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Major Schools of Economic Theory
Modern economic thought emerged in the 17th and 18th centuries as the western world began
its transformation from a farming society to an industrial society.
Despite the enormous differences between the past and now, the economic problems with
which society struggles remain the same:
 How do we decide what to produce with our limited resources?
 How do we ensure stable prices and full employment?
 How do we provide a high standard of living both for ourselves and for future
generations?
Progress in economic thought toward answers to these questions tends to take small steps rather
than evolve smoothly over time. A new school of ideas suddenly emerges and changes are
made in economic rules. Old ideas are thrown out and new ideas are used. Sometime old rules
become popular again. The motivation is the same today as it was three centuries ago: to
understand the economy so that we may use it wisely to achieve society's goals. Here some of
the major schools of thought:
Mercantilists- Believed that nations become wealthy by collecting gold and silver. If you do
not have gold or silver, then you export goods to buy it. You restrict imports of goods by
making trade barriers and quotas. In this way you can become a country that exports things
and become rich in gold and silver.
Classical School Adam Smith- Believed in the “invisible hand of the markets”: Markets work best when
everyone is looking for their own self-interest.
 David Ricardo- Believed that land owners have an advantage over labour because the
amount of land available cannot change.
 Robert Malthus- Believed that the number of people will aways growth faster than
production of food and resources, thus there will always be a lot of poor people.
 John Stuart Mills- Capital markets make production more efficient, but does a bad job
of distributing income. That is why the government should intervene.
Marginalist School- Believed that if you are satisfying the customer, then you will get rich. If
you are very rich, it means you are doing a good job of satisfying the customers.
Marxist School- Capitalist cannot do anything without labour, therefore, power belongs to the
workers because they produce all of the value in society. Capitalism use labour-saving
machinery to keep workers from making too much money.
Institutionalist School- We do things, not because it makes us richer, but we do things
because we are trying to do what the institutions in society want us to do.
Keynesian School- In an economic downturn, fear makes the recession worse. Government
should intervene by making projects and cutting taxes. When the economy is doing good, then
taxes can be raised to make a surplus for bad times.
Monetarist- Think that government should not interfere in a down turn. Instead they should
make money more available and easier to borrow.
Rational Expectations Theory- Markets work faster than the government. When government
makes a change, the markets will try to change before the law limiting the effect of the change.
Supply-side Economics- By cutting taxes on individuals, then people will have a bigger
supply of money to spend. They will buy things and this will put people to work.
In the following section, choose a theory from above that best reflects the following
statement. Do you think that the statements are true or false.
1. The butcher doesn’t sell us meat because he likes us…..he sells
us meat because he is trying to make money….and this is good.
2. There will also be more and more people and one day we will
destroy the world with so many people.
3. I love my i-phone, i-pad, i-pod…. I don’t mind if Steve Jobs is
filthy rich…but rich bankers….what did they ever do for society?
4. Too many useful things make too many useless people….
capitalist are like vampires that sucks the lives of labour.
5. We need to be spending money on highways, education, and
research and development. It is not so important that the
government is spending more money than it collects in taxes.
6. If you keep the interest rates low, then people will borrow
money to start new business. Then, there will be less
unemployment.
7. This is the way we have always done it. Why change now?....
I am only doing what everyone else is doing….
8. Governments that limit imports and have big trade surplus are
the modern equivalent of the gold lovers of the past.
9. The tax on alcohol is going up next year. That is why I plan to
buy several cases of scotch this year.
10. If you owned a house in Stara Mesto, Bratislava in 1990, then
you are rich today without ever really doing anything.
11. It is the job of the government to make sure that everyone gets
a fair share of the wealth of a society.
12. Lower taxes is always better than higher taxes
1. Which of the above theory do you find most interesting and why?
2. Give an example of a theory from above that is affecting behavior today.
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