Mainstream Economics
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Mainstream economics is the body of knowledge, theories, and models of
economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...
, as taught by universities worldwide, that are generally accepted by
economists An economist is a professional and practitioner in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this field there are ...
as a basis for discussion. Also known as orthodox economics, it can be contrasted to
heterodox economics Heterodox economics is any economic thought or theory that contrasts with orthodox schools of economic thought, or that may be beyond neoclassical economics.Frederic S. Lee, 2008. "heterodox economics," ''The New Palgrave Dictionary of Economics' ...
, which encompasses various schools or approaches that are only accepted by a minority of economists. The economics profession has traditionally been associated with
neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
. This association has however been challenged by prominent historians of economic thought like David Collander. They argue the current economic mainstream theories, such as
game theory Game theory is the study of mathematical models of strategic interactions among rational agents. Myerson, Roger B. (1991). ''Game Theory: Analysis of Conflict,'' Harvard University Press, p.&nbs1 Chapter-preview links, ppvii–xi It has appli ...
, behavioral economics,
industrial organization In economics, industrial organization is a field that builds on the theory of the firm by examining the structure of (and, therefore, the boundaries between) firms and markets. Industrial organization adds real-world complications to the perf ...
,
information economics Information economics or the economics of information is the branch of microeconomics that studies how information and information systems affect an economy and economic decisions. One application considers information embodied in certain types ...
, and the like, share very little common ground with the initial axioms of neoclassical economics.


History

Economics has always featured multiple
schools of economic thought In the history of economic thought, a school of economic thought is a group of economics, economic thinkers who share or shared a common perspective on the way economy, economies work. While economists do not always fit into particular schools, pa ...
, with different schools having different prominence across countries and over time. The current use of the term "mainstream economics" is specific to the post–
World War II World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposin ...
era, particularly in the
English-speaking world Speakers of English are also known as Anglophones, and the countries where English is natively spoken by the majority of the population are termed the '' Anglosphere''. Over two billion people speak English , making English the largest languag ...
, and to a lesser extent globally. Prior to the development and prevalence of classical economics, the dominant school in Europe was
mercantilism Mercantilism is an economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal. The policy aims to reduce a ...
, which was rather a loose set of related ideas than an institutionalized school. With the development of modern economics, conventionally given as the late 18th-century ''
The Wealth of Nations ''An Inquiry into the Nature and Causes of the Wealth of Nations'', generally referred to by its shortened title ''The Wealth of Nations'', is the ''magnum opus'' of the Scottish economist and moral philosopher Adam Smith. First published in 1 ...
'' by
Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
, British economics developed and became dominated by what is now called the classical school. From ''The Wealth of Nations'' until the
Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
, the dominant school within the English-speaking world was classical economics, and its successor,
neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
. In continental Europe, the earlier work of the
physiocrats Physiocracy (; from the Greek for "government of nature") is an economic theory developed by a group of 18th-century Age of Enlightenment French economists who believed that the wealth of nations derived solely from the value of "land agricultur ...
in France formed a distinct tradition, as did the later work of the
historical school of economics The historical school of economics was an approach to academic economics and to public administration that emerged in the 19th century in Germany, and held sway there until well into the 20th century. The professors involved compiled massive econ ...
in Germany, and throughout the 19th century there were debates in British economics, notably the opposition
underconsumptionist Underconsumption is a theory in economics that recessions and stagnation arise from an inadequate consumer demand, relative to the amount produced. In other words, there is a problem of overproduction and overinvestment during a demand crisis. The ...
school. During the Great Depression and the following
Second World War World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposin ...
, the school of
Keynesian economics Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output an ...
gained attention, which built on the work of the underconsumptionist school, and gained prominence as part of the neoclassical synthesis, which was the post–World War II merger of Keynesian macroeconomics and neoclassical microeconomics that prevailed from the 1950s until the 1970s.Clark, B. (1998). ''Political-economy: A comparative approach''. Westport, CT: Preager. In the 1970s, the consensus in macroeconomics collapsed as a result of the failure of the neoclassical synthesis to explain the phenomenon of
stagflation In economics, stagflation or recession-inflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since action ...
: subsequent to this, two schools of thought in the field emerged:
New Keynesianism New Keynesian economics is a school of macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of new classical macroe ...
and
New classical macroeconomics New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical framework. Specifically, it emphasizes the importance of rigorous founda ...
. Both sought to rebuild macroeconomics using
microfoundations Microfoundations are an effort to understand macroeconomic phenomena in terms of economic agents' behaviors and their interactions.Maarten Janssen (2008),Microfoundations, in ''The New Palgrave Dictionary of Economics'', 2nd ed. Research in microf ...
- to explain macroeconomic phenomenon using microeconomics. Over the course of the 1980s and the 1990s, macroeconomists coalesced around a paradigm known as the
new neoclassical synthesis The new neoclassical synthesis (NNS), which is now generally referred to as New Keynesian economics, and occasionally as the New Consensus, is the fusion of the major, modern macroeconomic schools of thought – new classical macroeconomics/ real ...
, which combines elements of both New Keynesian and New classical macroeconomics, and forms the basis for the current consensus, which covers previously disputed areas of macroeconomics. The consensus built around this synthesis is characterised by an unprecedented agreement on methodological questions (such as the need to validate models econometrically); such agreement had, until the new synthesis, historically eluded macroeconomics, even during the neoclassical synthesis. The
financial crisis of 2007–2010 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...
and the ensuing global economic crisis exposed modelling failures in the field of short-term macroeconomics.


Term

The term "mainstream economics" came into use in the late 20th century. It appeared in 2001 edition of the seminal textbook ''
Economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...
'' by
Samuelson Samuelson is an English-language patronymic surname meaning "son of Samuel (name), Samuel". There are alternative spellings such as the Scandinavian language, Scandinavian-origin Samuelsson and Samuelsen. It is uncommon as a given name. Samuelson m ...
and Nordhaus on the inside back cover in the "Family Tree of Economics," which depicts arrows into "Modern Mainstream Economics" from J.M. Keynes (1936) and
neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
(1860–1910). The term " neoclassical synthesis" itself also first appears in the 1955 edition of Samuelson's textbook.


Scope

Mainstream economics can be defined, as distinct from other schools of economics, by various criteria, notably by its ''assumptions,'' its ''methods,'' and its ''topics.'' It is however also useful to challenge this distinction in light of the mutation of mainstream economics.


Assumptions

While being long rejected by many heterodox schools, several assumptions used to underpin many mainstream economic models. These include the neoclassical assumptions of
rational choice theory Rational choice theory refers to a set of guidelines that help understand economic and social behaviour. The theory originated in the eighteenth century and can be traced back to political economist and philosopher, Adam Smith. The theory postula ...
, a
representative agent Economists use the term representative agent to refer to the typical decision-maker of a certain type (for example, the typical consumer, or the typical firm). More technically, an economic model is said to have a representative agent if all agen ...
, and, often,
rational expectations In economics, "rational expectations" are model-consistent expectations, in that agents inside the model are assumed to "know the model" and on average take the model's predictions as valid. Rational expectations ensure internal consistency i ...
. However, much of modern economic mainstream modeling consists of exploring the effects that complicating factors have on models, such as imperfect and asymmetric information, bounded rationality,
incomplete markets In economics, incomplete markets are markets in which there does not exist an Arrow–Debreu security for every possible state of nature. In contrast with complete markets, this shortage of securities will likely restrict individuals from transfer ...
,
imperfect competition In economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market. Imperfect competition will cause market inefficiency when it hap ...
, heterogenous agents and
transaction cost In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike produ ...
s. Originally, the starting point of orthodox economic analysis was the individual. Individuals and firms were generally defined as units with a common goal: maximisation through rational behaviour. The only differences consisted of: * the specific objective of the maximisation (individuals tend to maximise utility and firms profit); * and the constraints faced in the process of maximisation (individuals might be constrained by limited income or commodity prices and firms might be constrained by technology or availability of inputs). From this (descriptive) theoretical framework, neoclassical economists like
Alfred Marshall Alfred Marshall (26 July 1842 – 13 July 1924) was an English economist, and was one of the most influential economists of his time. His book '' Principles of Economics'' (1890) was the dominant economic textbook in England for many years. I ...
often derived - although not systematically - the political prescription that political action should not be used to solve the problems of the economic system. Instead, the solution ought to derive from an intervention on the above-mentioned maximisation objectives and constraints. It is in this context that economic
capitalism Capitalism is an economic system based on the private ownership of the means of production and their operation for Profit (economics), profit. Central characteristics of capitalism include capital accumulation, competitive markets, pric ...
finds its justification. Yet, mainstream economics now includes descriptive theories of
market Market is a term used to describe concepts such as: *Market (economics), system in which parties engage in transactions according to supply and demand *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an ...
and
government failure Government failure, in the context of public economics, is an economic inefficiency caused by a government intervention, if the inefficiency would not exist in a true free market. The costs of the government intervention are greater than the bene ...
and private and public goods. These developments suggest a range of views on the desirability or otherwise of government intervention, from a more normative perspective.


Methods

Additionally, some economic fields include elements of both mainstream economics and
heterodox economics Heterodox economics is any economic thought or theory that contrasts with orthodox schools of economic thought, or that may be beyond neoclassical economics.Frederic S. Lee, 2008. "heterodox economics," ''The New Palgrave Dictionary of Economics' ...
: for example,
Austrian economics The Austrian School is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result exclusively from the motivations and actions of individuals. Austrian school ...
,
institutional economics Institutional economics focuses on understanding the role of the Sociocultural evolution, evolutionary process and the role of institutions in shaping Economy, economic Human behavior, behavior. Its original focus lay in Thorstein Veblen's instin ...
,
neuroeconomics Neuroeconomics is an interdisciplinary field that seeks to explain human decision-making, the ability to process multiple alternatives and to follow through on a plan of action. It studies how economic behavior can shape our understanding of t ...
and non-linear complexity theory. They may use neoclassical economics as a point of departure. At least one institutionalist has argued that "neoclassical economics no longer dominates a mainstream economics."


Topics

Economics has been initially shaped as a discipline concerned with a range of issues revolving around money and wealth. However, in the 1930s, mainstream economics began to mutate into a science of human decision. In 1931, Lionel Robbins famously wrote "Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses". This drew a line of demarcation between mainstream economics and other disciplines and schools studying the economy. The mainstream approach of economics as a science of decision-making contributed to enlarge the scope of the discipline. Economists like
Gary Becker Gary Stanley Becker (; December 2, 1930 – May 3, 2014) was an American economist who received the 1992 Nobel Memorial Prize in Economic Sciences. He was a professor of economics and sociology at the University of Chicago, and was a leader of ...
began to study seemingly distant fields as crime, the
family Family (from la, familia) is a Social group, group of people related either by consanguinity (by recognized birth) or Affinity (law), affinity (by marriage or other relationship). The purpose of the family is to maintain the well-being of its ...
,
law Law is a set of rules that are created and are enforceable by social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. It has been vario ...
,
politics Politics (from , ) is the set of activities that are associated with making decisions in groups, or other forms of power relations among individuals, such as the distribution of resources or status. The branch of social science that studies ...
, and
religion Religion is usually defined as a social- cultural system of designated behaviors and practices, morals, beliefs, worldviews, texts, sanctified places, prophecies, ethics, or organizations, that generally relates humanity to supernatural, ...
. This expansion is sometimes referred to as
economic imperialism The theory of imperialism refers to a range of theoretical approaches to understanding the expansion of capitalism into new areas, the unequal development of different countries, and economic systems that may lead to the dominance of some count ...
.


References

{{Macroeconomics ^ ^