Schools of economic thought

• 1. Introduction

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  Schools of economic thought are groups of thinkers who share a view of how economies function. One striking early voice belonged to a Finnish priest named Anders Chydenius, who lived from 1729-1803 and sat in parliament. In 1765 he published a book called The National Gain. It argued for freedom of trade and industry and explored how an economy and a society relate. Eleven years later, Adam Smith published a similar and more comprehensive book, The Wealth of Nations. Chydenius held that democracy, equality and respect for human rights were the only road to progress and happiness for all of society.

  Economists do not always fit inside any single school, particularly in the modern era, yet sorting them into schools remains common. That habit raises real questions. What do thinkers in the same school actually share? Why do some schools grow into the orthodoxy while others shrink into dissent? And how far back do the arguments reach?

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• 2. Ancient and Medieval Roots

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  Chanakya, who is also called Kautilya, appears among the ancient thinkers in this tradition. The same list includes the Greek writers Xenophon and Aristotle, and the Chinese figures Qin Shi Huang and Wang Anshi. Historians group the Greco-Roman, Indian, Persian, Islamic and Imperial Chinese traditions together as the premodern phase of economic thought. Ancient Greek writers were already thinking about the role of the household and the choices it had to make.

  In the late Middle Ages and early Renaissance, Europe treated economic activity as something to tax. The revenue went to the nobility and the church. Feudal rights shaped trade, such as the right to collect a toll or to hold a fair. Guild restrictions and religious limits on lending added more rules. Sumptuary laws even regulated dress and housing, setting the allowed styles, materials and how often each social class could buy. Policy, such as it was, aimed mainly to steer trade through a particular area.

  Niccolò Machiavelli, in his book The Prince, was among the first authors to theorize economic policy. He framed it as advice. Princes and republics, he said, should limit their own spending and stop either the wealthy or the common people from plundering the other. A state that did this would be seen as generous, because it was not a heavy burden on its citizens.

  Scholasticism contributed Nicole Oresme and Thomas Aquinas, and the School of Salamanca and Leonardus Lessius belong to the same tradition. Mercantilism belongs to the early modern phase and is remembered for its emphasis on hoarding precious metals. Thomas Mun, Jean Baptiste Colbert and John Locke all appear among its thinkers.

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• 3. Islamic Economics

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  Between the 8th-12th centuries, the Caliphate produced an early market economy and some of the earliest forms of merchant capitalism. Some people call this period "Islamic capitalism". Islamic economics applies Islamic law to economic life. It reaches beyond personal matters to the broader goals and policies of a society, with a focus on uplifting the deprived masses. Its founding idea was that wealth should circulate freely, so that it reaches even the lowest levels of society.

  Two features set its rules apart. The first is a wealth tax, collected as both Zakat and Jizya, paired with a ban on taxing trade and transactions. That ban covers income, sales, excise, import and export duties. The second is a prohibition on interest, meaning excess charges on money transactions. Paper currency is treated carefully. Promissory notes are recognized, but they must be fully backed by reserves, and fractional-reserve banking is disallowed as a breach of trust.

  Trade in Islamic societies produced a long list of innovations. Among them were trading companies, bills of exchange, cheques and long-distance international trade. The first forms of partnership, called mufawada, included limited partnerships known as mudaraba. Trusts were set up as waqf. Savings accounts, ledgers, exchange rates, bankers, money changers and double-entry bookkeeping all belong on the same list, as do startup companies and lawsuits.

  Ibn Khaldun, Al-Ghazali, Ibn Taymiyyah and Al-Maqrizi appear among the school's thinkers. So do Ibn Sina, also rendered Avicenna, and Al-Farabi. Abu Yusuf and Muhammad Baqir al-Sadr are listed as well.

  Interest in the school has revived since the latter part of the 20th century. In its modern form it counts as heterodox, because it replaces the assumption of rational utility maximization with a framework governed by Sharia law. Its macroeconomic theory centers on the prohibition of usury, called riba, and the mandatory redistribution of wealth through zakat.

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• 4. Physiocrats and Classical Economists

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  François Quesnay and Anne Robert Jacques Turgot belonged to the Physiocrats, French economists of the 18th century. They stressed that productive work, particularly agriculture, created an economy's wealth. Their early support for free trade and deregulation influenced Adam Smith and the classical economists who followed.

  Adam Smith, David Ricardo, Thomas Malthus and John Stuart Mill are among the names filed under classical political economy. This was the original form of mainstream economics in the 18th and 19th centuries. It concentrated on the tendency of markets to move toward equilibrium, and on objective theories of value. The modern era of economic thought begins, in this telling, with Smith and classical economics in the late 18th century.

  Neoclassical economics later parted from this tradition in two ways. It took a utilitarian view of value, and it built its models and equations on marginal theory. Marxian economics also descends from classical theory. Karl Marx himself appears on the classical roster, though his school with Friedrich Engels began in the mid 19th century.

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• 5. Nations, Markets, and History

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  Alexander Hamilton, the first Treasury Secretary of the United States, gave the American School its origin. He favoured high tariffs on imports to help build a fledgling manufacturing base and to finance infrastructure projects. The school also backed national banking, public credit and government investment in advanced scientific and technological research. Friedrich List, one of its best-known advocates, named it the National System. List was the main impetus behind the German Zollverein. He also stood behind the economic policies of Germany under Chancellor Otto von Bismarck beginning in 1879.

  Frédéric Bastiat and Jean-Baptiste Say belong to the French Liberal School of the 19th century. It was centered at the Collège de France and the Institut de France, and it is also called the Optimist School or the Orthodox School. The Journal des Économistes spread its ideas. Its members defended free trade and laissez-faire capitalism with great energy. They opposed collectivist, interventionist and protectionist ideas, which made the school a forerunner of the modern Austrian school.

  In Germany, the historical school held that history was the key source of knowledge about economic matters. Its members saw economics as specific to a culture and so not generalizable across space and time. They rejected the universal validity of economic theorems. Careful empirical and historical analysis, not logic and mathematics, was their path. Many members were also Kathedersozialisten, concerned with social reform and the conditions of ordinary people during heavy industrialization.

  The school had three tendencies. The Older was led by Wilhelm Roscher, Karl Knies and Bruno Hildebrand. The Younger was led by Gustav von Schmoller. The Youngest was led by Werner Sombart and, to a very large extent, included Max Weber.

  Friedrich Althoff headed the university department in the Prussian Ministry of Education in the years 1882-1907. Many of his advisors had studied under members of the school, so it largely controlled appointments to economics chairs in German universities. Prussia dominated academia in central Europe and in the United States until about 1900, because holders of German Ph.D.s led the American economics profession.

  The school's legacy runs deep. It forms the basis of the social market economy, long the dominant model in most countries of continental Europe. Joseph Schumpeter's work on innovation and entrepreneurship continues ideas from Schmoller and Sombart. In English-speaking countries, the school is perhaps the least understood approach, because it differs radically from the dominant Anglo-American analytical view.

  England had its own historical school, with William Whewell, Richard Jones, Walter Bagehot and Arnold Toynbee among its figures. It was not nearly as famous. It criticized the deductive approach of the classical economists, especially David Ricardo, and called for merging historical fact with the present period.

  The German school also fought the Methodenstreit, meaning strife over method, with the Austrian School, whose approach was more theoretical and a priori.

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• 6. Radical Alternatives

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  Charles Fourier, Robert Owen, William Godwin and Saint-Simon are grouped together under utopian economics. John Francis Bray, John Gray, Charles Hall, Thomas Hodgskin and William Thompson form a different group, the Ricardian socialists of the early 19th century. Drawing on David Ricardo, they held that labor is the source of all wealth and exchange value. Rent, profit and interest, to them, distorted a free market. Their theories of capitalist exploitation came before Marx and are widely seen as favouring collective ownership of the means of production.

  Henry George gave his name to Georgism, which proposes that economic outcomes improve when the rent arising from control of land and natural resources is captured through levies such as a land value tax.

  Marxian economics descends from the work of Karl Marx and Friedrich Engels. In it, the labour theory of value works as a method for measuring the exploitation of labour by capital in a capitalist society, rather than simply as a theory of price. Rosa Luxemburg, Vladimir Lenin, Nikolai Bukharin and Karl Kautsky are among the names in the tradition. Neo-Marxian economics adds Paul A. Baran, Samuel Bowles and Adam Przeworski. State socialism has Ferdinand Lassalle, Johann Karl Rodbertus and the Fabian Society.

  Pierre-Joseph Proudhon, Peter Kropotkin, Mikhail Bakunin and Lysander Spooner are associated with anarchist economics. It outlines ways of organizing production and exchange that are not governed by coercive social institutions. Four strands stand out within it. Mutualists want market socialism built on cooperatives, mutual banking and usufructs. Collectivist anarchists want collective ownership, decentralised planning and salaries based on time contributed. Anarcho-communists seek a direct transition from capitalism to libertarian communism with a gift economy. Anarcho-syndicalists seek the abolition of wage labour, industrial unionism and workers' self-management through syndicates.

  Dependency theory and world systems theory, which study international relations, offer further viewpoints from outside the mainstream.

  Distributism came from Catholic thinkers in the late 19th and early 20th centuries. It reflects Pope Leo XIII's encyclical Rerum Novarum and Pope Pius XI's encyclical Quadragesimo Anno. It seeks a third way between capitalism and socialism, ordering society by Christian principles of justice while preserving private property. Its named voices are G. K. Chesterton and Hilaire Belloc.

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• 7. From Marginalism to Keynes

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  William Stanley Jevons, Alfred Marshall, Francis Ysidro Edgeworth, John Bates Clark, Irving Fisher and Knut Wicksell make up the neoclassical roster. Its critics often call it Orthodox Economics. The school arose after the marginal revolution.

  Léon Walras and Vilfredo Pareto held successive professorships in political economy at the University of Lausanne in the latter half of the 19th century. The Lausanne School, named after the university, extends neoclassical economics. It played a central role in developing mathematical economics, which earned it the name Mathematical School. Walras built general equilibrium theory, an attempt to analyse the whole economy at once. Partial equilibrium theory, by contrast, looks at single markets in isolation. In the general view, demand and supply interact across many markets operating simultaneously until equilibrium is reached.

  Pareto also helped found welfare economics. Contrary to utilitarianism, he found that an economy's welfare cannot be measured by adding up its inhabitants' utilities. Individual utilities are subjective, so their measurements may not be directly comparable. If at least one person's utility rose and no one was made worse off, he reasoned, the economy's welfare rose. If most people gained while at least one lost, no definite conclusion followed. Out of these observations came Pareto efficiency, a situation in which nobody can be made better off without making someone else worse off. It is still widely used in welfare economics and game theory.

  In Stockholm in the 1930s, a loosely organized group of Swedish economists worked together on macroeconomics. They reached the same conclusions as John Maynard Keynes on macroeconomics and on demand and supply. Like Keynes, they drew inspiration from Knut Wicksell. Gunnar Myrdal and Bertil Ohlin are the names attached to the group.

  Keynesian economics, from the work of John Maynard Keynes, focuses on short-run macroeconomics, especially the rigidities that arise when prices are fixed. It posed a substantial challenge to the dominant neoclassical school. John Hicks's neoclassical synthesis carried Keynesian views into the mainstream, which reduced the appeal of heterodox schools. Two successors followed. Post-Keynesian economics is tied to Cambridge, England and the work of Joan Robinson. It concentrates on macroeconomic rigidities and adjustment, and it bases its models on real-world practices rather than simple optimizing. New-Keynesian economics shares the neoclassical emphasis on microfounded models and optimizing behaviour. It treats price and wage rigidity as features that arise inside the models. Advocates of a more fundamental critique of neoclassical economics were the ones who formed the post-Keynesian school.

  At the University of Chicago, faculty including Frank H. Knight, Jacob Viner and Milton Friedman built the Chicago School. It is a neoclassical school. In macroeconomics it is notable for developing monetarism as an alternative to Keynesianism, and for its influence on how rational expectations are used in models.

  Thorstein Veblen shaped institutional economics, which studies how evolutionary processes and institutions shape economic behaviour. Its original focus was Veblen's contrast between technology and the "ceremonial" sphere of society. Its name and core elements trace to a 1919 article in the American Economic Review by Walton H. Hamilton. New institutional economics extends the analysis to social and legal norms and rules, going beyond earlier institutional and neoclassical economics. Ronald Coase, Douglass North and Oliver E. Williamson are among its names. It even rediscovers aspects of classical political economy.

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• 8. Mainstream and Dissent

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  Lionel Robbins defined economics in a 1932 essay. It is, he wrote, "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." The definition captures much of modern mainstream economics, the approach followed by the vast majority of economists and sometimes called orthodox economics. Scarcity means resources are too few to satisfy all wants and needs, so choosing one alternative means giving up another. That forgone alternative is the opportunity cost. In a market economy, such costs show up as prices. In a planned economy, comparable shadow price relations must hold for resources to be used efficiently, as the Italian economist Enrico Barone first demonstrated.

  Consumer theory of individual demand shows how prices and income shape the quantity demanded. Mainstream economics acknowledges market failure and draws on Keynesian insights, most notably in the new neoclassical synthesis. It uses models of economic growth to analyze long-run variables affecting national income, and game theory to model market or non-market behaviour. Politically, most mainstream economists hold views from laissez-faire to modern liberalism. Within the United States, saltwater economists are distinguished from the more laissez-faire freshwater economists.

  Today's disputes in mainstream macroeconomics concern how convincing individual empirical claims are, such as the predictive power of a specific model. Earlier periods saw deeper fights over methodology, as between Monetarists and Neo-Keynesians. Economists of different schools then disagreed on whether a given work was even a legitimate contribution to the field.

  The Austrian School and Institutional economics are the most significant of the dissident schools that contended with the neoclassical mainstream in the late 19th century. Most survive as self-consciously dissident schools, far smaller and less influential than the mainstream. Austrian economists favour methodological individualism, the subjective theory of value, the view that money is non-neutral, and laissez faire. They stress the organizing power of the price mechanism, a theme of the Economic calculation debate. The modern Austrian school rejects mathematical modeling and blames central bank interference in interest rates for the business cycle. Carl Menger, Ludwig von Mises and Friedrich Hayek are among its names.

  Post-Keynesians reject the neoclassical focus on equilibrium and rational expectations. They point instead to fundamental uncertainty, effective demand and debt. They argue there is no natural tendency for a competitive market economy to reach full employment. Feminist economics argues that female labor is systemically undervalued. Green economics wants externalized and intangible ecosystems brought into the tangible capital asset model as natural capital. Feminist and ecological economics adapt and critique mainstream approaches, emphasizing particular issues rather than developing as independent schools.

  In the late 20th century, risk-based models, imperfect economic actors and the treatment of economics as a biological science changed economic thinking. The study of risk made variations in price over time matter more than the actual price, particularly in financial economics, where risk and return tradeoffs were the crucial decisions. Joseph Stiglitz's work on information and decision-making is one example. Asymmetric information and moral hazard shape modern dilemmas such as executive stock options, insurance markets and Third-World debt relief. Biology-inspired ideas included the claim that energy relationships, rather than price relationships, determine economic structure, along with fractal geometry in market analysis. Neuroeconomics, a branch still in its infancy, combines neuroscience, economics and psychology to study how people make choices.

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