The Schools of Economics


Macroeconomics can broadly be defined as a branch of economics that studies the behaviour, structure and decisions of economies as a whole. However, economics is a social science and with this, it creates varying opinions and beliefs leading to the schools of economics, that see the world in different ways and have varying explanations of economic phenomenon.


The father of economics, “Adam Smith,” is the originator of the classical theory that dominated economic thought during the 18th and 19th centuries. The classical school of thought introduced the idea of the, “invisible hand,” referring to the self-correcting market determining prices. Smith believed that free agents in an economy would work to maximise their utility/ profit, so firms will produce goods and services that consumers want and will compete to provide cheaper and higher quality goods. The classical school believes in “laissez-faire” policies and limiting market intervention believing it to be unnecessary and distorting of the price mechanism. Classical economists also believe in the supply of factors of production and that markets always work at their most efficient with transparent prices, wages and rates. (It is for this reason that the LRAS curve is vertical, as the classical school assumes that all economies operate with all factors of production utilized.)


Based on the works of John Maynard Keynes, Keynesian economics challenged the ideas of the Classical school by giving increased importance to the level of aggregate demand in causing issues of unemployment and growth. Keynesians believe that the economy can operate with not all resources being utilized, i.e. the economy is operating with spare capacity. Hence this school of thought believes in the idea of deficient demand causing a recession and unemployment. Following the 1920s Wall St. Crash the Keynesian school encouraged increased government expenditure and investment to increase AD to utilize the spare capacity in the economy to recover from recession.


Monetarist economics believes in the idea that economic performance is dependent on changes in the money supply, which is the only thing that should be managed. The key idea behind this is the importance of inflation to an economy’s health and inflation can be controlled by controlling the money supply. The monetarist view of economics believes that as the availability of money in a system increases, aggregate demand for goods and services goes up, encouraging job creation and growth. However, if the growth is too fast, demand will be greater than supply creating a disequilibrium leading to inflation. This is the basis of the monetary policy set by the Bank of England today. However, during Thatcher’s time as PM, she faced stagflation. Thatcher used contractionary monetary policy to combat inflation, however, in the process worsened the recession by limiting consumption.


Founded, by the Austrian economist Carl Menger, the Austrian school of economics uses priori thinking (without relying on the outside world) to discover laws of economics, as opposed to other schools that rely on mathematical modelling and statistical analyses. The Austrian school believe that price is determined by individual preferences to buy or not buy a good. They also believe that costs of productions are determined by subjective views of the potential other uses of a resource. This school of thought also prioritizes distinction between capital goods. Keynesian models equate a £10,000 tractor with the same productive potential as a £10,000 machine, whereas the Austrian school recognizes and accounts that the wrong type of capital can be detrimental, and the re-adjustment can be painful.

In conclusion, all the different schools have their benefits and followers, it is important to not only look at standard economic theory when discussing matters of importance and to widen your horizons to think in different manners. As the study of economics progresses, new schools have been introduced and in the future, there will still be more. For example, behavioural economics has become more popular following Thaler’s Nobel prize for the recognition of irrational agents in economic behaviour that have to be accounted for through psychological and social study in addition to standard economics.