Historical Perspective on Economic Schools of Thought
Dr. Judd W. Patton
Once upon a
time there were two skeletons locked in a closet.
After a long silence, one finally rattled over the other one and
said, “How did we ever got in this mess?”
After a short pause the second one rattled back, “I don’t know.
But if we had any guts, we’d get out!”
Yes, world economic conditions of chronic unemployment, continually
rising prices, labor strife, pollution, persistent poverty, and threats of
international trade wars reveal all too clearly the “mess” of the new 21st
century. Moreover, it is going
to take more than just “guts” to conquer these problems.
something is fundamentally and desperately wrong.
But there is hope! Mankind
can triumph over these seemingly insolvable economic problems (triumph is
nothing more than “tri”, with some “umph” added!), but first
humankind needs to be educated. Our
economic woes are rooted in a lack of knowledge and understanding regarding
economic cause and effect.
effect there must be a cause. Basic
truth? Indeed. Conventional
wisdom to the contrary, there is a fundamental and primary cause to the
phenomenon of ever rising prices, popularly called inflation.
Likewise, there are basis causes for unemployment and recessions.
The same is true for all economic disorders.
all a matter of cause and effect. Once
identified, elimination of the causes must necessarily eliminate the
has the knowledge and wisdom of the basic laws and principles governing
economic events? Besides many
intelligent laymen and businessmen, the obvious individuals to look to for
the answers would be the specialists in economic theory, the economists.
that brings us to a disturbing dilemma.
Which economists should one seek out?
There are Supply-Siders, Demand-Siders, Conservatives, Liberals, Neo-Classicals,
Monetarists, Marxists, et cetera. Each
has different principles, different cause and effect relationships, and
different policy prescriptions. Ghastly!
If you ask six economists about a particular economic problem, you
will likely get at least seven different answers!
matters worse, many of today’s economists frankly feel disillusioned.
A well-known economist, Kenneth Boulding, expressed his sentiment
that today there exists among economists, “a generally hopeless feeling
that all the answers to social questions are wrong.”
Looking at the performance of economic advisors, Nobel-winning
economist F. A. Hayek expressed his disillusionment when he said, “one
sometimes feels that untaught common sense would probably have done
The science of
economics today appears to be in as much chaos and distress as world
economies. Perhaps there is a
economics has been dubbed the “dismal science” since the early
The science of
economics is generally recognized by economic historians to have begun with
the 1776 publication, Inquiry into the Nature and Causes of the Wealth
of Nations by the Scottish moral philosopher Adam Smith.
He, unlike his predecessors of previous centuries, systematically
deduced many principles of cause and effect relationships in a market
economy. As a result he became recognized as the “father of
economics.” In addition he
founded a tradition known now as the Classical School of Economics, which
lasted nearly a century. Great
economists, such as Jean-Baptist Say, James Mill, David Ricardo, and John
Stuart Mill, subsequently developed the tradition and were a major force in
ushering in the age of Capitalism.
Smith and most of the classical economists, economics, known to them as
political economy, was a subdivision of moral philosophy.
Their economic science was built on a moral base.
Economic science was not hermetically sealed from moral questions of
right and wrong.
Smith himself believed in the existence of a moral order that he called
natural liberty or natural law. For him economics was a normative science, which of course,
explains what ought to be. He
convincingly made his case, based in his moral framework that laissez-faire
Capitalism, besides being a more productive system than its alternatives,
was the only right, moral choice. Under
Capitalism individuals, acting in their own self-interest (not necessarily
selfishly) are led to promote, as through an invisible hand, the general
well-being of society. Competitive
Capitalism was in harmony with the natural, God-ordained order.
Classical Traditionalists had one major, glaring flaw in their work.
They believed that market prices were determined in the long run by
the amount of labor time embodied in the products.
This simply did not square with reality. Why for instance did gold command a higher price than iron
and its products, when the latter not only required more labor time to
produce but also seemed more useful as well?
Their answer was highly unsatisfactory.
the 1870s three economists, working independently, “revolutionized”
economic science by discovering the subjective theory of value as the basis
for market prices and phenomena. Carl
Menger at the University of Vienna, William Jevons at Cambridge University
and Leon Walras at the University of Lausanne perceived that it is the
acting, preferring, valuing individual that is the source of value and
prices, not labor time! The
result was the birth of the Neo-Classical Tradition.
foundational principle subsequently produced great fruit.
However, key differences in the three founders’ expositions led to
three separate schools of thought within the Neo-Classical Tradition.
Only the followers of Menger developed the subjective insight. More on them later.
of Humanism and Empiricism
“revolutionary” idea emerged during the nineteenth century.
The idea was that economics should become an “exact” science,
like the natural sciences, by adopting its trial and error approach.
The impetus to this experimental or empirical method was due in large
part to the notable successes and progress of Newtonian physics, biology,
corollary to this development was that science should not have a
moral foundation, as did Adam Smith and the Classicals.
Science should be value-free.
clear and obvious that no scientist should inject his opinions, prejudices,
and judgments into his analysis or work.
Scientists by definition are unbiased researchers.
Nevertheless, it is widely recognized today that all science is based
on a foundation or paradigm that conditions the nature of thinking and
theorizing. To exclude God or revealed knowledge from the “starting
point” in the study of economic phenomena, in an effort to be unbiased, is
to make man and his reasoning the sole source of knowledge.
rush to be unbiased and value-free, humanism (man as the sole source of
knowledge) replaced the Creator God as the foundation of all knowledge and
reasoning. And a humanistic
trial and error science obviously has no absolute truths.
As the author of a current-day popular economic textbook put it,
“It would be foolish to regard a set of principles as absolute truth.
The testing process in economics and in other sciences never ends.
Economic theory is not a once-and-for-all set of principles.
It is viable, evolving and continually growing.”
virtually unheralded “revolution” changed the scope of economics from a
morally-based, deductive science producing what were believed to be
universal principles that governed the wealth of nations, to an amoral,
humanistic, experimental science producing “principles” that are
relative to time and place, continually open to refinement or refutation.
As a noted scientific empiricist proclaimed, “truth may exist out
there in the universe, but science can never know for sure if it has
economics “progressed” from a science of wealth and welfare based on a
moral framework to a science of getting the most for the least (Science of
Avarice), finally culminating in the twentieth century as the humanistic
science of economizing (Microeconomics) and the science of governmental
management of the economy (Macroeconomics).
and empiricism swept the day even enhancing Neo-Classical schisms into
various Schools of Thought. The
modern-day Neo-Classical descendants include the Monetarists, led by
Nobel-Laureate Milton Friedman, who stresses that the proper management of
the economy requires a steady growth in the money supply; and the relatively
new Supply-Side school of the 1970s, who emphasize restoring incentives to
the economy by cutting taxes to stimulate work, savings, and investment.
tradition for the last sixty years has not been Neo-Classical however.
Born in the midst of the Great Depression, Keynesian Economics (named
after the founder John Maynard Keynes – pronounced “Canes”)
revolutionized the science of economics by supposedly proving that
Capitalism was inherently unstable, contrary to Neo-Classical thought.
Their theory provided the “principles” for government to manage
the economy to attain the goals of full employment, growth, and price level
development needs to be noted. With
the rise of Keynesian, Demand-Side economics came the rise of pragmatic
economists (which include economists of all traditions).
These economists direct their work and research to solve the problems
of the moment. Their job is the
rationalization of politically expedient policies.
Their theorizing and forecasting follow elections and particular
administration lines. Amazingly,
these economists seem oblivious to the fact that their pragmatism smuggles
value judgments into their analysis! In
doing so they openly contradict their own time hallowed tenet of humanistic
science to be unbiased, neutral, and value-free.
Austrian School Tradition
There is only
one school of economic thought that has not followed the pragmatic,
empirical, humanist, no-truth ideology.
The Austrian School, founded by the Neo-Classical economist Carl
Menger and developed notably by Ludwig von Mises (1881-1973), has developed
a body of inexorable economic principles based on the self-evident,
biblically-based axiom of purposeful human action.
These deduced principles, reminiscent of Adam Smith, are believed to
be universal laws of human action that are true and absolute regardless of
time or place.
these cause and effect economists (Austrians) perceive that questions of
“what ought to be” are questions that require an ethical
standard. Advice and questions
of public policy are in the area of normative economics.
In their view Adam Smith was right after all!
A moral framework is essential to any pronouncements of public
policy. The role of value-free,
cause and effect economics, according to these economists, is to provide the
knowledge of the proper economic means that must be followed to
achieve an ethically chosen end.
Economic science cannot establish policies or answer questions of
what ought to be. Economic
science is neutral with regard to human values, but it provides acting man
with vital information he may need to form his valuations and to act
economic schools today typically lack this necessary, well thought out
ethical system for their public policy pronouncements.
If you don’t believe that, just ask one for the ethical basis of
his policy statements.
Here is the
most important point concerning economic schools of thought: disagreements
among economists, and therefore their policy prescriptions, are not because
they have widely divergent values, but primarily the result of different
paradigms or worldviews. They just don’t see the world in the same way.
Their “starting points” or premises and assumptions vary significantly.
Therefore, economists will continue to disagree until they can agree on the
fundamental premises upon which they build their theories.
author believes that lasting solutions to economic problems require the
recognition of inexorable economic principles of cause and effect, as
elaborated by the Austrians. Until that proposition becomes mainstream and
generally accepted, economics students would be well-advised to study and
seek the answer to the difficult question: “Which Economic Tradition has
the right paradigm and worldview?” It’s a difficult and challenging task
to be sure. But it is necessary and essential if one ever hopes to know
where he or she stands, and what economists one should listen too for advice
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