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.

BIBLIOGRAPHY

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

The Types of Pro-Free Market Libertarians

Pro-free market libertarians, or libertarians who support free markets, come in various kinds. I say “pro-market libertarians” because left-wing libertarians who support anarchism believe that the word “libertarian” has been unjustly appropriated by anarcho-capitalists and other capitalist libertarians.

Pro-free market libertarians can be divided in two main types: (1) Austrians and (2) non-Austrians. I provide a list of such libertarians below, on the basis of this division:

I. Austrians
(1) the Anarcho-capitalists, like Rothbard and Hoppe;

(2) The minimal state Austrians like Mises (with his praxeology);

(3) Austrian supporters of Hayek’s economics, with a minimal state;

(4) The “orthodox” Austrians who have a moderate subjectivist position (like Israel Kirzner and Roger Garrison);

(5) Austrian radical subjectivists like Ludwig Lachmann;

II. Non-Austrian libertarians

(6) Randians;

(7) followers of Robert Nozick’s libertarianism;

(8) followers of David D. Friedman’s anarcho-capitalism.

(9) other non-Austrian libertarians (e.g., Tom Palmer, Bryan Caplan and Tyler Cowen).

I have already discussed the Austrian school and its various subcategories in an earlier post (see “The Different Types of Austrian Economics,” December 5, 2010).

Non-Austrian libertarians also come in various forms. The Randians are followers of Ayn Rand’s Objectivism, an atheist, individualist, and laissez-faire ideology. I must confess that I have never thought much of Randian libertarianism, either in terms of its ethical ideas or its argument for laissez faire. Randians have a cultist feel to them, and this sentiment was famously shared by Murray Rothbard in his now classic play “Mozart was a Red,” which I highly recommend. In fact, I can’t resist quoting part of Justin Raimondo’s introduction to this:

“The Randian ideology was not so much an integrated philosophical system as a mythos, based as it was on Rand’s novels. Unfortunately, as she got older, she imagined herself to be a philosopher, and gave up fiction writing to become the leader of a movement. In her nonfiction tirades, Rand quotes mainly from her own works; this was due not only to her inflated self-estimate, but also to a colossal ignorance. She read almost nothing but detective novels, and her followers, usually considerably younger, were even worse. Although her philosophy of rational self-interest was an eccentric modern variation on a much older philosophical tradition, the only precedent she acknowledged was Aristotle.”
http://www.lewrockwell.com/rothbard/mozart.html

And this was from a fellow libertarian! As an aside at this point, I myself once had a Randian friend in university, and his support for Randian ideology came almost exclusively from reading Atlas Shrugged – so I cannot help but think there is something to Raimondo’s assessment of the Randians. But let’s move on.

Perhaps a more intellectually rigorous libertarianism can be found in David D. Friedman’s anarcho-capitalism, which is based on a consequentialist/utilitarian argument, in contrast to the natural rights/natural law approach of Murray Rothbard.

The various other non-Austrian libertarians seem to be adherents of neoclassical economics – or at least influenced by neoclassical economics to some extent, even when they claim an affiliation with Austrian economics, without completely accepting the ideas of that school. We can include Robert Nozick, Jan Narveson, David Gauthier, Bryan Caplan, and David D. Friedman in this group.

We should note that Austrian economics began as a theory that was not fundamentally hostile to government intervention (see “Friedrich von Wieser and Eugen von Philippovich von Philippsberg: Austrian Economists and Fabian Socialists,” October 21, 2010), but then took a wrong turn to the dead-end of Misesian and Rothbardian thought after World War II.

Of modern Austrians who managed to escape the grip of Mises and Rothbard, the most interesting (in my view) are the radical subjectivists like Ludwig Lachmann. The Austrian radical subjectivists share some ideas with Post Keynesians, and Austrian economics is still haunted by the “Lachmann problem” – the problem of how free markets result in plan/pattern co-ordination under subjective expectations and fundamental uncertainty.

The development of modern Austrian economics amongst the moderate subjectivists (such as Israel Kirzner, Roger Garrison, Gerald P. O’Driscoll and Mario J. Rizzo) is essentially the story of Austrians who have tried to solve the “Lachmann problem,” albeit unsuccessfully. In particular, O’Driscoll and Rizzo’s book The Economics of Time and Ignorance (Oxford, UK, 1985) is one that stands out in the Austrian literature.