Monday, January 31, 2011

An Overview of the Major Schools of Economics

The major approaches to economics can be divided into
(1) neoclassical theories and
(2) non-neoclassical or heterodox schools.
The neoclassical schools include Supply-side economics, Monetarism, New Classical economics, and New Keynesian economics.

The mainstream and orthodox approach to economics is the New Consensus Macroeconomics, which is a synthesis of the main neoclassical approaches. But the mainstream neoclassicals do not agree on all issues: at the higher level they can be found in different groups like the monetarists, New Classicals, and New Keynesians.

There are three major heterodox, or non-neoclassical traditions: Austrian economics, Post Keynesian economics, and Marxism (and Marxism has more in common with Classical economics/Classical political economy, an older economic theory).

These divisions can be seen in the chart below (please open it in a new tab or window to see a larger version).

On the development of the Keynesian schools, I have already written a post called “Neoclassical Synthesis Keynesianism, New Keynesianism and Post Keynesianism: A Review,” July 7, 2010.

After 1945, there were two Keynesian traditions:
(1) the neoclassical synthesis and
(2) the Cambridge Keynesians, who were the founders and progenitors of the Post Keynesian school.
Post Keynesian economics has no need for, and rejects, the IS-LM model of Hicks, the Phillips curve, and the empirically unsupported notion of the liquidity trap (Davidson 2002: 95). It is a more radical development of Keynesian theory, true to Keynes’ fundamental ideas (if not to all his more conservatively-minded policy recommendations), and has always rejected the foundational neoclassical axioms (namely, the gross substitution axiom, neutrality of money axiom, and the ergodic axiom).

The New Keynesians emerged after the collapse of neoclassical synthesis Keynesianism in the 1970s, but even modern New Keynesianism can be divided into conservative and liberal/progressive wings. Both Paul Krugman and Joseph Stiglitz are outstanding liberal New Keynesians. By contrast, George W. Bush took advice from the rather more neoliberal or economically conservative Republican New Keynesian N. Gregory Mankiw, who was chairman of Bush’s Council of Economic Advisors from 2003 to 2005. Despite the name “Keynesian”, there is a good deal of false and questionable neoclassical theory in New Keynesian economics, and in many ways it is inferior to the Post Keynesian tradition. Indeed, some of the worst writings of the conservative New Keynesians can actually be regarded as a travesty of Keynes’ thought. In its best, progressive forms, New Keynesian theory parallels Post Keynesian thinking.

The various types of libertarians are discussed in “The Types of Pro-Free Market Libertarians,” January 30, 2011.

Compared to the Austrians, the monetarists and New Classicals in fact support numerous state interventions, and their economics is derived from a revived neo-Walrasian general equilibrium theory. In fact, many Austrians are hostile to the mainstream monetarists and New Classicals, and there are very significant differences between their economic ideas.

As we can see, not all economists who support extreme or strong free markets are libertarians. I have not included monetarists as libertarians, but of course there is some overlap between the two sets. Although it is true that some supply-siders, monetarists, New Classicals, and Republicans think of themselves as “libertarians” in some way as well, many in fact do not. Modern conservatism or conservative economics comes in many forms, and by no means can it all be simply labelled as “libertarianism”.

Perhaps a better division of extreme or strong pro-free market ideologues would be as follows:
(1) Libertarians, including Austrians (Anarcho-capitalists, Misesians, Hayekians, moderate subjectivists, radical subjectivists) and non-Austrian libertarians (Randians, Robert Nozick’s libertarianism, David D. Friedman’s anarcho-capitalism, and non-Austrian neoclassical libertarians), and

(2) Mainstream neoclassical theorists, including Supply-siders, Monetarists, New Classicals, and conservative New Keynesians.
This can be shown in another chart below.

There is a blue line that divides the New Keynesians into conservatives on the left and liberals/progressives on the right. It is unfair to characterise the liberal/progressive New Keynesians as strong pro-free market ideologues, so they should be excluded from the other groups. The libertarians outside the black box (i.e., the Austrians and Randians) are non-neoclassicals but pro-free market. Those libertarians inside the black box are neoclassicals or influenced by neoclassical theory.

Now over the past 65 years (since about 1945) we have had two different economic systems based on two different macroeconomic theories:
(1) neoclassical synthesis Keynesianism and Cambridge Keynesianism/Post Keynesianism from 1945 to about 1979;
(2) revived neoclassical macrotheory from the late 1970s.
The revival of neo-Walrasian neoclassical theory was done mainly by (1) Milton Friedman and (2) the New Classicals at the University of Chicago in the 1970s, including John F. Muth, Robert Lucas, Thomas J. Sargent, Robert J. Barro, Neil Wallace, Robert M. Townsend, Robert E. Hall, Edward C. Prescott and Finn E. Kydland. In many ways, the New Classicals are the worst of all the revived neoclassical theories, because they have been one of the most powerful schools, with considerable influence.

While Neoclassical synthesis Keynesianism had its theoretical problems, derived from the mistaken attempt to wed it to fundamental neoclassical ideas, it provided a far better system than the one that we have seen since about 1979.

The new neoclassical orthodoxy that emerged in the 1980s can be called “neoliberalism,” the “Washington consensus,” or “globalization.”

Reaganomics and Thatcherism were blends of the various new neoclassical ideas. In particular, Reaganomics was a strange blend of monetarism and supply-side economics, with a type of military Keynesianism brought in via Reagan’s huge budget deficits. Thatcherism was a more doctrinaire neoliberal ideology influenced by Milton Friedman, with a tinge of Austrian rhetoric, via Friedrich von Hayek.

While forms of monetarism and supply-side economics rather quickly fell from favour amongst policy-makers (indeed I think that forms of monetarism or quasi-monetarism in fact failed rather spectacularly), the New Classical economics emerged as the dominant neoclassical theory, and, through its arguments with the New Keynesians, the resulting synthesis lead to the New Consensus Macroeconomics by the early 1990s. It is this modern consensus that has come under severe attack in the wake of the 2007–2009 global financial crisis and great recession.

It is clear that the New Consensus Macroeconomics has failed. The question is whether some of the more intelligent New Keynesians can escape from the death-grip of neoclassical economics and develop a better macroeconomic theory, purging it of its unnecessary, mad and bad neoclassical ideas. If that happens, my money is on Post Keynesian economics to be the new economic paradigm.


Davidson, P. 2002. Financial Markets, Money, and the Real World, Edward Elgar, Cheltenham.


  1. I occasionally read Greg Mankiw's blog, and he seems to be a fairly apolitical, unideological academic economist, and many of his blog posts have a rather "fairness doctrine" style to them, where he lists all other points of view and summarizes them. Perhaps because his blog is meant for new young students, so it is hoping to give them a broad view.

    I don't think I have ever heard him give his OWN opinion. His recent NYTimes editorial had him quoting both Nozick and Rawls on redistribution of wealth, and he simply said both ideas had a long philosophical tradition.

  2. I have sad news for you, Prateek Sanjay.

    Greg Mankiw is self-proclaimed Republican and economic conservative:

    My Party Affiliation, Greg Mankiw,

    He claims that:

    "The reason I am a Republican is that, compared to Democrats, the Republicans tend to favor smaller government, lower taxes, and greater reliance on free markets. On many social issues, I find myself agreeing with the Democrats more than the Republicans"

  3. Ah.

    I see.

    It certainly begins to explain his positions on many things. I could have sworn he was just being bipartisan when he defended Republicans. :)

    I wonder what exactly was Thatcher's derived influence from Messrs. Friedman and Hayek. Margaret Thatcher tripled social spending, retained several public sector enterprises, and protected services like the NHS just like her Labour colleagues did. She was as close to her Labour Party colleagues as any Labour Party member could be. The only difference was that she wanted to raise funds to run those services, and when the Opposition leader tried to call her out on her on increasing income inequality, she said that all incomes in all brackets had increased and there was a need to have a high income class to provide tax revenues for public services in the first places.

    Supposedly, Friedman and Hayek were "classical liberals", a group of people engaged in maximum welfare for ordinary people through less government. But Miss Thatcher is quite clear that she did what she did for protecting the government's existence, and not necessarilly because it benefitted the private sector. For a Conservative Leader to conduct Labour policies in her own way is "neoliberalism"?

  4. Thatcher's experiement with monetarism was a retreat from the Keynesianism that had dominated post-WWII Britain.

    And that experiment with monetarist doctrine was actually started by Labour in 1976-1979, so there is plenty of blame to go around.

    Thatcher intensified the monetarist experiment, to utter disaster, causing mass unemployment and recession, when it supposedly would control inflation with minimal loss of output.

  5. You've left out institutional and ecological economics! The ecological macro perspective is rather important. Of course, I consider Post Keynesian, institutional, and ecological economics to be largely complimentary to one another.

  6. "You've left out institutional and ecological economics"

    Yes, indeed I have. A slight oversight!

    Also, the Public Choice school and New Institutionalists.

  7. Interesting post, good stuff.

    I would only disagree with one bit of your taxonomy. Austrians descend from Menger who was, along with Jevons and Walras, very much a neoclassical thinker. So I don't think they should be floating off to the left in that little pink box you've so tastefully painted for them. Also odd is your inclusion of the Austrians with "Randians". Randian economics? Really? If you're going to put economics inspired by novels into a scheme that tries to classify serious attempts at economic thought, then put in Wellsian economics too, or throw in Star Trek economics :)

  8. Yes, classifying "Randian" libertarianism as economics is a bit of an insult to real economists eveywhere!

    I have included it to show the different types libertarians.

  9. I don't think even Randians presume to have some separate Randian economics. Randians are about morality and there are all their insights (pretty impressive too). Randians simply support whatever's laissez faire, they don't really go into details. Interestingly though, looking at some major characters (Dominique, Wynand), Randians would happily support keynesians (sic!) just to prevent casting pearls before swine.

  10. Koning, Randian is libertarian, Wellsian is progressive (or liberal fascist as he called himself and Star Trek is obviously a communist fairy tale of altruist humans. You are correct, neither is proper economics, rather moral propaganda.

  11. I see you have completely ignored Modern Monetary Theory - a rather glaring omission! And what about evolutionary economics? There are a whole lot more strains of heterodox economics than you mention.

  12. Thank you for this excellent overview. I have reposted it on with reference to your blog. Hope you don't mind.

    1. Thanks for the link - and, no, I don't mind at all.