Adobe Systems Introduction to economics MEB435/MEBn5035 1 Schools of economic thought Vladan Hodulák This powerpoint serves as a study material for the students of the course Introduction to economics (MEB435/MEBn5035) at FSS MU in Fall 2019. Using this presentation for other purposes without consent of the author is prohibited. Adobe Systems Introduction ̶Theory ̶A construct of thought that abstracts the relevant information and relationships from the reality ̶A tool that enables us to recognize the essence of the problem ̶A tool to organize our thoughts ̶And finally a tool that gives us solutions to the problem at hand ̶Positive vs normative theory ̶Economics has gone through a turbulent development with several paradigmatic shifts ̶Apart from the dominant neoclassical theory there are several recognized schools of economic thought Introduction to economics MEB435/MEBn5035 Adobe Systems Mercantilism ̶International trade is a zero-sum game ̶16th-18th century ̶Widespread economic policy (in Europe) ̶Key concepts ̶Money is wealth ̶Positive balance of payments should be the goal of government economic policy ̶Added value – governments should try to locate productions with highest value added to their territory ̶Relevance and shortcomings ̶ Introduction to economics MEB435/MEBn5035 Adobe Systems The Classical School ̶The market keeps all producers alert through competition, so leave it alone ̶Late 18th – late 19th century ̶A. Smith, D. Ricardo ̶Key concepts ̶Invisible hand – market coordination is spontaneous ̶Say’s law – supply always finds sufficient demand ̶Comparative advantage – international trade is beneficial ̶Class analysis and labor theory of value ̶Relevance and shortcomings Introduction to economics MEB435/MEBn5035 Adobe Systems The Neoclassical School ̶Individuals know what they are doing, so leave them alone – except when markets malfunction. ̶Since late 19th century ̶L. Walras, A. Marshall ̶Key concepts ̶Rational individuals ̶Subjective theory of value (utility) ̶Marginal analysis ̶Pareto criterion Introduction to economics MEB435/MEBn5035 Adobe Systems Internal divisions among NC economists ̶Various labels (saltwater vs freshwater, new Keynesian vs new classical etc.), the basic model, different additional assumptions (or frictions) ̶Liberal (Krugman, Stiglitz) ̶Market failures, externalities, asymmetric information, oligopolies, sticky prices ̶Conservative (Friedman, Lucas) ̶Rational expectations, efficient market hypothesis, government failures, flexible prices ̶Relevance and shortcomings ̶ Introduction to economics MEB435/MEBn5035 Adobe Systems The Marxist School ̶Capitalism is a powerful vehicle for economic progress, but it will collapse, as private property ownership becomes an obstacle to further progress. ̶Since the second half of 19th century, K. Marx ̶Key concepts ̶Labor theory of value and exploitation ̶Historical materialism (modes of production; base × superstructure; forces × relations of production) ̶Class conflict, economic crises and communist revolution ̶Relevance and shortcomings ̶ Introduction to economics MEB435/MEBn5035 Adobe Systems The Developmentalist Tradition ̶Backward economies can’t develop if they leave things entirely to the market. ̶Very old, important after the Second World War ̶A. Hamilton, F. List ̶Key concepts ̶Focus on practical problems of development ̶Production capabilities ̶Infant industry argument ̶Relevance and shortcomings ̶ Introduction to economics MEB435/MEBn5035 Adobe Systems The Austrian School ̶No one knows enough, so leave everyone alone. ̶Late 19th century ̶C. Menger, L. Mises ̶Key concepts ̶Uncertainty ̶Spontaneous order ̶Free markets ̶Strong anti-government bias ̶Relevance and shortcomings ̶ Introduction to economics MEB435/MEBn5035 Adobe Systems The (Neo-)Schumpeterian School ̶Capitalism is a powerful vehicle of economic progress, but it will atrophy, as firms become larger and more bureaucratic. ̶First half of the 20th century, J. Schumpeter ̶Key concepts ̶Innovations (creative destruction) ̶Role of the entrepreneur ̶Bureaucratization of the economy ̶Relevance and shortcomings ̶ Introduction to economics MEB435/MEBn5035 Adobe Systems The Keynesian School ̶What is good for individuals may not be good for the whole economy. ̶Since 1930s, J. Keynes ̶Key concepts ̶Full employment ̶Uncertainty ̶Animal spirits (liquidity preference) ̶Demand management ̶Relevance and shortcomings Introduction to economics MEB435/MEBn5035 Adobe Systems The Institutionalist School ̶Individuals are products of their society, even though they may change its rules. ̶Old – since late 19th century, T. Veblen ̶Key concepts ̶Formal and informal institutions ̶Conspicuous consumption (importance of status) ̶New – since 1980s. D. North ̶Key concepts ̶Transaction costs ̶Property rights ̶Relevance and shortcomings ̶ Introduction to economics MEB435/MEBn5035 Adobe Systems The Behaviouralist School ̶We are not smart enough, so we need to deliberately constrain our own freedom of choice through rules. ̶Since late 20th century, H. Simon, D. Kahneman ̶Key concepts ̶Bounded rationality ̶Heuristics ̶Altruism ̶Relevance and shortcomings ̶ Introduction to economics MEB435/MEBn5035