An Introduction to Schools of Economic Thought
Economics desperately needs diversity of thought
by Eamonn Butler
Modern economics education has "forgotten its own history", focusing on mathematical models rather than understanding different approaches to economic problems
A new book explains how ten major schools of thought offer different solutions to economic challenges
It reveals how Austrian School economists predicted government policy failures decades before they occurred, while Keynesian approaches dominated discourse despite systemic flaws
A new book from the Institute of Economic Affairs argues that economics education has become a "sterile and lifeless endeavour" that has forgotten its intellectual heritage, leaving students with mathematical formulas but no real understanding of the fundamental debates that shape economic thinking.
An Introduction to Schools of Economic Thought, published today and authored by Eamonn Butler, traces the evolution of economic ideas from Ancient Greece to modern Behavioural Economics. The book demonstrates how different schools of thought, including the Classical School, Austrian School, Chicago School, and Keynesian approaches, offer radically different explanations for how economies work and what governments should do about economic problems.
Butler argues that the mathematical, model-based approach that dominates university economics courses "crowds out many other things" and has created a generation of economics graduates who know formulas but understand little about the intellectual battles that created modern economic policy. The book shows how these different approaches led to vastly different policy prescriptions, from Adam Smith's "invisible hand" of free markets to John Maynard Keynes's call for government intervention.
The primer reveals how Austrian School economists like Ludwig von Mises and Friedrich Hayek warned as early as 1920 that central planning would fail because governments lack the price signals needed to allocate resources efficiently. These predictions proved accurate when Soviet-style economies collapsed decades later.
Meanwhile, it shows how Keynesian economics became dominant after the Great Depression, despite what Public Choice School economists later demonstrated were systematic flaws in how governments actually implement economic policies.
The book explains how the Chicago School's Milton Friedman used extensive empirical data to show that the Great Depression was caused not by market failures, as Keynesians claimed, but by government monetary authorities allowing the money supply to shrink by over a third. This research helped shift global economic policy away from activist government intervention toward more market-oriented approaches in the 1980s and 1990s.
Economics students should learn about the various different schools of thought.
Eamonn Butler, Director of the Adam Smith Institute and author of An Introduction to Schools of Economic Thought, said:
"No one view of economics, nor of any part of human life, explains everything. But by understanding past economists’ viewpoints, we can enhance our own understanding of how economics works—and how what our students get from their teachers is so often very flawed. I hope this book will be of value to lay readers who want to learn about how modern economics has evolved. But even more, I hope that students will read it and bring their own new ideas to bear on our economic problems."
Very interesting Eamon. As we are still trying to find that holy grail we can deduce that none have cracked it! For their time it is an interesting assessment of their thoughts. But, I fear they would all say different now. I’d like to give it a go! …. The one thing we now have that they didn’t is computers! And of course internet banking and payment cards. Even so, we or rather the governments are not using them! Another important consideration is to get beyond a two dimensional bookkeeping budget as used by Thatcher. You can’t run a Country thinking it’s like a household budget! No!! You need to think in the round. Keynes was right in that way. And by that, I mean you must think in three and four dimensions. We learn as children with ‘Piggybank economics’ that, if you put money in it grows and if you take money out, it reduces. And if you want to save, you keep adding without taking away! Very hard to do at that tender age! But really, is that the way to run an economy for 70 million people?… of course not! But they can’t seem to think beyond two dimensions. Money in and money out!… to think in the round, holistically, you have to have a better plan than just hope and ‘market forces’. There has to be a mechanism to return money for a cycle and rotation to occur. So we need to think in 3D. How can money come back around? Now there is the holy grail. How can money rotate? Well for the first time in monetary history we can plan for it! With computers and electronic banking we can track every penny! Yes, for 79 million people we can see who when how and why and see every transaction in real time! …. And there it is, the fourth dimension… time! We can then put a time scale to the cycle of rotation via SPENDING. Despite most people’s inability to understand economics it’s rather easy in reality. It’s not as difficult to follow. But if you keep thinking all those gone by have the answers and look for them there you’ll end up going round in a never ending circle. First you must have sufficient money in the economy. That sounds simple but why aren’t you looking at it? A country of 70 million needs more money than say one of 2 million. It’s just logical. But that job is for mathematicians. But it needs debate. Secondly, you need to ensure that the economy can produce and reward by payment that effort. So we need a fair exchange of work. We need to reward hard work, skills, brains and brilliance inc leadership. But fairness must be a factor to keep a happy workforce. Next we need to consider our democracy. So we can’t sustain too much money in the hands of a few. The money must rotate for the majority of the workforce to be paid for their efforts. And next we need to start the ball rolling! And so it starts with those who have it. After all you wouldn’t expect a poor man to have money, would you? Then I would let market forces determine value. And let the workers or recipients of money, non workers get on and enjoy their money. Via SPENDING. But here is the kicker!…. Put a ‘spend by date’ on all or most of that money so it has to be SPENT. This can be done electronically. Money goes in and money is SPENT in a cycle, say a month. As bills, loans and taxes etc have to be paid in a time, so should money be returned to the economy in a set time! Four dimensions!…. Now, we have an economy already so how would we transmission? Firstly, reinstate exchange controls. Removed by Thatcher. Stop money going abroad. Let goods flow but not our money!… then get all money swapped for digital money. At that point we will see who has it! And how they got it! Then let the show begin! As for taxation, I would guess that the tsunami of SPENDING would be so great that we would only need one tax, VAT. Earn as much as you can, but spend it snd enjoy it knowing money will come back around again, and again and again, autonomously and perpetually. Spend it or loose it to the exchequer. I would think we can pay a much higher state pension and benefits. Wages will be fair and generous, we need a clear gap between wages and benefits to show work really pays. And tax according to government needs. It will streamline the economy so it fires on all cylinders. Business needs money, workers need money and government needs money. Non workers need money but, why should we limit all these amounts? Have a wider vision and make it really work. Turbo charge it. Anyone can make cuts! It takes thinking in the round to make it run like a Swiss watch, scrub that, a Rolls Royce! We are told that 95% of money is held by 5% of people. That not fair or just but crucially it’s undemocratic! My view is even the rich will be richer! With extra income for all they too will SPEND all their money so get loads of stuff (a technical term) that is valuable so will be richer off that, just not money itself! Why do we limit our thinking and our need for money? I’m fed up with austerity and cuts. Start making us all happy. Make our tax triggering economy increase its take exponentially more by letting ALL money rotate via SPENDING! Debate that Eamonn?