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I was thinking recently how economic theories (the stuff they teach you in college) affects real-life decisions. I found some examples (see below), but most of them are from the past and many of those theories are not "established"/respected today.

What are examples from the present or recent past, when an established economic theory affects real-life decisions, preferably on a large scale?

I'm interested in cases when some organization or individual decides what to do based on such theories and their decisions affect many people (e. g. it is known that the central bank of country X uses some monetary economics theory to decide what the interest rate should be). I'm looking for examples of established economic theories being widely used "in the wild" (in the real world).

Examples from the past:

  • Vulgar liberalism: Economic reforms in the post-Soviet Russia in the 1990es.
  • Marxism-Leninism: Soviet Russia
  • In the late 1990es many people believed that free trade between the US and China would benefit both sides. This belief was based on the experience with trade between the US and European countries (Germany, France). The US helped China join the WTO in 2001. 17 years thereafter it turned out that free trade with China was harmful to the US economy because China is very different from Germany and France. The methodology used by those economists was wrong and the decisions based on it affected about 400 000 people in the American manufacturing sector (source, passage starting with "We would conservatively estimate...").
  • Chicago school of economics: Milton Friedman's ideas influenced how Estonia's economy was reformed in post-Soviet times.
  • Input-output models were used, among other things, in the Soviet planning economy.
  • Linear programming/Operations research was used to optimize the output of factories (allegedly both in socialist and capitalist countries).
  • Demurrage proposed by Silvio Gesell was used in, among other things, the Austrian city of Wörgl (German) in 1932.
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    $\begingroup$ If points 1. and 4. are valid examples then pretty much every economic theory is, because most versions of some idea have influenced something at some point. $\endgroup$ – Giskard Mar 20 '18 at 21:35
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    $\begingroup$ DSGE models are quite modern and used by almost all central banks in the world. Not all undergraduate programs teach them though. $\endgroup$ – BB King Mar 20 '18 at 23:08
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    $\begingroup$ Welcome to the site. However I'm voting to close this question as too broad because the number of combinations of policies and countries that might be considered is very large, and any one might be contentious. A question about the application of a specific economic theory would be more suitable for this site. $\endgroup$ – Adam Bailey Mar 21 '18 at 9:28
  • $\begingroup$ They are commonly used as a point of reference. "What if laissez-faire"? (then ask about monopolies). "What if Leninist technocracy"? (then ask about Stalin). "What if a Marxian 100% inheritance tax?" (then ask about parental altruism and labour or entrepreneurial effort). "What if production technologies themselves determine the socio-political context?" (and then ask if some correction for expected effects should be intentionally undertaken). $\endgroup$ – nathanwww Mar 21 '18 at 22:10
  • $\begingroup$ @BBKing Is there good evidence, that something good is coming from the banks employing DGSE models? I would tend to mistrust models that exogenously plug in equilibrium as a given. $\endgroup$ – gwr May 16 at 5:42
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There’s an argument in modern economic theory (Macroeconomics Mankiw 5th edition) that a society is only as wealthy as its GDP, or the goods and services within the economy, adjusted for inflation (not nominal GDP). This would highlight if we use deductive logic that our trade agreements with Germany, AND France were not good agreements because the Trade was one sided (not a mutual flow). They produce a car for example, we produce nothing. Modern economic theory teaches us that society faces a trade off between production and consumption. Consume a lot now, consume much less later, because you must produce to increase your future consumption.

All of this is relevant to your question because trade agreements with China AND Germany led to a similar issue. The United States consumed and did not produce proportionately (severe trade imbalances). For a while it feels good to produce without consuming (Mankiw uses an illustration of an economy that can produce robots or pizza’s), but as you can see, the lack of production leaves you with no resources over time to increase consumption. Real GDP is higher in the long-run if you produce at an accelerated rate, than if you consume without an increase in production. The real world result is that you’d expect the exact outcome that we got from “free trade” with China. They can simply produce cheaper and more goods, we don’t produce as much or as efficiently, and the outcome is what we see today if we follow modern (college) economic theory.

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Spectrum auctions are generally designed by economists using results and insights from auction theory. For example, most modern spectrum auctions are at least somewhat related to the ascending clock proxy auction of Ausubel and Cramton. These auctions are used to sell hundreds of millions of dollars of radio spectrum licenses. A similar point can be made about the auction mechanisms used by other branches of the public section (such as central bank treasury auctions).

Matching theory has been widely applied in the design of many real-world markets and allocation mechanisms. Examples include the assignment of student doctors to medical residency, the assignment of students to high schools, and the pairing of kidney donors with patients.

Compeition (antitrust) policy is based to a very large extent on results from industrial organisation. This includes policy formulation informed by many comparatively recent results on topics including bundling, collusion, and vertical restraints.

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This is an excellent question. I believe there are five different "flavors" of conventional economics that dominate our landscape today that come from the past. In order of emergence they would be:

  1. Modern Capitalism: this is the classical free-market capitalism: supply and demand discover price of goods, services, labor, money and risk in open, transparent markets.
  2. Marxism: developed by Karl Marx in the second half of the 19th Century, Marxist analysis holds that private capital has a built-in advantage over labor, and left to its own devices capital will impoverish laborers and enrich the owners of capital.
  3. Socialist State Capitalism: unfettered capitalism creates great disparities in income and wealth (that is, winners and losers). The solution is to extract wealth from the free-market winners via taxes for social programs that distribute the nation's wealth more equitably.
    1. Neo-Keynesian State Capitalism: to counter recessions, the state (government) increases its own borrowing and spending (called deficit spending) to compensate for declining private consumption, and the central bank lowers the cost of borrowing money and floods the banking system with credit to persuade households and businesses to borrow money to spend and invest.
    2. Neoliberal Global Capitalism: government regulations and meddling (that is, picking winners and losers rather than letting the free market select winners and losers) hamper growth, and without growth prosperity declines for rich and poor alike. The solution is to cut regulatory red tape and unleash markets to allow the free flow of information, labor and capital. This freedom increases the pie of wealth for everyone in the economy.

It's important to note that these established examples of economic theory at play today do not replace each other the way conventional high school economics would have us believe; in the modern post-World War II era, each new system is layered on top of the existing arrangement. Thus, state socialism didn't replace free-market capitalism; it was added as a new layer that distributed income to social programs and controlled key industries. The increased role of the state in the form of Keynesian policies influenced free-market capitalism but did not displace it, and neoliberal globalization extended the free flow of capital even as it left many domestic industries virtually untouched.

Again, you cite examples from the past which can mislead readers into thinking, these economic theories are no longer practiced and so what is in practice today?

What I am saying above, is those five that I cite are the dominant economic theories and they are ALL in practice today.

There are no 100% ideologically pure economies...virtually every major economy is a complex mix of free markets, social program spending, Keynesian stimulus and neoliberal globalization. Take the United States for example, widely held as a free-market economy, devotes $2.5 trillion of its $3.8 trillion Federal budget to social programs.

European nations such as Germany widely held as social-democratic relies heavily on globalization and exports to fund their social spending.

China, nominally Communist, relies on free markets to generate the revenues needed to subsidize state-owned enterprises (SOEs).

The point being we don't have one dominant economic theory in play at this time; we have a multitude of economic theories being mixed and applied together. These economies co-exist and can be imagined as layers that overlap each other in certain areas but operate by their own rules and inputs.

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