Which are the different Schools of Economic Thought?

Question

It would be great to have a brief but comprehensive list of current (e.g. Austrian) and defunct (e.g Mercantilism) schools of thought in Economics. I think an ideal answer would include:

1. the defining features of the school, which enable it to differentiate it with the rest.

2. major authors/writers behind the school.

3. key papers/books/textbooks presenting/defending the ideas of the school of thought.

Note: To order the discussion and avoid very lengthy answers, I suggest we have one school of thought per answer (like they do in other forums, like TeX).

Answer 1

Post-Keynesian

Post-Keynesianism (PK) is based on the criticism of the so called "Keynesianism", which according to PKs is not loyal to core Keynes ideas. As such, this school of thought aims to be called the "true" Keynesians.

The criticism starts with the workhorse model of Keynesianism, the IS-LM model, developed by Hick in a 1937's article, right after Keynes magnum opus. According to Minsky (a prominent PK), this is

an article which ... misses Keynes’ point completely’ (Minsky, 1969, p. 225)

Later in life Hicks acknowledge this, by stating that his model

was Walrasian rather than Keynesian in origin (Hicks, 1981, p. 142)

Given this background, PK has the following core features in its method:

• emphasis on disequilibrium rather than equilibrium (as in IS-LM).
• rejection of rational expectations. Agents can make inaccurate estimates of future based on present information without need to be either fully rational or incredibly naive.
• against microfoundations. PKs argue that "emergent properties" of a system, arising from the interaction of individuals, means a system cannot be understood from a simple extrapolation of the properties of a few agents (e.g. representative firm and household).
• the use of Leontieff (fixed proportion) production functions. PKs reject the marginalist theory, and argue that the latter is empirically inconsistent (e.g. Blinder, 1998).
• Money is not neutral. This is a straightforward Keynesian argument, also present in IS-LM. Modern approaches highlight the crucial role of banks in endogenous money creation, which is not dependent on reserves (e.g. Moore, 1979).
• Government has an important role in stimulating aggregate demand. Also in line with IS-LM, PKs argue that effective demand is what matters for economic activity. Say's law is therefore rejected.

Some early authors of this discipline are Michael Kalecki, Joan Robinson, Nicholas Kaldor, Luigi Pasinetti, and Piero Sraffa. More recent authors include Wynne Godley, Steve Keen, Frederic S. Lee, and Marc Lavoie.

A recent introduction to PK can be found in Godley and Lavoie (2007). There is also a very comprehensive two-volume Oxford Handbook of Post-Keynesian Economics.

Sources: own research, and Keen (2013).

Answer 2

Chang Ha-Joon distinguishes between 9 schools of thought. Here are his one-sentence summaries of each:

1. Classical: The market keeps all producers alert through competition, so leave it alone.

2. Neoclassical: Individuals know what they are doing, so leave them alone – except when markets malfunction.

3. Marxist: Capitalism is a powerful vehicle for economic progress, but it will collapse, as private property ownership becomes an obstacle to further progress.

4. Developmentalist: Backward economies can’t develop if they leave things entirely to the market.

5. Austrian: No one knows enough, so leave everyone alone.

6. (Neo-)Schumpeterian: Capitalism is a powerful vehicle of economic progress, but it will atrophy, as firms become larger and more bureaucratic.

7. Keynesian: What is good for individuals may not be good for the whole economy.

8. Institutionalist (Old and New?): Individuals are products of their society, even though they may change its rules.

9. Behaviouralist: We are not smart enough, so we need to deliberately constrain our own freedom of choice through rules.

Source: Economics: The User's Guide (2014).

Answer 3

Complexity/Evolutionary Economics

This approach to economics, widely inspired in Evolutionary Biology, is a direct criticism to Neoclassical Economics, as its key postulates indicate. These are:

• Economics are open, dynamic, non-linear systems far from equilibrium

• Agents have realistic rationality, as opposed to perfect rationality. This is, they use inductive heuristics or rules of thumb for decision-making; they are subject to error/biases; have finite computing power; and are a constant learning and adaptation process. Information is important.

• Agents interaction modeled explicitly, for example, as in Agent-Based Models, or via explicit networks, as opposed through the market only (supply/demand).

• No sharp distinction between macro and microeconomics. Instead, the focus is on emergence. This is, how macro processes and patterns emerge from micro behaviours and interactions.

• There is an evolutionary process which creates novelty, induces greater order, but also increases complexity. For example, creative destruction of firms and technology follows a natural selection mechanism, where fitter firms/methods survive and reproduce.

• Markets are not perfectly efficient at allocation, but are very effective in create wealth (through evolution and natural selection, again). The State can create the institutional conditions for economic evolution.

According to Eric Beinhocker, complexity economics is built upon very old contributions, including Mathus, Darwin, Marshall, Schumpeter, and Hayek, to name a few. It is inspired by Biology (and Evolutionary Biology in particular), but also by physics. There is a discipline related to the latter and many times associated with Complexity ideas, called Econophysics. In terms of Institutions, the main precursor of this school of thought, and still central today in its development, is the Santa Fe Institute, in the U.S.

Answer 4

The Chicago School

The Chicago School is a sub-school of the broader neoclassical school of economic thought, named for the significant influence of prominent scholars in Chicago. According to Wikipedia "The term was coined in the 1950s to refer to economists teaching in the Economics Department at the University of Chicago, and closely related academic areas at the University such as the Booth School of Business and the Law School. They met together in frequent intense discussions that helped set a group outlook on economic issues, based on price theory."

Key principles of this school include:

• the importance of careful and systematic analysis of social problems to the exclusion of intuition and political prejudice;
• the default position that markets work well unless specific reason to believe otherwise can be identified;
• the adoption of the neoclassical research method, characterized by the development of theory within mathematical models of optimizing behavior along with quantitative empirical testing of those theories;
• the principle that insights from market behavior can be applied to study a wide range of non-market social phenomena.

The Chicago School describes an approach to economics and is not confined to any particular field (indeed, the term also covers practitioners from closely related disciplines such as law who adhere to the same kind of principles). Prominent examples of work falling within this school are

• Milton Friedman's work on macroeconomics and political economy, with an archetypal Chicago view summarized in his book Capitalism and Freedom.
• Gary Becker's and Richard Posner's work to apply economic principles to study a wide range of social phenomena, such as crime (see, e.g., Becker's "Crime and Punishment: An Economic Approach" or Posner's "Economic Analysis of Law") and marriage (see, e.g., Becker's "A Theory of Marriage").
• Robert Bork and Aaron Director's work advocating systematic economic analysis with a clear objective in antitrust cases (see, e.g., Bork's book "The Antitrust Paradox").
• Robert Lucas, whose famous critique pointed out that a policy change many change agents' decision rules so that econometric analyses that assumed the decision rule to be fixed were not valid. Instead, Lucas advocated a micro-founded approach to macroeconomics in which the decision rules are explicitly modeled in equilibrium.
• Ronald Coase, who showed how market forces could be used to mitigate the effects of externalities (in "The Problem of Social Cost") and argued that the existence of firms can be attributed to optimizing behaviour to minimize transaction costs (in "The Nature of the Firm").

Note that while these works cover disparate branches of economics, they share in the application of the principle that individual rational behavior and systematic analysis of markets are important in understanding social phenomena.

Chicago School Economists' contributions have often been most valuable for the subsequent debate that they prompt. For example, Director, Bork, and others cogently argued that vertical relations between firms are not generally anti-competitive—contrary to the prevailing wisdom of the day. This prompted a re-think of decades of antitrust practice, and gave rise to an entire literature studying the limits of this line of reasoning and providing a much more nuanced understanding of sound antitrust practice.

A recent history of this school of thought can be found in the book

• Ebenstein, Lanny (2015): Chicagonomics, St. Martin's Press.

Answer 5

Neoclassical Economics

It is not-controversial to say that Neoclassical Economics is the dominant strand of economics within mainstream economics, not only in academia but also in teaching. Regarding this school of thought, this article states:

It describes the synthesis of the subjective and objective theory of value in a diagram of supply and demand, which was developed by Alfred Marshall. Marshall combined the classical understanding that the value of a commodity results from the costs of production with the new findings of marginalism, stating that the value is determined by individual utility. Until today, the market diagram representing the intersection of (objective) supply and (subjective) demand is a central element of neoclassical economics.

The core elements of this school of thought are:

• a view of the economic system centered on scarcity. This means the efficient allocation of resources is the core economic problem to solve
• individual action is the key focus to the study of economic phenomena (see methodological individualism for more details). This means social and economic dimensions that are not reduced to the individual are usually omitted from the analysis. Similarly, this makes the microfoundation of macroeconomics a key methodological aim (in opposition to e.g. (Post-)Keynesianism, or to emergence concepts in complexity economics).
• important emphasis (albeit not exclusively) on equilibrium and comparative static evaluations
• rationality and maximisation of utility are central methodological tools (homo economicus). This school of thought departs from classical economics in that it adopts the subjective theory of value.
• a very high regard on the formalisation of theories through mathematics and marginalist principles.
• economic reality can be observed and modelled, independent of the interpretation of the individual. This positivism is common in most of schools of thought, but different for example in Austrian Economics (constructivist). It believes that science can be divided between normative and positive realms.

Albeit many economists contributed to the emergence of this school of thought (particularly the "marginalists" William Stanley Jevons, Leon Walras, and Carl Menger), the father of neoclassical economics is Alfred Marshall. In his famous and widely used book "Principles of Economics", published in 1890, he provided a systematic and rigorous treatment to now-common topics like "elasticity, consumer surplus, increasing and diminishing returns, short and long terms, and marginal utility". He was also the first to use the demand and supply graph:

Source: here plus Wikipedia.

Answer 6

Feminist Economics

Unlike Neoclassical Economics, which focus is usually on scarcity, Feminist economics focuses on the issue of Power relations, particularly in relation to gender and family structure. For example, whilst a neoclassical economist would study the gender gap in terms of benefits and costs (e.g. cost of post-natal leave), a Feminist economist would focus on how institutions (ranging from firm culture to family structures) are designed to the benefit of men's development and detriment of women's development.

Core elements of Feminist economics are:

• gender dimension central
• (evolving) institutions are important in shaping gender differences
• power relations and hierarchies matter
• policies are related to equality and emancipation (e.g. right to vote, financial independence, participation in unions, equal pay, etc)
• broad concept of labour, including unpaid activities like housework and care
• critique to masculine stereotype behind rational, egoistic, objective, utility maximizing homo economicus

Methodologically, there is no a clear, distinct perspective. Both quantitative and qualitative methods are used (according to Nelson (1995), this is consistent with a feminist stance against the stereotype where mathematical models are "masculine" and better regarded than the "femenine" qualitative methods, which are weaker).

Politically, the spectrum of feminist economics is quite broad, ranging from liberal feminists (focused mainly on equal access to labour market and institutions) to Marxists feminists (arguing that gender differences are intrinsic to capitalism).

Needless is to say that there are both female and male feminist economists. See a comprehensive list here.

Key references:

• If Women Counted by Marilyn Waring, considered the founding book of the discipline.
• Counting on Marilyn Waring: New Advances in Feminist Economics, a 2014 book with an update on developments in the discipline.
• Feminism and Economics, a 1995 paper on a mainstream journal (JEP) by Julie A. Nelson
• The Subjection of Women by John Stuart Mill, published in 1869.
• Feminist Economics, a peer-reviewed journal
• A recent The Economist article on Feminist Economics

Source: based on this article.