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Schools of economic thought

Groups who share a common perspective

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Currently, the vast majority of economists follow an approach known as mainstream economics (sometimes called 'orthodox economics'). Economists generally specialize into either macroeconomics, broadly on the general scope of the economy as a whole, or microeconomics, on specific markets or actors.

Within the macroeconomic mainstream in the United States, distinctions can be made between saltwater economists and the more laissez-faire ideas of freshwater economists. However, there is broad agreement on the importance of general equilibrium, the methodology related to models used for certain purposes (e.g. statistical models for forecasting, structural models for counterfactual analysis, etc.), and the importance of partial equilibrium models for analyzing specific factors important to the economy (e.g. banking).

Some influential approaches of the past, such as the historical school of economics and institutional economics, have become defunct or have declined in influence, and are now considered heterodox approaches. Other longstanding heterodox schools of economic thought include Austrian economics. Some more recent developments in economic thought, such as feminist economics and ecological economics, adapt and critique mainstream approaches, emphasizing particular issues rather than developing as independent schools of thought.

Contemporary economic thought

Mainstream economics

Mainstream economics is distinguished from heterodox approaches and schools within economics. It begins with the premise that resources are scarce and that choices must be made among competing alternatives. That is, economics deals with tradeoffs. With scarcity, choosing one alternative implies forgoing another alternative—the opportunity cost. The opportunity cost expresses an implicit relationship between competing alternatives. Such costs, treated as prices in a market economy, are used to analyze economic efficiency or to predict responses to market disturbances. In a planned economy, comparable shadow price relations must be satisfied for the efficient use of resources, as first demonstrated by the Italian economist Enrico Barone.

Economists believe that incentives and costs play a pervasive role in shaping decision making. An immediate example of this is the consumer theory of individual demand, which isolates the effects of prices (as costs) and income on the quantity demanded. Modern mainstream economics has foundations in neoclassical economics, which began to develop in the late 19th century. Mainstream economics also acknowledges the existence of market failure and draws on insights from Keynesian economics, most notably in the macroeconomic new neoclassical synthesis. It uses models of economic growth for analyzing long-run variables affecting national income. It employs game theory for modeling market or non-market behavior. Important insights into collective behavior (for example, the emergence of organizations) have been incorporated into the new institutional economics. A definition that captures much of modern economics is that of Lionel Robbins in a 1932 essay: "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." Scarcity means that available resources are insufficient to satisfy all wants and needs. Absent scarcity and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choice, as affected by incentives and resources.

Mainstream economics encompasses a wide (but not unbounded) range of views. Politically, most mainstream economists hold views ranging from laissez-faire to modern liberalism. There are also differing views on certain empirical claims within macroeconomics, such as the effectiveness of expansionary fiscal policy under certain conditions.

Disputes within mainstream macroeconomics tend to be characterised by disagreement over the convincingness of individual empirical claims (such as the predictive power of a specific model) and in this respect differ from the more fundamental conflicts over methodology that characterised previous periods (like those between Monetarists and Neo-Keynesians), in which economists of differing schools would disagree on whether a given work was even a legitimate contribution to the field.

Contemporary heterodox economics

In the late 19th century, several heterodox schools contended with the neoclassical school that arose following the marginal revolution. Most survive to the present day as self-consciously dissident schools, but with greatly diminished size and influence relative to mainstream economics. The most significant are Institutional economics and the Austrian School.

The development of Keynesian economics was a substantial challenge to the dominant neoclassical school of economics. Keynesian views entered the mainstream as a result of the neoclassical synthesis developed by John Hicks. The rise of Keynesianism and its incorporation into mainstream economics reduced the appeal of heterodox schools. However, advocates of a more fundamental critique of neoclassical economics formed a school of post-Keynesian economics.

Heterodox approaches often embody criticisms of perceived "mainstream" approaches. For instance:

  • feminist economics criticizes the valuation of labor and argues that female labor is systemically undervalued;
  • green economics criticizes instances of externalized and intangible ecosystems and argues for them to be brought into the tangible capital asset model as natural capital; and
  • Post-Keynesian economics disagrees with the notion of the long-term neutrality of demand, arguing that there is no natural tendency for a competitive market economy to reach full employment.

Other viewpoints on economic issues from outside mainstream economics include dependency theory and world systems theory in the study of international relations.

Modern Major Heterodox Schools

  • Post Keynesian Economics: This school rejects the neoclassical focus on equilibrium and rational expectations, arguing instead that "fundamental uncertainty" and the dynamics of effective demand and debt are the primary drivers of economic activity.
  • Austrian Economics: Characterized by its adherence to methodological individualism and a rejection of mathematical modeling, this school emphasizes the "spontaneously organizing" power of the price mechanism and blames central bank interference in interest rates for the business cycle.
  • Islamic Economics: This school identifies as heterodox by replacing the assumption of "rational utility maximization" with a framework governed by Sharia law, centering its macroscopic theory on the prohibition of usury (riba) and the mandatory redistribution of wealth (zakat).

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