Schools of Economic Thought

There are four major schools of economic thought:

1. Marxism

2. Keynesianism

3. The Chicago School of Economics,

4. The Austrian School of Economics

• Marxism
• Generally advocates for government control of the economy, at least until the establishment of a perceived future utopia.
• Keynesianism
• Generally supports government intervention in the market.
• Associated with John Maynard Keynes.
• The goal of the economy, in this view, is often seen as full employment.
• Chicago School of Economics
• Generally advocates for minimal government intervention in the market.
• Founded primarily in the 1940s under Frank Knight at the University of Chicago.
• Key figures included James M Buchanan, George Stigler, and Milton Friedman.
• Sees economics as the study of the allocation of scarce resources that have alternative uses.
• Views economics as being closer to a hard science. Resources can be recorded as data, allowing economists to study effects of policies like scientists in a lab.
• Adopts an almost entirely data-driven view of the world and economics.
• Advances arguments through empirical evidence and a quantitative approach, often saying "show me the evidence".
• Has no objections to using mathematical models, testing them by their ability to predict real-world outcomes..
• Austrian School of Economics
• Generally advocates for no intervention in the market at all, equating to total laissez-faire.
• Founded by Karl Menger in the 1870s. Prominent figures include Menger's students Eugene Böhm-Bawerkand Friedrich von Wieser, and their students Ludwig von Mises and F. A. Hayek.
• The starting point is the study of purposeful human action, or praxeology. They are concerned with which actions are chosen, referring to this as demonstrated preference or revealed preference.
• Describes the economy as causal realist, asserting that only people make things happen.
• The central tenet is that value is subjective and always subjective. They argue subjective preferences determine prices in the real economy, and these cannot be measured. Production costs do not determine prices, only subjective preferences do.
• Rejects the idea that economics can be a hard science like physics, arguing human actions are not predictable like stones and real-world variables are not constant. Therefore, they reject mathematical modelling in economics.

In Modern times we have seen new schools arise:

• Modern Monetary Theory (MMT)
• Described as the idea that governments can use deficit spending to help their economies reach full employment and help people save money with minimal downsides.
• Advocates reject the idea that money emerged as a natural market phenomenon.
• Follows the doctrine known as chartalism, which asserts that all money derives from governments and arises from the government's need to levy taxes. In this view, money is a function of law, not a commodity. One source considers this explanation of money's origin "plain wrong".
• Advocates have an erroneous view of what causes inflation. They define inflation as rising onlywhen an economy hits 100% employment and the government competes with the private sector for resources. This view is called "obvious nonsense" by one source, which maintains that inflation always arises from an increase in the money supply.
• Post-Keynesians
• A group who think they have found evidence to disprove the law of supply and demand and its effect on prices.
• They lean on nominal price rigidity (prices not changing often) to support their arguments.
• Some believe that most businesses set prices based on total average unit costs plus a profit markup.
• Monetarism
• A school of thought associated with Milton Friedman.
• Its core idea is the quantity theory of money, stating that the total amount of money supply dictates real-world prices.
• Friedman argued that government intervention should be limited to controlling the money supply.
• Public Choice / Virginia School of Public Choice
• A sub-branch of political economy that grew out of the Chicago School, founded by James M Buchanan.
• Develops a robust way of analysing the functions of government and government departments.
• Used to push back against Keynesian claims of market failure by highlighting examples of government failure.

#### Six Key Lessons from Classical Economics

1. Wealth is not money but a measure of the goods and services in the economy (standard of living).

2. The economy is a positive-sum game, not a zero-sum competition where one person's gain is another's loss.

3. International trade is not a zero-sum game due to comparative advantage, which leaves everyone better off in the long run.

4. Say's law: To demand goods, you must first supply them; you cannot demand something into existence. This also suggests there is no general glut (overproduction of everything).

5. General equilibrium: Every part of the economy is connected, so small changes in one part reverberate throughout the economy. Interventions have long-run effects, and there is "no such thing as a free lunch" as someone always pays.

6. Marginal utility: Both value and utility are entirely subjective. Value is not determined solely by production cost. Prices are an expression of subjective value determined by supply and demand.