schools of economics thought

Orthodox Economic models

This document summarizes and critiques the twelve major economic schools of thought detailed in the video “Every Major Economic Theory Explained in 20 Minutes” (2024). adamsaxiom in this video

1. Classical Economics

• Key Figures: Adam Smith (1776), David Ricardo.

• Core Concept: The economy is a self-regulating machine driven by the “Invisible Hand” of rational self-interest.

• Prescriptions: Laissez-faire policy (let it be). Markets naturally adjust through prices and wages. Ricardo introduced “comparative advantage,” proving countries benefit by specializing in what they produce most efficiently.

2. Marxian Economics

• Key Figures: Karl Marx.

• Core Concept: The labor theory of value, which argues that a product’s value comes entirely from human labor. Profit is seen as “surplus value” extracted by capitalists from exploited workers.

• Prescriptions: Predicts capitalism will inevitably collapse under its own contradictions, transitioning naturally through historical materialism toward socialism and communism.

3. Game Theory

• Key Figures: John von Neumann, John Nash.

• Core Concept: Analyzes strategic decision-making where an individual’s success depends on the choices of others.

• Prescriptions: Illustrated by the “Prisoner’s Dilemma,” showing how rational self-interest can lead to collectively disastrous outcomes (e.g., arms races, price wars, climate change). The “Nash Equilibrium” defines a state where no player wants to change their strategy unilaterally.

4. Neoclassical Economics

• Key Figures: Late 19th-century marginalists.

• Core Concept: Shifts focus from social classes to individual utility. It introduced “marginalism” (value is derived from the satisfaction of the next unit consumed, explaining why diamonds are expensive while essential water is cheap).

• Prescriptions: Models the economy as an equilibrium of supply and demand curves, assuming perfectly rational actors working to maximize utility and profits.

5. Keynesian Economics

• Key Figures: John Maynard Keynes (1936).

• Core Concept: Focuses on aggregate demand. During downturns, individual thrift becomes a collective “paradox of thrift,” reducing spending and causing a downward economic spiral.

• Prescriptions: The government must step in during depressions to spend money, cut taxes, and create a multiplier effect to kick-start flow.

6. Supply-Side Economics

• Key Figures: Arthur Laffer, Ronald Reagan (1980s).

• Core Concept: Focuses on boosting production rather than demand.

• Prescriptions: Cut taxes and regulations to incentivize investment and work. It relies on the “Laffer Curve” (arguing lower tax rates can increase total tax revenue) and “trickle-down” effects.

7. Monetarism

• Key Figures: Milton Friedman (1970s).

• Core Concept: Inflation is always and everywhere a monetary phenomenon caused by printing too much money.

• Prescriptions: Rejects Keynesian fine-tuning due to policy lags. Advocates for a simple, predictable rule of growing the money supply at a small, steady percentage annually.

8. Development Economics

• Key Figures: Muhammad Yunus, Amartya Sen.

• Core Concept: Explores why some nations stay poor, identifying “poverty traps” where lack of capital, health, or infrastructure creates a self-reinforcing cycle.

• Prescriptions: Targets micro-interventions (e.g., microfinance, conditional cash transfers) and emphasizes that robust institutions (rule of law, property rights) matter more than raw resources.

9. Austrian School

• Key Figures: Carl Menger, Friedrich Hayek, Ludwig von Mises.

• Core Concept: Rejects mathematical modeling in favor of human action (praxeology). Recessions are caused by central banks keeping interest rates artificially low, creating a “sugar rush” of malinvestment.

• Prescriptions: Rely on the price system to transmit information. Central planning is impossible due to the “knowledge problem.”

10. Behavioral Economics

• Key Figures: Daniel Kahneman, Amos Tversky.

• Core Concept: Humans have “bounded rationality” and are prone to cognitive biases (e.g., loss aversion, where losing £100 hurts more than gaining £100 feels good).

• Prescriptions: Markets are not perfectly efficient. Uses subtle “nudges” to steer people toward better decisions while preserving choice.

11. New Institutional Economics (NIE)

• Key Figures: Ronald Coase, Douglas North.

• Core Concept: Explains why firms, contracts, and legal frameworks exist to reduce “transaction costs” (the friction of doing business).

• Prescriptions: Economic development is “path dependent”—shaped heavily by historical institutions and property rights rather than simple capital accumulation.

12. Public Choice Theory

• Key Figures: James Buchanan, Gordon Tullock.

• Core Concept: Applies economic models to politics. Politicians and bureaucrats are not selfless; they are rational actors seeking votes and budget expansion.

• Prescriptions: Explains why bad laws persist due to “concentrated benefits and dispersed costs” (e.g., small interest groups lobbying hard while the general public pays a tiny individual cost). Recommends strict constitutional constraints on government spending.

Heterodox Models and Economists

…. Not covered by above

• doughnut economics Kate Raworth

• Mariana Mazzucato and her flavour of missions.

• Ecological Economics (Herman Daly, Robert Costanza): This is the most glaring omission. Neoclassical and Keynesian economics view the environment as a minor sub-sector of the market. Ecological Economics flips this, modeling the human economy as a wholly dependent subsystem of the Earth’s finite, thermodynamic biophysical system. It is the academic foundation for post-growth and degrowth theories.

• Post-Keynesian Economics (Joan Robinson, Steve Keen): While the video covers John Maynard Keynes, it ignores his heterodox successors. Post-Keynesians reject the mainstream “neoclassical synthesis” of Keynesian ideas. They model the economy using fundamental uncertainty, historical time, and “endogenous money” (the reality that private banks create money out of thin air when they issue loans, rather than just acting as intermediaries for savings).

• Modern Monetary Theory (MMT) (Stephanie Kelton, L. Randall Wray): A highly influential branch of heterodox macroeconomics that analyzes fiat currency systems. MMT argues that a government that issues its own sovereign currency (like the UK or the US) is never financially constrained by tax revenues or borrowing, but is instead constrained only by real resources and inflation.

• Original Institutional Economics (Thorstein Veblen, John R. Commons): The video covers “New” Institutional Economics (which uses neoclassical mathematics to analyze transaction costs). It entirely excludes the “Original” school, which argues that economic behavior is not driven by rational, utility-maximizing individuals, but is instead structurally molded by evolving social habits, legal frameworks, and power dynamics.

• Feminist Economics (Marilyn Waring): This school critiques standard macroeconomic accounting (such as GDP) for completely ignoring non-market labor, care work, and household production—even though this unpaid labor forms the invisible baseline that allows the paid economy to function.

Structural Insights for Chemical and Environmental Engineering

For your son studying a combined Chemical and Environmental Engineering degree at university, these theories bridge the gap between physical science and economic reality:

• Game Theory and the Climate Dilemma: Game theory (specifically the Prisoner’s Dilemma) is the definitive model for global decarbonization. While it is collectively rational for nations to cut emissions, it is individually rational for each country to free-ride. Your son’s work in green technology will always operate within this geopolitical constraint.

• New Institutional Economics and Infrastructure: Environmental engineering projects (like carbon capture plants or regional hydrogen networks) are often slowed down by transaction costs and regulatory friction rather than technical limits. Understanding NIE will help him design projects that minimize administrative and legal hurdles.

• Development Economics and Resource Traps: When designing environmental solutions for developing regions, his engineering skills must pair with institutional awareness. As development economics shows, introducing high-tech water filtration or clean energy is useless if the local institutional framework cannot maintain it, turning a solution into a stranded asset.

The Missing Historic and Modern Models

To truly cover all major past and present economic models, we must add the following five highly distinct schools of thought:

• 1. Physiocracy (18th Century): Led by François Quesnay in France, this was the very first organized school of economic thought. It argued that the wealth of nations is derived solely from the value of “land agriculture” or natural resources. They viewed labor and manufacturing as “sterile” because they merely reformulate raw materials rather than creating new biological energy.
• 2. Mercantilism (16th–18th Century): The dominant pre-classical model. It viewed global wealth as a static, finite pie. A nation’s power was measured solely by its gold reserves, leading to aggressive protectionism, colonization, and monopolistic trading companies (e.g., the East India Company).
• 3. The Historical School (German and English - 19th Century): Led by Gustav von Schmoller. This school rejected the classical idea that there are universal, mathematical “economic laws” (like supply and demand) applicable to all times and places. Instead, they argued that economics is entirely historically specific and culturally relative, advocating for deep empirical history over abstract theory.

• 4. Complexity Economics (Late 20th Century–Present): todo Pioneered at the Santa Fe Institute (W. Brian Arthur). This modern heterodox school rejects the neoclassical idea of “market equilibrium” entirely. Using computer simulations and agent-based modeling, it views the economy as a complex, adaptive, non-equilibrium system—much like a biological ecosystem or a weather pattern—where small changes can trigger massive, unpredictable chain reactions.

• 5. Buddhist Economics / Appropriate Scale (E.F. Schumacher) todo: Popularized in the 1973 book Small is Beautiful. This model rejects the consumerist assumption that “more consumption is always better.” It prioritizes human well-being, dignified work, and local self-reliance, warning that giant centralized industrial structures destroy both local communities and the environment

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