Introduction to Economics – Dawson College

Major Schools of Thought in Economics

What is a School of thought?

It is like a school of fish! Only for people who think the same way about an academic
topic, like economics.

Two main themes are behind the major Schools of Thought in Economics:

i. The role of the State in the economy

ii. Whether or not a market economy is good for peoples’ well-being

m
er as
Adam Smith and the Classics

co
eH w
Adam Smith was born in 1723. A Scottish philosopher, he believed that the market
economy regulates itself. Supply and Demand produce prices and quantities that reflect

o.
the real cost of producing things. He argued that capital investment and innovation were
rs e
the keys to economic growth and prosperity.
ou urc
Also, he argued that if each individual person set out to pursue their own self-interest,
well, this is not wrong or immoral. On the contrary, Smith argued that this feature of a
o

free-market is actually a good thing because in the end, the system enables people to
aC s

satisfy most of their wants and needs.

vi y re

He also coined the term Invisible Hand. Although the market economy may seem
chaotic, he believed that the self-regulation of the economy did produce the right
quantities at the right prices. He saw patterns where others saw chaos. He referred to an
ed d

“invisible hand” that sets these prices and quantities.

ar stu

Smith and the Classic School of Thought believed the government should exist to build
roads and schools. But it should not intervene in the market economy. And they believed
is

the market economy did produce socially acceptable outcomes.

Th

Karl Marx and the Marxists

sh

Karl Marx was born in 1818. This German philosopher and journalist believed the market
did not regulate itself. He understood Supply and Demand. But he believed this did not
produce an economy that was good for ordinary people because constant innovation led
to crises, unemployment and poverty. Marx based his beliefs on the social reality of the
Industrial Revolution in Europe.

This study source was downloaded by 100000822720224 from CourseHero.com on 04-22-2021 12:57:59 GMT -05:00

https://www.coursehero.com/file/67579619/Lecture06B-Major-Schools-of-Thoughtpdf/
 Karl Marx’s main argument was that in a market economy, there was an unbalance of
economic power between rich and poor. According to Marx, those who owned Capital
used their profits to own even more Capital and therefore they dominated the labour-
force which had left their land in the country side to come work in the city. Marx coined
this phenomenon as the Surplus Value of Labour.

Marx explained that workers transformed land and capital into products. These products
were sold at higher prices. Marx argued workers should own this added value of their
own work instead of it becoming profit for capitalists.

The problem with this is that workers would eventually not have enough money to buy
the ever increasing quantities of products the economy would make. The lack of demand
would create an imbalance with supply and endemic unemployment would be the
outcome. These crises would be inevitable, according to Marx.

To help workers get better wages, Marx and the Marxist School of Thought believed that

m
er as
the government should intervene in the economy, and the State should own and allocate
resources such as Capital. This view inspired the political movement called Communism.

co
eH w
o.
John Maynard Keynes and the Keynesians
rs e
ou urc
John Maynard Keynes was born in 1883. This English economist and statistician believed
the market did regulate itself, most of the time. He believed the market economy was a
good thing for most people. But, he also believed the market economy needed help from
o

government to move out of times of economic recession or depression. He called this

aC s

Government Intervention.
vi y re

Keynes based this belief on the fact that the economy, in his time, was in fact in a
depression, as of 1929. These hard times lasted for 10 years. Widespread unemployment
had decreased regular peoples’ ability to spend (aggregate demand). This sent the
ed d

economy in a tailspin of factory shutdowns and poverty.

ar stu

The Classics argued that resources made idle would eventually be put to use in other
sectors of the economy. They also argued that lower wages would help kick start the
is

recovery. But Keynes argued that it would take more than that to put the economy back
on track. He argued that investors were rattled, and capital investment would not increase
Th

swiftly.

Keynes proposed that we study the economy in its whole rather than a few industries at a
sh

time, a fact most did not consider because there were no such statistics to measure the
entire economy. He also argued that the government could increase its’ spending if
consumers and investors were not able to.

Keynes and the Keynesian School of Thought believed that the government should
intervene in the economy. But, they do not believe the State should own or allocate

This study source was downloaded by 100000822720224 from CourseHero.com on 04-22-2021 12:57:59 GMT -05:00

https://www.coursehero.com/file/67579619/Lecture06B-Major-Schools-of-Thoughtpdf/
 resources. Keynes argued in favour of stabilisation policy which includes monetary
policy, changing tax rates and government spending. He invented macroeconomics and
spurred the development of macroeconomic indicators of the economy such as the Gross
Domestic Product, the Unemployment Rate and the Consumer Price Index.

© Charles-Albert Ramsay, 2010

m
er as
co
eH w
o.
rs e
ou urc
o
aC s
vi y re
ed d
ar stu
is
Th
sh

This study source was downloaded by 100000822720224 from CourseHero.com on 04-22-2021 12:57:59 GMT -05:00

https://www.coursehero.com/file/67579619/Lecture06B-Major-Schools-of-Thoughtpdf/
Powered by TCPDF (www.tcpdf.org)