Posted by : Ahsan Khan Thursday, 7 February 2013



SCHOOL OF THOUGHTS OF ECONOMICS

1. Islamic economics

Islamic economics is the practice of economics in accordance with Islamic law. The origins can be traced back to the Caliphate, where an early market economy and some of the earliest forms of merchant capitalism took root between the 8th-12th centuries, which some refer to as "Islamic capitalism".
Islamic economics seeks to enforce Islamic regulations not only on personal issues, but to implement broader economic goals and policies of an Islamic society, based on uplifting the poor to sufficient. It was founded on free and unhindered circulation of wealth so as to handsomely reach even the lowest authorities of society. One distinguishing feature is the tax on wealth (in the form of both Zakat and Jizya), and bans levying taxes on all kinds of trade and transactions (Income/Sales/Excise/Import/Export duties etc.). Another distinguishing feature is prohibition of interest in the form of excess charged while trading in money. Its announcement on use of paper currency also stands out. Though promissory notes are recognized, they must be fully backed by reserves. Fractional-reserve banking is disallowed as a form of breach of trust.
This school has seen a revived interest in development and understanding since the later part of 20th century.

 

2. Mercantilism

Economic policy in Europe during the late Middle Ages (14th to the 16th century) and early Renaissance (Italy, 1400–79) treated economic activity as a good which was to be taxed to raise revenues for the nobility and the church.  Mercantilism is the economic doctrine that government control of foreign trade is of paramount importance for ensuring the military security of the country. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic policy and discourse from the 16th to late-18th centuries. Mercantilism was a cause of frequent European wars in that time and motivated colonial expansion. Mercantilist theory varied in sophistication from one writer to another and developed over time. Favours for powerful interests were often defended with mercantilist reasoning.
Economic exchanges were regulated by feudal rights, such as the right to collect a toll or hold a faire, as well as guild restrictions and religious restrictions on lending. Economic policy, such as it was, was designed to encourage trade through a particular area. Because of the importance of social class, sumptuary laws were enacted, regulating dress and housing, including allowable styles, materials and frequency of purchase for different classes. Niccolò Machiavelli in his book “The Prince” was one of the first authors to theorize economic policy in the form of advice. He did so by stating that princes and republics should limit their expenditures, and prevent either the wealthy or the populace from damaging the other. In this way a state would be seen as "generous" because it was not a heavy burden on its citizens.
High tariffs, especially on manufactured goods, are an almost universal feature of mercantilist policy. Other policies have included:
  • Building a network of overseas colonies;
  • Forbidding colonies to trade with other nations;
  • Monopolizing markets with specific ports;
  • Banning the export of gold and silver, even for payments;
  • Forbidding trade to be carried in foreign ships;
  • Export subsidies;
  • Promoting manufacturing with research or direct subsidies;
  • Limiting wages;
  • Maximizing the use of domestic resources;
  • Restricting domestic consumption with non-tariff barriers to trade.
The Austrian lawyer and scholar Philipp Wilhelm von Hornick, in his Austria Over All, If She Only Will of 1684, detailed a nine-point program of what he believed effective national economy, which sums up the tenets of mercantilism comprehensively:
  • That every inch of a country's soil be utilized for agriculture, mining or manufacturing.
  • That all raw materials found in a country be used in domestic manufacture, since finished goods have a higher value than raw materials.
  • That a large, working population be encouraged.
  • That all export of gold and silver is prohibited and all domestic money being kept in circulation.
  • That all imports of foreign goods be discouraged as much as possible.
  • That where certain imports are indispensable they be obtained at first hand, in exchange for other domestic goods instead of gold and silver.
  • That as much as possible, imports are confined to raw materials that can be finished in the home country.
  • That opportunity is constantly sought for selling a country's surplus manufactures to foreigners, so far as necessary, for gold and silver.
  • That no importation be allowed if such goods are sufficiently and suitably supplied at home.

3. Physiocrats

In his Austrian Perspective on the History of Economic Thought, Murray Rothbard argued that the modern history of economics should properly begin with the physiocrats rather than with Adam Smith. Pierre Samuel du Pont de Nemours, a prominent Physiocrat, immigrated to the US and his son founded DuPont, the world's second largest chemicals company. In his book la Physiocratie, du Pont advocated low tariffs and free trade.
Physiocracy (from the Greek for "Government of Nature") is an economic theory developed by the Physiocrats, a group of economists who believed that the wealth of nations was derived solely from the value of "land agriculture" or "land development." Their theories originated in France and were most popular during the second half of the 18th century. Physiocracy is perhaps the first well-developed theory of economics.
The movement was particularly dominated by François Quesnay (1694–1774) and Anne-Robert-Jacques Turgot (1727–1781). It immediately preceded the first modern school, classical economics, which began with the publication of Adam Smith's The Wealth of Nations in 1776.
The most significant contribution of the Physiocrats was their emphasis on productive work as the source of national wealth. This is in contrast to earlier schools, in particular mercantilism, which often focused on the ruler's wealth, accumulation of gold, or the balance of trade. At the time the Physiocrats were formulating their ideas, economies were almost entirely agrarian. That is presumably why the theory considered only agricultural labor to be valuable. Physiocrats viewed the production of goods and services as consumption of the agricultural surplus, since the main source of power was from human or animal muscle and all energy was derived from the surplus from agricultural production.

Characteristics

1. Natural Order. The Physiocrats thought there was a "Natural order" that allowed human beings to live together. Men did not come together via a somewhat illogical "social contract". Rather, we have to discover the laws of the natural order that will allow individuals to live in society without losing significant freedoms.

2. Individualism and laissez-faire. The Physiocrats, especially Turgot (10 May 1727 – 18 March 1781) was a French economist, believed that self-interest is the motivation for each segment of the economy to play its role. Each individual is best suited to determine what goods he wants and what work would provide him with what he wants out of life. While a person might labor for the benefit of others, he will work harder for his own benefit; however, each person's needs are being supplied by many other people. The system works best when there is a complementary relationship between one person's needs and another person's desires, and trade restrictions place an unnatural barrier to achieving one's goals.

3. Private property. None of the theories concerning the value of land could work without strong legal support for the ownership of private property. Combined with the strong sense of individualism, private property becomes a critical component of the Tableau's functioning.

4. Diminishing returns. Turgot was one of the first to recognize that “successive applications of the variable input will cause the product to grow, first at an increasing rate, later at a diminishing rate until it reaches a maximum.” This was recognition that the productivity gains required to increase national wealth had an ultimate limit, and, therefore, wealth was not infinite.

5. Investment capital. Both Quesnay and Anne Robert Jacques Turgot, Baron de Laune recognized that capital was needed by farmers to start the production process, and both were proponents of using some of each year’s profits to increase productivity. Capital was also needed to sustain the laborers while they produced their product. Turgot recognizes that there is opportunity cost and risk involved in using capital for something other than land ownership, and he promotes interest as serving a “strategic function in the economy.”

 

4. Classical political economy

Classical economics, also called classical political economy, was the original form of mainstream economics of the 18th and 19th centuries. Classical economics focuses on the tendency of markets to move to equilibrium and on objective theories of value. Neo-classical economics differs from classical economics primarily in being utilitarian in its value theory and using marginal theory as the basis of its models and equations. Marxian economics also descends from classical theory. Anders Chydenius (1729–1803) was the leading classical liberal of Nordic history (After conversion to Christianity in the 11th century, three northern kingdoms – Denmark, Norway and Sweden – emerged and what we today call the Nordic Region became a part of Europe). A Finnish priest and member of parliament, he published a book called The National Gain in 1765, in which he proposes ideas of freedom of trade and industry and explores the relationship between economy and society and lays out the principles of liberalism, all of this eleven years before Adam Smith published a similar and more comprehensive book, The Wealth of Nations. According to Chydenius (26 February 1729 – 1 February 1803) was a Swedish), democracy, equality and a respect for human rights were the only way towards progress and happiness for the whole of society.
It’s Assumptions:
  1. There is existence of full employment without inflation.
  2. There is a laissez faire capitalist economy without government interference.
  3. It is a closed economy without foreign trade.
  4. There is a perfect competition in labour and product markets.
  5. Labour is homogenous.
  6. Total Output of the economy is divided between consumption and investment expenditure.
  7. The quantity of money is given and money is only the medium of exchange.
  8. Wages and Prices are perfectly flexible.
  9. There is perfect information on the part of al market participants.
  10. Money wages and real wages are directly related and proportional.
  11. Savings and investments depend upon rate of interest.
  12. The law of diminishing returns operates in production.
  13. It assumes long run.

 

5. Marxian economics

Marxian economics come down from the work of Karl Marx and Friedrich Engels. This school focuses on the labor theory of value and what Marx considered to be the exploitation of labour by capital. Thus, in Marxian economics, the labour theory of value is a method for measuring the exploitation of labour in a capitalist society, rather than simply a theory of price.
Marxian economics refers to theories on the functioning of capitalism based on the works of Karl Marx. Adherents of Marxian economics, particularly in academia, distinguish it from Marxism as a political ideology and sociological theory, arguing that Marx's approach to understanding the economy is intellectually independent of his advocacy of revolutionary socialism or his support of proletarian revolution. Adherents consider Marx's economic theories to be the basis of a viable analytic framework, and an alternative to more conventional neoclassical economics. Marxian economists do not lean entirely upon the works of Marx and other widely known Marxists; they draw from a range of Marxist and non-Marxist sources.
Marx's major work on political economy was Capital: A Critique of Political Economy (better known by its German title Das Kapital), a three-volume work, of which only the first volume was published in his lifetime (the others were published by Friedrich Engels from Marx's notes). One of Marx's early works, Critique of Political Economy, was mostly incorporated into Capital, especially the beginning of Volume I. Marx's notes made in preparation for writing Capital were published years later under the title Grundrisse.
Marx employed a labour theory of value, which holds that the value of a commodity is the socially necessary labour time invested in it. In this model, capitalists do not pay workers the full value of the commodities they produce; rather, they compensate the worker for the necessary labor only (the worker's wage, which cover only the necessary means of subsistence in order to maintain him working in the present and his family in the future as a group). This necessary labor is, Marx supposes, only a fraction of a full working day - the rest, the surplus-labor, would be pocketed by the capitalist. Marx theorized that the gap between the value a worker produces and his wage is a form of unpaid labour, known as surplus value. Moreover, Marx argues that markets tend to obscure the social relationships and processes of production; he called this commodity fetishism. People are highly aware of commodities, and usually don't think about the relationships and labour they represent.

 

6. Neoclassical economics

Neoclassical economics is the dominant form of economics used today and has the highest amount of supporters among economists. It is often referred to by its critics as Orthodox Economics. The more specific definition this approach implies was captured by Lionel Robbins in a 1932 essay: "the science which studies human behavior as a relation between scarce means having alternative uses." The definition of scarcity is that available resources are insufficient to satisfy all wants and needs; if there is no scarcity and no alternative uses of available resources, and then there is no economic problem.

Definition of 'Neoclassical Economics'

An approach to economics that relates supply and demand to an individual's rationality and his or her ability to maximize utility or profit. Neoclassical economics also increased the use of mathematical equations in the study of various aspects of the economy. This approach was developed in the late-nineteenth century, based on books by William Stanley Jevons, Carl Menger and Leon Walras.
Investopedia explains 'Neoclassical Economics'
Since its inception, neoclassical economics has grown to become the primary take on modern-day economics. Although it is now the most widely taught form of economics, this school of thought still has its detractors. Most criticism points out that neoclassical economics makes many unfounded and unrealistic assumptions that do not represent real situations. For example, the assumption that all parties will behave rationally overlooks the fact that human nature is vulnerable to other forces, which cause people to make irrational choices. Therefore, many critics believe that this approach cannot be used to describe actual economies.

Neoclassical economics is also sometimes blamed for inequalities in global debt and trade relations because the theory holds that such matters as labor rights will improve naturally, as a result of economic conditions.

7. Keynesian economics

Keynesian economics has developed from the work of John Maynard Keynes and focused on macroeconomics in the short-run, particularly the rigidities caused when prices are fixed. It has two successors. Post-Keynesian economics is an alternative school-one of the successors to the Keynesian tradition with a focus on macroeconomics. They concentrate on macroeconomic rigidities and adjustment processes, and research micro foundations for their models based on real-life practices rather than simple optimizing models. Generally associated with Cambridge, England and the work of Joan Robinson. New-Keynesian economics is the other school associated with developments in the Keynesian fashion. These researchers tend to share with other Neoclassical economists the emphasis on models based on micro foundations and optimizing behavior, but focus more narrowly on standard Keynesian themes such as price and wage rigidity. These are usually made to be endogenous features of these models, rather than simply assumed as in older style Keynesian ones.
Keynesian economics is an economic theory named after John Maynard Keynes, a British economist who lived from 1883 to 1946. He is most well-known for his simple explanation for the cause of the Great Depression. His economic theory was based on a circular flow of money, which refers to the idea that when spending increases in an economy, earnings also increase, which can lead to even more spending and earnings. Keyne’s ideas generated numerous interventionist economic policies during the Great Depression.
In Keynes' theory, one person's spending goes towards another person's earnings, and when that person spends his or her earnings, he or she is, in effect, supporting another person's earnings. This cycle continues on and helps support a normal, functioning economy. When the Great Depression hit, people's natural reaction was to hoard their money. Under Keynes' theory, this stopped the circular flow of money, keeping the economy at a standstill.
Keynes' solution to this poor economic state was to "prime the pump." He argued that the government should step in to increase spending, either by increasing the money supply or by actually buying things itself. During the Great Depression, however, this was not a popular solution. It is said, however, that the massive defense spending that United States president Franklin Delano Roosevelt initiated helped revive the U.S. economy.
Keynesian economics advocates for the public sector to step in to assist the economy generally, which is a significant departure from popular economic thought that preceded it - laissez-faire capitalism. Laissez-faire capitalism supported the exclusion of the public sector in the market. The belief was that an unfettered market would achieve balance on its own.
The proponents of free-market capitalism include the Austrian School of economic thought. One of its founders, Friedrich von Hayek, lived in England at the same time as Keynes. The two men had a public rivalry for many years because of their opposing thoughts on the role of the state in the economic lives of individuals.
Keynesian economics warns against the practice of too much saving and not enough consumption, or spending, in an economy. It also supports considerable redistribution of wealth, when needed. Keynesian economics further concludes that there is a pragmatic reason for the massive redistribution of wealth: if the poorer segments of society are given sums of money, they will likely spend it, rather than save it, thus promoting economic growth. Another central idea of Keynesian economics is that trends in the macroeconomic level can disproportionately influence consumer behavior at the micro-level.

Salient Features

1. According to Keynes, equilibrium level of NI takes place where aggregate demand (aggregate expenditure) is equal to aggregate supply (Aggregate output).
2. The equilibrium level may be at above the full employment and may be at below the full employment level. Full employment represents maximum level of output which could be obtained by utilizing all the natural and human resources of the economy. Thus at the level of full employment AD = AS and the equilibrium level of NI will be maintained at full employment level.
If at the level of full employment AD > AS, NI will take place above the full employment increased in AD means more demand for goods + services. So profit of the producer will increase, so investment  (i) also increases, so NI increases. The increases in NI will be only in monetary units. If at the level of full employment AD < AS, NI will take place below the full employment level. Decreased AD means less dd for goods + service. So producers profit and ii will decrease. Hence NI will also decrease and in this situation unemployment occurs.
3. Keynes introduced the idea of “effective demand” effective dd represents AS, AD and the level of NI. According to Keynes higher level of effective demand, higher will be the level of output and employment. He says effective dd deficiency is responsible for unemployment.
4. In response to classical utopianism of “Laissez-faire” Keynes is in favor of government intervention in inflation and deflation also. He is advocating deficit budget and deficit financing which increases employment and output and also effective dd.

8. Modern schools

  • Mainstream economics is a term used to distinguish economics in general from heterodox approaches and schools within economics. It begins with the premise that resources are scarce and that it is necessary to choose between competing alternatives. That is, economics deals with tradeoffs. With scarcity, choosing one alternative implies forgoing another alternative-the opportunity cost. The opportunity cost expresses an implicit relationship between competing alternatives. Such costs, considered as prices in a market economy, are used for analysis of economic efficiency or for predicting responses to disturbances in a market. In a planned economy comparable shadow price relations must be satisfied for the efficient use of resources, as first demonstrated by the Italian economist Enrico Barone. Economists represent incentives and costs as playing a central role in shaping decision making. An immediate example of this is the consumer theory of individual demand, which isolates how prices (as costs) and income affect quantity demanded. Modern mainstream economics builds primarily on neoclassical economics, which began to develop in the late 19th century. Mainstream economics also acknowledges the existence of market failure and insights from Keynesian economics. It uses models of economic growth for analyzing long-run variables affecting national income. It employs game theory for modeling market or non-market behavior. Some important insights on collective behavior (for example, emergence of organizations) have been incorporated through the new institutional economics. A definition that captures much of modern economics is that of Lionel Robbins in a 1932 essay: "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." Scarcity means that available resources are insufficient to satisfy all wants and needs. Absent scarcity and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choice, as affected by incentives and resources. Economics generally is the study of how people allocate scarce resources among alternative uses.

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