Economic Schools of Thought
- Cecilie 🇩🇰
- 6. sep. 2016
- 2 min læsning
The Purpose
Economics as a science has two purposes:
To explain economic phenomenons and correlations:
Microeconomics
Looks at the individual actors (such as households and businesses) and how they act under different requisites. In other words: The consumers' and businesses' actions, eg. in relation to changes of price, wages, taxes etc.
Macroeconomics
Looks at the aggregated factors such as GDP, unemployment, balance of payments, inflation etc. In other words: It is about economic relations at a societal level.
Economics recommend certain economic policies. The science is normative because the goals and means are political.
Economic Schools of Thought
There are lots of economic schools of thought – if we were to divide some of them into two categories it would be as follows:
The classic school, neo-classic school, the monetarists, the supply-economists and the right-wing politicians. The total production/the economic growth is determined by the supply of factors of production: Work force, capital and raw material etc. The politicians should provide the biggest possible supply of these factors of production – also in order to avoid inflation. For example by giving incentives (rewards and punishments (low tax rates = reward. Lower benefits = punishment)). The free market forces are best at ensuring the balance of the economy – not the politicians. Trade unions should be weakened because they hinder free wage formation. The Central Bank should control the inflation through the money supply (and interest rate). Fighting inflation is more important than fighting unemployment.
Keynesian economics, demand economists and the left wing politicians. The total production/economic growth is determined by the demand (especially in the short run), crises are caused by too low a demand and too much saving. The free market forces cannot ensure full employment by themselves among other things because of inertia of the price and wage adaption. The politicians need to ensure sufficient demand through fiscal and monetary policy. Economic equality boosts demand and consumption because the propensity to consume is bigger for low incomes (the savings ratio is higher for high incomes). Low unemployment rates is prioritised over low inflation. It has no effect that the businesses invest if no one is able to buy the goods and services they produce.