Mainstream economics

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Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis for discussion. Also known as orthodox economics, it can be contrasted to heterodox economics, which encompasses various schools or approaches that are only accepted by their proponents, but not by economists in general.

Economics Social science that analyzes the production, distribution, and consumption of goods and services

Economics is the social science that studies the production, distribution, and consumption of goods and services.

Heterodox economics schools of economic thought or methodologies that are outside "mainstream economics", contrasting with or going beyond neoclassical economics

Heterodoxy is a term that may be used in contrast with orthodoxy in schools of economic thought or methodologies, that may be beyond neoclassical economics. Heterodoxy is an umbrella term that can cover various schools of thought or theories. These might for example include institutional, evolutionary, Georgist, Austrian, feminist, social, post-Keynesian, ecological, Marxian, socialist and anarchist economics, among others.

In the history of economic thought, a school of economic thought is a group of economic thinkers who share or shared a common perspective on the way economies work. While economists do not always fit into particular schools, particularly in modern times, classifying economists into schools of thought is common. Economic thought may be roughly divided into three phases: premodern, early modern and modern. Systematic economic theory has been developed mainly since the beginning of what is termed the modern era.

Contents

The economics profession has generally been associated with neoclassical economics [1] and with the neoclassical synthesis, and since the mid-20th century, has included the Keynesian approach to macroeconomics. [2]

Neoclassical economics is an approach to economics focusing on the determination of goods, outputs, and income distributions in markets through supply and demand. This determination is often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production, in accordance with rational choice theory, a theory that has come under considerable question in recent years.

The neoclassical synthesis was a post-World War II academic movement in economics that worked towards absorbing the macroeconomic thought of John Maynard Keynes into neoclassical economics. The resultant macroeconomic theories and models are termed Neo-Keynesian economics. Mainstream economics is largely dominated by the synthesis, being largely Keynesian in macroeconomics and neoclassical in microeconomics.

Keynesian economics is a group of various macroeconomic theories about how in the short run – and especially during recessions – economic output is strongly influenced by aggregate demand. In the Keynesian view, named for British economist John Maynard Keynes, aggregate demand does not necessarily equal the productive capacity of the economy; instead, it is influenced by a host of factors and sometimes behaves erratically, affecting production, employment, and inflation.

United States

In the United States, economists are not generally separated into schools, but two major contemporary economic schools of thought have been the "saltwater and freshwater schools". In the early 1970s, so-called "fresh-water economists" challenged the prevailing consensus in macroeconomics research. Key elements of their approach were that macroeconomics had to be dynamic, quantitative, and based on how individuals and institutions make decisions under uncertainty.

United States Federal republic in North America

The United States of America (USA), commonly known as the United States or America, is a country comprising 50 states, a federal district, five major self-governing territories, and various possessions. At 3.8 million square miles, the United States is the world's third or fourth largest country by total area and is slightly smaller than the entire continent of Europe. With a population of over 327 million people, the U.S. is the third most populous country. The capital is Washington, D.C., and the most populous city is New York City. Most of the country is located contiguously in North America between Canada and Mexico.

In economics, the freshwater school comprises US-based macroeconomists who, in the early 1970s, challenged the prevailing consensus in macroeconomics research. A key element of their approach was the argument that macroeconomics had to be dynamic and based on how individuals and institutions interact in markets and on how they make decisions under uncertainty.

Many of the proponents of this radically new approach to macroeconomics were associated with Carnegie Mellon University, the University of Chicago, the University of Rochester and the University of Minnesota. They were referred to as the "freshwater school" since Pittsburgh, Chicago, Rochester, and Minneapolis are located nearer to the Great Lakes. The established consensus was primarily defended by economists at the universities and other institutions located near the east and west coast of the United States, such as Berkeley, Harvard, MIT, University of Pennsylvania, Princeton, Columbia, Stanford, and Yale. They were therefore often referred to as "the saltwater schools". Economists generally tend not to identify themselves as members of a particular school, though in the political arena they are sometimes categorized.

Carnegie Mellon University private research university in Pittsburgh, Pennsylvania, United States

Carnegie Mellon University (CMU) is a private research university based in Pittsburgh, Pennsylvania. Founded in 1900 by Andrew Carnegie as the Carnegie Technical Schools, the university became the Carnegie Institute of Technology in 1912 and began granting four-year degrees. In 1967, the Carnegie Institute of Technology merged with the Mellon Institute of Industrial Research to form Carnegie Mellon University. With its main campus located 3 miles (5 km) from Downtown Pittsburgh, Carnegie Mellon has grown into an international university with over a dozen degree-granting locations in six continents, including campuses in Qatar and Silicon Valley, and more than 20 research partnerships.

University of Chicago Private research university in Chicago, Illinois, United States

The University of Chicago is a private research university in Chicago, Illinois. Founded in 1890, the school is located on a 217-acre campus in Chicago's Hyde Park neighborhood, near Lake Michigan. The University of Chicago holds top-ten positions in various national and international rankings.

University of Rochester private, nonsectarian, research university in Rochester, New York, United States

The University of Rochester is a private research university in Rochester, New York. The university grants undergraduate and graduate degrees, including doctoral and professional degrees.

History

Economics has always featured multiple schools of economic thought, with different schools having different prominence across countries and over time. The current use of the term "mainstream economics" is specific to the post–World War II era, particularly in the English-speaking world, and to a lesser extent globally.

World War II 1939–1945 global war

World War II, also known as the Second World War, was a global war that lasted from 1939 to 1945. The vast majority of the world's countries—including all the great powers—eventually formed two opposing military alliances: the Allies and the Axis. A state of total war emerged, directly involving more than 100 million people from over 30 countries. The major participants threw their entire economic, industrial, and scientific capabilities behind the war effort, blurring the distinction between civilian and military resources. World War II was the deadliest conflict in human history, marked by 70 to 85 million fatalities, most of whom were civilians in the Soviet Union and China. It included massacres, the genocide of the Holocaust, strategic bombing, premeditated death from starvation and disease, and the only use of nuclear weapons in war.

English-speaking world Countries and regions where English is everyday language and people (or peoples) who speak English

Over 2 billion people speak English, making English the largest language by number of speakers, and the third largest language by number of native speakers. With 300 million native speakers, the United States of America is the largest English-speaking country. As pictured in the pie graph below, most native speakers of English are Americans.

Prior to the of development and prevalence of classical economics, the dominant school in Europe was mercantilism, which was rather a loose set of related ideas than an institutionalized school. With the development of modern economics, conventionally given as the late 18th-century The Wealth of Nations by Adam Smith, British economics developed and became dominated by what is now called the classical school. From The Wealth of Nations until the Great Depression, the dominant school within the English-speaking world was classical economics, and its successor, neoclassical economics. [3] In continental Europe, the earlier work of the physiocrats in France formed a distinct tradition, as did the later work of the historical school of economics in Germany, and throughout the 19th century there were debates in British economics, notably the opposition underconsumptionist school.

Mercantilism economic policy emphasizing exports

Mercantilism is a national economic policy that is designed to maximize the exports, and minimize the imports, of a nation. These policies aim to reduce a possible current account deficit or reach a current account surplus. Mercantilism includes a national economic policy aimed at accumulating monetary reserves through a positive balance of trade, especially of finished goods. Historically, such policies frequently led to war and also motivated colonial expansion. Mercantilist theory varies in sophistication from one writer to another and has evolved over time.

<i>The Wealth of Nations</i> 1776 work on economics by Adam Smith

An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith. First published in 1776, the book offers one of the world's first collected descriptions of what builds nations' wealth, and is today a fundamental work in classical economics. By reflecting upon the economics at the beginning of the Industrial Revolution, the book touches upon such broad topics as the division of labour, productivity, and free markets.

Adam Smith 18th-century Scottish moral philosopher and political economist

Adam Smith was a Scottish economist, philosopher and author as well as a moral philosopher, a pioneer of political economy and a key figure during the Scottish Enlightenment, also known as ''The Father of Economics'' or ''The Father of Capitalism''. Smith wrote two classic works, The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776). The latter, often abbreviated as The Wealth of Nations, is considered his magnum opus and the first modern work of economics. In his work, Adam Smith introduced his theory of absolute advantage.

During the Great Depression and the following Second World War, the school of Keynesian economics gained attention, which built on the work of the underconsumptionist school, and present-day mainstream economics stems from the neoclassical synthesis, which was the post–World War II merger of Keynesian macroeconomics and neoclassical microeconomics.

In continental Europe, by contrast, Keynesian economics was rejected, with German thought dominated by the Freiburg school, whose political philosophy of ordoliberalism formed the intellectual basis of Germany's post-war social market economy. Within developing economies, which formed the majority of the world's population, various schools of development economics have been influential.

Since 2007, the financial crisis of 2007–2010 and the ensuing global economic crisis has publicly exposed divisions within economics and spurred discussion. [4]

Term

The term "mainstream economics" came into use in the late 20th century. It appeared in 2001 edition of the seminal textbook Economics by Samuelson and Nordhaus [5] on the inside back cover in the "Family Tree of Economics," which depicts arrows into "Modern Mainstream Economics" from J.M. Keynes (1936) and neoclassical economics (1860–1910). The term "neoclassical synthesis" itself also first appears in the 1955 edition of Samuelson's textbook. [6]

Scope

Mainstream economics can be defined, as distinct from other schools of economics, by various criteria, notably by its assumptions, its methods, and its topics.

Assumptions

A number of assumptions may underpin many mainstream economic models, while being rejected by some heterodox schools. These include the neoclassical assumptions of rational choice theory, a representative agent, and, often, rational expectations. Much of modern economic modelling consists of exploring the effects that complicating factors have on models, such as imperfect and asymmetric information, incomplete markets, imperfect competition and transaction costs.

The starting point of orthodox economic analysis is the individual. People are generally defined as units with a common goal: maximisation through rational behaviour. The only differences consist of:

From this theoretical framework, orthodox economists derive that political action should not be used to solve the problems of the economic system. Instead, the solution ought to derive from an intervention on the above-mentioned maximisation objectives and constraints. It is in this context that economic capitalism finds its justification. Capitalism and its arguments seem logical because orthodox economics theories think of the aggregate economy as the sum of the agents trying to maximise their utility or profit through exchange. [7]

Methods

Mainstream economics has also been defined methodologically as work which mainstream economists are willing to engage, which requires conforming to the mainstream language of mathematical models, [8] featuring calculus, optimization, and comparative statics. Under this definition, areas of thought which are typically thought of as heterodox because they do not work under the typical neoclassical assumptions, such as econophysics, behavioral economics, and evolutionary economics, can be considered mainstream when they are engaged in the mainstream, using mainstream methods. [8] Geoffrey Hodgson has considered the possibility that evolutionary economics and institutional economics may eventually become a new mainstream. [9]

Additionally, some economic fields include elements of both mainstream economics and heterodox economics: for example, the Austrian economics [ how? ], [10] institutional economics, neuroeconomics and non-linear complexity theory. [11] They may use neoclassical economics as a point of departure. At least one institutionalist has argued that "neoclassical economics no longer dominates a mainstream economics." [12]

A countervailing trend is the expansion of mainstream methods to such seemingly distant fields as crime, the family, law, politics, and religion. This expansion is sometimes referred to as economic imperialism. [13]

Topics

Mainstream economics includes theories of market and government failure and private and public goods. These developments suggest a range of views on the desirability or otherwise of government intervention.

Criticisms

Since the financial crisis of 2007–2010, considerable conflict has arisen, among both economic theorists and a wider cross-section of the public, regarding the status and future of mainstream economics. [4] [14] Some critics have argued that potentially promising approaches have been excluded in major mainstream publications by a focus on problems amenable to formal modeling. [15] [16]

Chartalists, who are generally considered part of the Post-Keynesian school of thought, criticise mainstream theory as failing to describe the actual mechanics of modern fiat monetary economies. Chartalism focuses on an alternative model of the way money flows through the different sectors of an economy. Chartalists reject mainstream theories such as the loanable funds market, the money multiplier, and the utility of fiscal austerity.

Some economists, in the vein of ecological economics, believe that the neoclassical "holy trinity" of rationality, greed, and equilibrium, is being replaced by the holy trinity of purposeful behavior, enlightened self-interest, and sustainability, considerably broadening the scope of what is mainstream. [8] Ecological economics addresses sustainability issues, such as public goods, natural capital and negative externalities (such as pollution). [17]

Energy related theories of economic concepts also exist within energy economics relating to thermodynamic concepts of economic thinking, such as energy accounting. [18] Biophysical economics relates to this area. [19]

Related Research Articles

Macroeconomics branch of economics that studies aggregated indicators

Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies.

Post-Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, with subsequent development influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor, Sidney Weintraub, Paul Davidson, Piero Sraffa and Jan Kregel. Historian Robert Skidelsky argues that the post-Keynesian school has remained closest to the spirit of Keynes' original work. It is a heterodox approach to economics.

New Keynesian economics is a school of contemporary macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of new classical macroeconomics.

Classical economics or classical political economy is a school of thought in economics that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. Its main thinkers are held to be Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Robert Malthus, and John Stuart Mill. These economists produced a theory of market economies as largely self-regulating systems, governed by natural laws of production and exchange.

Steve Keen Australian economist

Steve Keen is an Australian economist and author. He considers himself a post-Keynesian, criticising neoclassical economics as inconsistent, unscientific and empirically unsupported. The major influences on Keen's thinking about economics include John Maynard Keynes, Karl Marx, Hyman Minsky, Piero Sraffa, Augusto Graziani, Joseph Alois Schumpeter, Thorstein Veblen, and François Quesnay. Hyman Minsky's financial instability hypothesis forms the main basis of his major contribution to economics which mainly concentrates on mathematical modelling and simulation of financial instability. He is a notable critic of the Australian property bubble, as he sees it.

Neo-Keynesian economics is a school of macroeconomic thought that was developed in the post-war period from the writings of John Maynard Keynes. A group of economists, attempted to interpret and formalize Keynes' writings and to synthesize it with the neo-classical models of economics. Their work has become known as the neo-classical synthesis and created the models that formed the core ideas of neo-Keynesian economics. These ideas dominated mainstream economics in the post-war period and formed the mainstream of macroeconomic thought in the 1950s, 1960s and 1970s.

Economics is an introductory textbook by American economists Paul Samuelson and William Nordhaus. It was first published in 1948, and has appeared in nineteen different editions, the most recent in 2009. It was the best selling economics textbook for many decades and still remains popular, selling over 300,000 copies of each edition from 1961 through 1976. The book has been translated into forty-one languages and in total has sold over four million copies.

Complexity economics is the application of complexity science to the problems of economics. It sees the economy not as a system in equilibrium, but as one in motion, perpetually constructing itself anew. It uses computational rather than mathematical analysis to explore how economic structure is formed and reformed, in continuous interaction with the adaptive behavior of the 'agents' in the economy

Dynamic stochastic general equilibrium modeling is a method in macroeconomics that attempts to explain economic phenomena, such as economic growth and business cycles, and the effects of economic policy, through econometric models based on applied general equilibrium theory and microeconomic principles.

New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical framework. Specifically, it emphasizes the importance of rigorous foundations based on microeconomics, especially rational expectations.

Neo-classical economics has come under critique on the basis of its core ideologies, assumptions, and other matters.

Keynesian Revolution economic theory

The Keynesian Revolution was a fundamental reworking of economic theory concerning the factors determining employment levels in the overall economy. The revolution was set against the then orthodox economic framework, namely neoclassical economics.

History of macroeconomic thought

Macroeconomic theory has its origins in the study of business cycles and monetary theory. In general, early theorists believed monetary factors could not affect real factors such as real output. John Maynard Keynes attacked some of these "classical" theories and produced a general theory that described the whole economy in terms of aggregates rather than individual, microeconomic parts. Attempting to explain unemployment and recessions, he noticed the tendency for people and businesses to hoard cash and avoid investment during a recession. He argued that this invalidated the assumptions of classical economists who thought that markets always clear, leaving no surplus of goods and no willing labor left idle.

Inflationism is a heterodox economic, fiscal, or monetary policy, that predicts that a substantial level of inflation is harmless, desirable or even advantageous. Similarly, inflationist economists advocate for an inflationist policy.

The new neoclassical synthesis (NNS) or new synthesis is the fusion of the major, modern macroeconomic schools of thought, new classical and New-Keynesianism, into a consensus on the best way to explain short-run fluctuations in the economy. This new synthesis is analogous to the neoclassical synthesis that combined neoclassical economics with Keynesian macroeconomics. The new synthesis provides the theoretical foundation for much of contemporary mainstream economics. It is an important part of the theoretical foundation for the work done by the Federal Reserve and many other central banks.

References

  1. David C. Colander (2000). Complexity and History of Economic Thought, 35.
  2. Olivier J. Blanchard (2008), "neoclassical synthesis," The New Palgrave Dictionary of Economics , 2nd Edition. Abstract.
  3. The precise distinction and relationship between classical economics and neoclassical economics is a debated point. Suffice to say that these are the ex post facto terms used to refer to successive chronological periods of an interrelated group of theories.
  4. 1 2 "The state of economics: The other-worldly philosophers", The Economist, July 16, 2009
  5. Paul A. Samuelson and William D. Nordhaus (2001), 17th ed., Economics
  6. Olivier Jean Blanchard (1987), "neoclassical synthesis," The New Palgrave: A Dictionary of Economics , v. 3, pp. 634–36.
  7. 1 2 Himmelweit, Sue (1997). "Chapter 2: The individual as the basic unit of analysis". In Green, Francis; Nore, Peter (eds.). Economics an Anti-text. London: MacMillan. pp. 21–35. ISBN   9780765639233.
  8. 1 2 3 Colander, D. C.; Holt, R. P. F.; Rosser, J. B. (2004), The Changing Face of Economics, University of Michigan Press, ISBN   978-0-472-06877-7 Description and preview links.
  9. Hodgson, G.M (2007), "Evolutionary and Institutional Economics as the New Mainstream", Evolutionary and Institutional Economics Review, 4 (1): 7–25, retrieved November 21, 2009.
  10. A Companion to the History of Economic Thought (2003). Blackwell Publishing. ISBN   0-631-22573-0 p. 452
  11. Colander, David; Holt, Richard P. F.; Rosser Jr, Barkley J. (2004). "The Changing Face of Mainstream Economics" (PDF). Review of Political Economy. 16 (4): 485–99. doi:10.1080/0953825042000256702.
  12. Davis, John B. (2006). "The Turn in Economics: Neoclassical Dominance to Mainstream Pluralism?". Journal of Institutional Economics. 2 (1): 1–20. doi:10.1017/s1744137405000263.
  13. Lazear, Edward (2000), "Economic Imperialism", The Quarterly Journal of Economics, 115: 99–146, doi:10.1162/003355300554683
  14. Krugman, Paul (September 2, 2009). "How did economists get it so wrong?". The New York Times Magazine . The New York Times.
  15. Schiffman, Daniel A. (November 2004). "Mainstream economics, heterodoxy and academic exclusion: a review essay". European Journal of Political Economy . 20 (4): 1079–95. CiteSeerX   10.1.1.622.3053 . doi:10.1016/j.ejpoleco.2004.06.003. Pdf. Archived April 2, 2013, at the Wayback Machine
  16. Lawson, Tony (July 2006). "The nature of heterodox economics". Cambridge Journal of Economics . 30 (4): 483–505. doi:10.1093/cje/bei093. JSTOR   23601875. SSRN   1095572 . Pdf.
  17. Nadeau, Robert (Lead Author); Cutler J. Cleveland (Topic Editor). 2008. "Environmental and ecological economics." In: Encyclopedia of Earth. Eds. Cutler J. Cleveland (Washington, D.C.: Environmental Information Coalition, National Council for Science and the Environment). First published in the Encyclopedia of Earth December 12, 2007; Last revised August 26, 2008; Retrieved October-6-2009
  18. Staff writer. "Science Notes: Energy Accounting and Balance". Environmental Decision Making, Science, and Technology, Carnegie Mellon University. Archived from the original on May 22, 2003. Retrieved October 6, 2009.Cite uses deprecated parameter |dead-url= (help)
  19. Cleveland, Cutler (Lead Author); Robert Costanza (Topic Editor). 2008. "Biophysical economics." In: Encyclopedia of Earth. Eds. Cutler J. Cleveland (Washington, D.C.: Environmental Information Coalition, National Council for Science and the Environment). First published in the Encyclopedia of Earth September 14, 2006; Last revised November 18, 2008; Retrieved Oct-6-09.