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 a minority of economists.

Contents

The economics profession has traditionally been associated with neoclassical economics. [1] This association has however been challenged by prominent historians of economic thought like David Collander. [2] They argue the current economic mainstream theories, such as game theory, behavioral economics, industrial organization, information economics, and the like, share very little common ground with the initial axioms of neoclassical economics.

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.

Prior to the 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.

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 gained prominence as part of the neoclassical synthesis, which was the post–World War II merger of Keynesian macroeconomics and neoclassical microeconomics that prevailed from the 1950s until the 1970s. [4] [5]

In the 1970s, the consensus in macroeconomics collapsed as a result of the failure of the neoclassical synthesis to explain the phenomenon of stagflation: subsequent to this, two schools of thought in the field emerged: New Keynesianism and New classical macroeconomics. Both sought to rebuild macroeconomics using microfoundations- to explain macroeconomic phenomenon using microeconomics. [6] [7]

Over the course of the 1980s and the 1990s, macroeconomists coalesced around a paradigm known as the new neoclassical synthesis, [8] which combines elements of both New Keynesian and New classical macroeconomics, and forms the basis for the current consensus, which covers previously disputed areas of macroeconomics. [9] [10] The consensus built around this synthesis is characterised by an unprecedented agreement on methodological questions (such as the need to validate models econometrically); such agreement had, until the new synthesis, historically eluded macroeconomics, even during the neoclassical synthesis. [11]

The financial crisis of 2007–2010 and the ensuing global economic crisis exposed modelling failures in the field of short-term macroeconomics, which was publicly confused with all of mainstream economics. [12] [13] [14]

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 [15] 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. [16]

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. It is however also useful to challenge this distinction in light of the mutation of mainstream economics.[ according to whom? ]

Assumptions

While being long rejected by many heterodox schools, several assumptions used to underpin many mainstream economic models. These include the neoclassical assumptions of rational choice theory, a representative agent, and, often, rational expectations. However, much of modern economic mainstream modeling consists of exploring the effects that complicating factors have on models, such as imperfect and asymmetric information, bounded rationality, incomplete markets, imperfect competition, heterogenous agents [17] and transaction costs.

Originally, the starting point of orthodox economic analysis was the individual. Individuals and firms were generally defined as units with a common goal: maximisation through rational behaviour. The only differences consisted of:

From this (descriptive) theoretical framework, neoclassical economists like Alfred Marshall often derived - although not systematically - the political prescription 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. [18] Yet, mainstream economics now includes descriptive 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, from a more normative perspective. [19]

Methods

Additionally, some economic fields include elements of both mainstream economics and heterodox economics: for example, Austrian economics,[ how? ] [20] institutional economics, neuroeconomics and non-linear complexity theory. [21] 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." [22]

Topics

Economics has been initially shaped as a discipline concerned with a range of issues revolving around money and wealth. However, in the 1930s, mainstream economics began to mutate into a science of human decision. In 1931, Lionel Robbins famously wrote "Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses". This drew a line of demarcation between mainstream economics and other disciplines and schools studying the economy.

The mainstream approach of economics as a science of decision-making contributed to enlarge the scope of the discipline. Economists like Gary Becker began to study seemingly distant fields as crime, the family, law, politics, and religion. This expansion is sometimes referred to as economic imperialism. [23]

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Economics Social science

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

Keynesian economics Group of macroeconomic theories

Keynesian economics are the various macroeconomic theories and models of how aggregate demand strongly influences economic output and inflation. In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy. Instead, it is influenced by a host of factors – sometimes behaving erratically – affecting production, employment, and inflation.

Macroeconomics Study of an economy as a whole

Macroeconomics is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, and government spending to regulate an economy’s growth and stability. This includes regional, national, and global economies. According to a 2018 assessment by economists Emi Nakamura and Jón Steinsson, economic "evidence regarding the consequences of different macroeconomic policies is still highly imperfect and open to serious criticism."

Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good or service is determined through a hypothetical maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production. This approach has often been justified by appealing to rational choice theory, a theory that has come under considerable question in recent years.

Post-Keynesian economics School of economic thought

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 School of macroeconomics

New Keynesian economics is a school of 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.

Business cycle Fluctuation in degree of utilization of production potential of an economy

Business cycles are intervals of expansion followed by recession in economic activity. They have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are measured by applying a band pass filter to a broad economic indicator such as Real Gross Domestic Production. Here important problems may arise with a commonly used filter called the "ideal filter". For instance if a series is a purely random process without any cycle, an "ideal" filter, better called a block filter, a spurious cycle is produced as output. Fortunately methods such as those in [Harvey and Trimbur, 2003, Review of Economics and Statistics] have been designed so that the band pass filter may be adapted to the time series at hand.

Paul Samuelson American economist (1915–2009)

Paul Anthony Samuelson was an American economist, who was the first American to win the Nobel Memorial Prize in Economic Sciences. When awarding the prize in 1970, the Swedish Royal Academies stated that he "has done more than any other contemporary economist to raise the level of scientific analysis in economic theory". Economic historian Randall E. Parker has called him the "Father of Modern Economics", and The New York Times considers him to be the "foremost academic economist of the 20th century".

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.

Heterodox economics Economic theories that contrast with orthodox schools of economic thought

Heterodox economics is any economics thought or theory that contrasts with orthodox schools of economic thought, or that may be beyond neoclassical economics. These include institutional, evolutionary, feminist, social, post-Keynesian, ecological, Austrian, Marxian, socialist and anarchist economics.

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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.

Microfoundations

Microfoundations are an effort to understand macroeconomic phenomena in terms of economic agents' behaviors and their interactions. Research in microfoundations explores the link between macroeconomic and microeconomic principles in order to explore the aggregate relationships in macroeconomic models.

The neoclassical synthesis (NCS), neoclassical–Keynesian synthesis, or just neo-Keynesianism was a neoclassical economics academic movement and paradigm in economics that worked towards reconciling the macroeconomic thought of John Maynard Keynes in his book The General Theory of Employment, Interest and Money (1936). It was formulated most notably by John Hicks (1937), Franco Modigliani (1944), and Paul Samuelson (1948) dominated economics in the post-war period and formed the mainstream of macroeconomic thought in the 1950s 1960s, and 1970s.

New classical macroeconomics School of thought in macroeconomics

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.

Saltwater and freshwater economics

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 make decisions under uncertainty.

Keynesian Revolution

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 Aspect of history

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.

New neoclassical synthesis Fusion of macroeconomic schools of thought

The new neoclassical synthesis (NNS), which is now generally referred to as New Keynesian economics, and occasionally as the New Consensus, is the fusion of the major, modern macroeconomic schools of thought - new classical macroeconomics/real business cycle theory and early New Keynesian economics - into a consensus view 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 macroeconomics. It is an important part of the theoretical foundation for the work done by the Federal Reserve and many other central banks.

Marxism and Keynesianism is a method of understanding and comparing the works of influential economists John Maynard Keynes and Karl Marx. Both men's works has fostered respective schools of economic thought that have had significant influence in various academic circles as well as in influencing government policy of various states. Keynes' work found popularity in developed liberal economies following the Great Depression and World War II, most notably Franklin D. Roosevelt's New Deal in the United States in which strong industrial production was backed by strong unions and government support. Marx's work, with varying degrees of faithfulness, led the way to a number of socialist states, notably the Soviet Union and the People's Republic of China. The immense influence of both Marxian and Keynesian schools has led to numerous comparisons of the work of both economists along with synthesis of both schools.

References

  1. David C. Colander (2000). Complexity and History of Economic Thought, 35.
  2. Colander, David (June 2000). "The Death of Neoclassical Economics". Journal of the History of Economic Thought. 22 (2): 127–143. doi:10.1080/10427710050025330. ISSN   1053-8372. S2CID   154275191.
  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. Fonseca, Gonçalo L. "Neo-Keynesian Synthesis". www.hetwebsite.net. The History Of Economic Thought Website. Retrieved 7 May 2017.
  5. Clark, B. (1998). Political-economy: A comparative approach. Westport, CT: Preager.
  6. "The New Keynesian Microfoundations". NBER Macroeconomics Annual 1987, Volume 2. The MIT Press. 1987. pp. 69–116.
  7. Chapter 1. Snowdon, Brian and Vane, Howard R., (2005). Modern Macroeconomics: Its Origin, Development and Current State. Edward Elgar Publishing, ISBN   1-84542-208-2
  8. Kocherlakota 2010, p. 12.
  9. Mankiw 2006, p. 38.
  10. Goodfriend, Marvin; King, Robert G (1997), "The New Neoclassical Synthesis and the Role of Monetary Policy", NBER Macroeconomics Annual, NBER Chapters, 12: 231–83, doi: 10.1086/654336 , JSTOR   3585232
  11. Woodford, Michael (2009), "Convergence in Macroeconomics: Elements of the New Synthesis" (PDF), American Economic Journal: Macroeconomics, 1 (1): 267–79, doi:10.1257/mac.1.1.267
  12. "The state of economics: The other-worldly philosophers", The Economist, July 16, 2009
  13. Krugman, Paul (September 2, 2009). "How did economists get it so wrong?". The New York Times Magazine .
  14. "ChrisAuld.com · 18 signs you're reading bad criticism of economics" . Retrieved 2020-01-11.
  15. Paul A. Samuelson and William D. Nordhaus (2001), 17th ed., Economics
  16. Olivier Jean Blanchard (1987), "neoclassical synthesis," The New Palgrave: A Dictionary of Economics , v. 3, pp. 634–36.
  17. https://www.nber.org/papers/w21897.pdf [ bare URL PDF ]
  18. 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.
  19. Jelveh, Zubin (17 September 2018). "Political Language in Economics". SSRN   2535453.
  20. A Companion to the History of Economic Thought (2003). Blackwell Publishing. ISBN   0-631-22573-0 p. 452
  21. 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. S2CID   35411709.
  22. 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. S2CID   37162943.
  23. Lazear, Edward (2000). "Economic Imperialism". The Quarterly Journal of Economics. 115: 99–146. doi:10.1162/003355300554683.