Economics School of Thought and History of Economics

Economic School of Thoughts from Neo-Classical to Modern

1. Topic A BRIEF STUDY OF DIFFERENT SCHOOLS OF ECONOMIC THOUGHTS

2. What is School of Thought ??? A doctrine, philosophy, philosophical system, school of thought, is a belief (or system of beliefs) accepted as authoritative by some group or school. Thus in economics, a school of thought can be thought of as a belief or system of beliefs held by some group of economists. Overall the definitions of Economics can be well explained by different School of Thoughts. Classical School of Thoughts Neo Classical School of Thoughts Keynesian School of Thoughts Modern School of Thoughts New Keynesian School of Thoughts

3. Classical School of Thoughts Classical School of Thoughts includes all those Economists who followed Adam Smith’s concept of Economics till Alfred Marshal came in 1890. List of following classical economists is given below: Frederic Bastiat Thomas Jophlin John Stuart Mill James Mill David Ricardo Robbert Torrens

4. Adam Smith’s Concept Adam Smith was the founder of Classical School of Thoughts. He is also known as the The Father of Economics. In the year 1776 he wrote a book “An Inquiry into Nature and Causes of Wealth of Nations”. He divided his definition into four parts . Production of Wealth: Production is done with four factors of production i.e. Land, Labor, Capital and Organization Distribution of Wealth: Distribution is done among the four factors of production as their reward i.e. Rent, Wages, Interest and Profit. Consumption of Wealth: Use of wealth/profit to fulfill needs. Exchange of Wealth: Transactions are done when wealth is used for fulfilling the needs.

5. Criticism According to John Ruskin and Thomas Carlyle---Adam Smith has made Economics a Dismal Science & Pigs Philosophy in which only wealth is discussed. They criticized that Adam Smith’s concept of Economics provokes Greed & he has made it a Science of Bread and Butter.

6. Focus on the Supply Side Classical economics focused on the supply side of the economy. Specifically, Jean Baptiste Say’s Law dominated classical economic thought: Supply creates its own demand.  Say meant that production creates income that provides enough purchasing power to purchase all the goods being produced, no more and no less.  One hundred dollars worth of goods produced creates one hundred dollars worth of income.  In this model, excess supply in one market must be balanced with excess demand in another; there can be no such thing as economy-wide excess supply.  This conclusion is known as Walras ’ law. A shift in relative demand will result in changes in relative prices; if one good is more desirable it will rise in price, while less desirable goods will fall in price.  The aggregate price level will not change.

7. Economy-wide Unemployment isn’t likely Widespread unemployment simply should not occur, according to classical theory.  If it did, the cause must be “sticky” wages—wages that don’t adjust downward, due to market imperfections such as unions.   Labor unions interfere with the economy’s movement towards full employment because they push up wages and make workers less willing to relocate for new work.  Over time though, unemployment should disappear. In classical thought, the labor market determines employment. At the equilibrium wage rate, everyone who wants a job will have one. Unemployment was believed to be caused by people choosing not to work for low wages.

8. Neoclassical School of Thought Though the term “neoclassical economics” was coined in 1900, historians trace the theory’s origins back to the 1870s through the works of economists William Stanley Jevons, Carl Menger and Leon Walras . These economists focused on how the perceived usefulness, or utility, of goods affected market forces. Since utility is determined at the consumer level, neoclassical economics largely became a study in microeconomics . Neoclassical theory operates on a few basic assumptions–mainly that economic decisions are always made rationally based on fully informed evaluations of utility. In other words, consumers compare goods and purchase the ones having the greatest utility, or highest personal value. The consumer’s main goal, the theory states, is to maximize personal satisfaction. Likewise, the goal of companies is to maximize profits.

9. Neo Classical Economists William A. Barnett Irving Fisher Farniyo Hayashi Alfred Marshall William Smart Harald Uhlig

10. Assumptions/features All economic agents optimize continuously, i.e. subject to their constraints, firms maximize profits and households maximize utility. In taking optimizing decisions, agents take into account only relative prices (do not suffer from money illusion). Agents able to exhaust all profitable opportunities, wages and prices are flexible and markets continuously clear.

11. Modern school of economic thought “Economics is the Science of Scarcity and Choice” David Romer,Lionel Robbins,Buz Brock, Richard Thaler , William Baumol , George Akerlof , Joe Stiglitz , David Card, Alan Krueger, Paul Krugman , Ken Arrow, Amartya Sen , Thomas Shelling. Each is considered a top modern economist, but each operates outside the “neoclassical framework” in portions of his work.

12. Robbins Definition of Economics Prof. Lionel Robbins has strongly criticized Alfred Marshall's definition about economics in 1931-1932 in his book "Nature and Significance of Economic Science." He said that the concept of material welfare does not explain the subject economics on wide and scientific grounds. The word "material" imposed unnecessary limitation . Prof. Lionel Robbins thus defined economics in the following four fundamental propositions that constitute the basis of the structure of economic science. 1.     Human wants or ends are unlimited. 2.     Human wants are different in importance. 3.     Resources to fulfill human wants are limited. 4.     Resources have alternative uses.