply of money.

The rise of monetarism and its establishment in the late 1960s and early 1970s required the fulfillment of a series of preconditions, the most important of which was the total or partial failure of the established Keynesian orthodoxy to give answers satisfactory to the simultaneous coexistence of inflation and unemployment, a phenomenon that came to be known as stagflation and that led to the collapse of the central idea associated with the economy Keynesian.

7.- Neo Keynesian

The lax monetarists (horribly mislabeled as "new Keynesians") try to accommodate some results. Macro-level Keynesians, although their theoretical tools remain almost entirely neoclassical, with just a few tweaks here and beyond.

The difference is that New Keynesians accept that prices are sometimes "sticky"i.e. they don't adjust or don't adjust fast enough. This can be due to monopoly conditions, transaction costs, information asymmetries, imperfections, errors, thoughtless government interference, or silly regulations. These real-world imperfections can prevent the price system from working properly and prevent adjustment, leading to prolonged periods of unemployment.