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Schools of Economic Thought

Introduction

People divide the study of economics into different "Schools of Thought." The ideas advocated by these many schools vary from reasonable to absurd. They can all, however, contributed something to the study of economics and markets. Even examining unreasonable, yet popular ideas, can help to clarify a person's thinking.

For the record, I generally subscribe to the principles and theories advocated by the Austrian School. After studying the points of view of the most popular concepts in economics, I have found that those espoused by the prominent "Austrian" thinker have the greatest level of logical consistency.

I will address many of these concepts throughout this website, but in this section I will briefly describe the distinctions between the more popular "schools."

Austrian School

The Austrian School of Economics espouses principles and theories of economics based upon deduction from the nature of human action, especially stressing the subjective nature of value.

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Classical School

Many people refer to the first modern school of economic thought as Classical Economics. Although Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill made major contributions to classical economic thought, most scholars consider the publication of Adam Smith's The Wealth of Nations in 1776 as the beginning of classical economics—a term said to have been coined by Karl Marx.

Value theory represents the primary distinction between the Classical and Austrian Schools of Economics. Classical economists tend to see value as derived at least in part from the intrinsic characteristics of goods. Austrians see individual preferences as the final determinant of value.

Monetary School

Monetary economics analyzes money in terms of the functions of a medium of exchange, a store of value, and a unit of account. It sees money as closely tied to macroeconomic activity. Although closely related to classical economics, monetary economics places a broader significance on the role of money.

Monetarists frequently advocate the use of fiat money as a public good, which the state maintains a responsibility for managing. Austrians agree with the importance of money, yet believe that, as a medium of indirect exchange, the market should control its quantity and value (or market price).

Keynesian School

Keynesian economics gets its name from the 20th-century English economist John Maynard Keynes.

Based on their premise that private sector decisions lead to inefficient macroeconomic outcomes, Keynesian economists advocate for the intervention of the public (or state) sector through fiscal and monetary actions. They believe that state intervention will lead to more stability in markets and ultimately a more efficient allocation of resources.

Austrian economists see the implementation of Keynesian hypotheses as a primary cause of destructive market cycles and damaging misallocation of resources.