A Historical Perspective on Economic Schools of Thought

by
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 dont know. But
if we had any guts, wed 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.
Obviously 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.
Cause and Effect
For every 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.
Its all a matter of cause and effect. Once identified, elimination of the causes
must necessarily eliminate the effects.
So who 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.
Unfortunately, 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!

To make matters worse, many of todays 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 better.
The science of economics today appears to be in as much chaos and distress as
world economies. Perhaps there is a relationship! Ironically, economics has been
dubbed the dismal science since the early nineteenth century.
Classical Economics
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.
For Adam 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.
Adam 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.
Neo-Classical Economics

However, the 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.
Then in 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.
This new 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.
Rising of Humanism and Empiricism
Another equally 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, and astronomy.
A 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.
It seems 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.
In the 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-andfor-all set of principles. It is viable, evolving and continually growing.
This 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 discovered it!
Thus, 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).
Humanism 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.
Keynesian Economics
The dominant 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 stability.
Pragmatic Economics
One final development needs to be noted. With the rise of Keynesian, DemandSide 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.
The 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.
Furthermore, 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 successfully.
Humanist economic schools today typically lack this necessary, well thought out
ethical system for their public policy pronouncements. If you dont believe that,
just ask one for the ethical basis of his policy statements.
Conclusion
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 dont 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.

The 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? Its 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 and council.

(click photo to enlarge)

Return Home - Top of Page
Sign My Guest book | View My Guest book | Contact Me
/\
Site Designed by JM Web Designs
All Rights Reserved

2000 BU - Economic$ Department