Economic Philosophers and Schools of Thought, 1770s to 2010s

Crash Course Economics talks a lot about the Keynesian School of Economics, because nearly the entire world runs on the Keynesian principle of deficit spending to stimulate economic growth. “That said, there are some other economic ideas out there, and today we’re going to talk about a few of them. So, if you’ve been aching to hear about socialism, communism, the Chicago School, or the Austrian School, this episode is for you.” Transcript.

The video refers to Adam Smith (1723-1790) as the founder of modern economics. I previously posted Adam Smith, the Founder of Capitalism: His Life and Ideas

A generation later:

Thomas Malthus (1766-1834). “In 1798, a British economist named Thomas Malthus argued that population growth would outpace food production, so eventually humans would run out of food and starve….So with the information he had, he was kinda right…Malthus was writing at the beginning of the industrial revolution…and didn’t factor in advancements in technology, agriculture production or transportation.” Ultimately, he was very wrong. This was the start of the reference to economics as a “dismal science,” a phrase coined by Thomas Carlyle.

The ideas of Malthus in the 1870s combined with the ideas of Charles Darwin, that only the fittest humans (should) survive through a process of natural selection. This was the philosophy of Social Darwinism, that “giving assistance to poor people and social programs like welfare are actually immoral.” 

Some people still believe in it. It was challenged in the Progressive Era (1890s to 1920) but was still widely believed in until the late 1920s.

A few years after Malthus, David Ricardo (1772-1823) “expanded on Smith’s ideas by introducing the theory of comparative advantage: “the idea that two people or countries can both benefit from trade, even if one of them can produce more of everything. When both focus on what they’re best at and then trade, everyone benefits.” Ricardo and Malthus were best friends and best opponents.

The next big step in economic thought came from German philosophers Karl Marx and Friedrich Engels, who published The Communist Manifesto in 1848. I wrote about Marx in:

Economic Systems, Macroeconomics and History

Marx and Engels “looked at economic classes and argued that history was explained by the conflict between workers and property owners. This process would inevitably lead workers to overthrow their bosses, ushering in a new stateless and classless system, called communism. Marx followed this up with Das Kapital. Political movements spawned by Marxist economics challenged Adam Smith’s view that individual self-interest serves the common good. The end result was two main camps: free market capitalism, supporting private property, and communism, advocating collective ownership of the means of production.”

Classical Economics, dominant in the 19th and early 20th century, embraced and interpreted the theories of Smith, Malthus, Ricardo, John Stuart Mill and others. The basic principle is that “markets work best when they are left alone, and that there is nothing but the smallest role for government. The approach is firmly one of laissez-faire and a strong belief in the efficiency of free markets to generate economic development.”

Eric Marshall put these ideas into a textbook, Principles of Economics, in 1890.

These ideas dominated economic theory until the Great Depression, beginning in 1929, which “crushed the market economies of the world’s richest countries, it also dealt a devastating blow to Classical Economics. The theories of Smith and Marshall didn’t have much to say about how something like this could happen, or how to fix it. The British economist John Maynard Keynes proposed new answers in his 1936 book A General Theory of Money, Interest, and Employment, which basically launched the field of macroeconomics.”

Economic Systems, Macroeconomics and History

Keynes “argued that market economies don’t self-correct quickly because prices and wages take time to adjust. They claimed that during recessions, it is necessary for the government to get involved by using monetary and fiscal policy to increase output and decrease unemployment. Keynes wasn’t supporting Communism, but his views directly challenged classical economists who saw government intervention as universally harmful for the economy. Now eventually Keynesian Economics became part of mainstream economic theory.”

Keynesian School of Economics

“Since the Great Depression, many nations have pursued a political and economic ideology called Socialism, although Socialist ideas and policies have been around since the 19th century. In most cases, these economies allow for private properties and markets, but also have government ownership of industry, significant regulation, and big public programs like universal healthcare. In Scandinavian countries like Norway and Sweden, they love these socialist policies.

“Now the US has rejected many of these socialist ideas, but the US government, or at least economists that advise politicians, are clearly in favor of Keynesian economic policies when the economy’s in trouble.”

Austrian School of Economics

“Friedrich Hayek and Ludwig Vunmises, who were unsurprisingly from Austria, argued that heavy state involvement has never produced the results it promised, and that regulation and government tinkering is actually a problem, not a solution. Rejecting nearly all forms of fiscal and monetary policy, the Austrian school today argues the economy’s just to complicated to manipulate.”

Chicago School of Economics

“This backlash against government intervention was carried forward in the US by Milton Friedman. Like the Austrians, Friedman advocated privatization of many functions that had been assumed by government, famously proposing school vouchers and deregulation of the economy. He also concluded that the depression could be blamed on botched monetary policy rather than some inherent fault of capitalism.

“The theories of Friedman and his followers at the University of Chicago came to be called the Chicago School of economics. Friedman’s views got a huge boost in the 1970’s. At that time, inflation soared while output stagnated. Remember stagflation? A combination that Keynesian economics had trouble reconciling. Some macroeconomists drew on the insights of the Chicago school to claim that these events disprove Keynesian economics.


“Building on the ideas of Friedman, another idea of economics gained traction: monetarism…Monetarists focused on price stability and argue the money supply should be increased slowly and predictably to allow for steady growth.

Supply Side Economics

“Another theory called supply-side economics, sometimes called trickle-down economics entered the mainstream (around 1980). Supply side economics advocated deregulation and cutting taxes, especially corporate taxes.

New Neoclassical Synthesis

“Mainstream economics today takes ideas from both classical economics, including monetarism, and Keynesian economics. This unified theory is called the new neoclassical synthesis. It dominated until at least the Great Recession which began in 2007-8. 


“Most countries that once supported strict Communism like China and Cuba have moved toward Capitalism. The only country that’s really sticking with it’s North Korea, but they’re too isolated to be a real test case for an economics system. But this doesn’t mean that Marxism is dead. Many capitalist countries have adapted socialist looking programs. It appears the world’s economies are converging towards the middle.”

Many economists are beginning to reevaluate the ideas of Milton Friedman, who was very popular in the 1980s. I’ll address that in a future post. 


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