The One Ring to Rule Them All?: The Diversity of Approaches to Economics Contrar

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The One Ring to Rule Them All?: The Diversity of Approaches to Economics

Contrary to what most economists would have you believe, there isn’t just one kind of economics – Neoclassical economics. In this chapter, I introduce no less than nine different kinds, or schools, as they are often known.*

1 These schools are not irreconcilable enemies, however; the boundaries between schools are actually fuzzy. 1 But it is important to recognize that there are distinctive ways of conceptualizing and explaining the economy, or ‘doing’ economics, if you like. And none of these schools can claim superiority over others and still less a monopoly over truth.

One reason is the nature of theory itself. All theories, including natural sciences like physics, necessarily involve abstraction and thus cannot capture every aspect of the complexity of the real world. 2 This means that no theory is good at explaining everything. Each theory possesses particular strengths and weaknesses, depending on what it highlights and ignores, how it conceptualizes things and how it analyses relationships between them. There is no such thing as one theory that can explain everything better than others – or ‘the one ring to rule them all’, 3 if you are a fan of The Lord of the Rings.

Added to this is the fact that, unlike things that are studied by natural scientists, human beings have their own free will and imagination. They do not simply respond to external conditions. They try – and often succeed – to change those very conditions by imagining a utopia, persuading others and organizing society differently; as Karl Marx once eloquently put it, ‘[ m] en make their own history’.* 2 Any subject studying human beings, including economics, has to be humble about its predictive power.

Moreover, unlike the natural sciences, economics involves value judgements, even though many Neoclassical economists would tell you that what they do is value-free science. As I will show in the following chapters, behind technical concepts and dry numbers lie all sorts of value judgements: what is the good life; how minority views should be treated; how social improvements should be defined; and what are morally acceptable ways of achieving the ‘greater good’, however it is defined. 4 Even if one theory is more ‘correct’ from some political or ethical points of view, it may not be so from another.

The Classical School

One-sentence summary: The market keeps all producers alert through competition, so leave it alone.

Today, the Neoclassical school dominates. As you will have guessed, there was Classical economics before Neoclassical economics, of which the latter is the supposed heir (although the Marxist school has an equally good claim to be its heir, as I shall explain).

The Classical school of economics – or, rather the Classical school of political economy, as the subject was then called – emerged in the late eighteenth century and dominated the subject until the late nineteenth century. Its founder is Adam Smith (1723– 90), who we have discussed already. Smith’s ideas were further developed in the early nineteenth century by three near-contemporaries – David Ricardo (1772– 1823), Jean-Baptiste Say (1767– 1832), and Robert Malthus (1766– 1834).

The invisible hand, Say’s Law and free trade: the key arguments of the Classical school

According to the Classical school, the pursuit of self-interests by individual economic actors produces a socially beneficial outcome, in the form of maximum national wealth. This paradoxical outcome is made possible by the power of competition in the market. In their attempts to make profits, producers strive to supply cheaper and better things, ultimately producing their products at the minimum possible costs, thus maximizing national output. This idea is known as the invisible hand and has become arguably the most influential metaphor in economics, although Smith himself used it only once in The Wealth of Nations (TWON) and did not accord it a prominent role in his theory.

Most classical economists believed in the so-called Say’s Law, which states that supply creates its own demand. The reasoning was that every economic activity generates incomes (wages, profits, etc.) equivalent to the value of its output. Therefore, it was argued, there can be no such thing as a recession due to a shortfall in demand. Any recession had to be due to exogenous factors, such as a war or the failure of a major bank. Since the market was incapable of naturally generating a recession, any government attempt to counter it, say, through deliberate deficit spending, was condemned as disturbing the natural order. This meant that recessions that could have been cut short or made milder became prolonged in the days of Classical economics.

The Classical school rejected any attempt by the government to restrict the free market, say, through protectionism or regulation. Ricardo developed a new theory of international trade, known as the theory of comparative advantage, further strengthening the argument for free trade. His theory showed that, under certain assumptions, even when a country cannot produce any product more cheaply than another country can, free trade between them will allow both to maximize their outputs. They can achieve this by specializing in, and exporting, products in which they have comparative advantage – those with the largest relative cost advantages in the case of the more efficient country and those with the smallest relative cost disadvantages in the case of the less efficient country.

The Classical school viewed the capitalist economy as being made up of ‘three classes of the community’, in Ricardo’s words – that is, capitalists, workers and landlords. The school, especially Ricardo, emphasized that it is in the long-term interest of everyone that the greatest share of national income go to the capitalist class (that is, profits), because it is the only class that invests and generates economic growth; the working class was too poor to save and invest, while the landlord class was using its income (rents) on ‘unproductive’ luxury consumption, such as the employment of servants. According to Ricardo and his followers, the growing population in Britain was forcing the cultivation of increasingly lower-quality land, constantly raising the rents for existing (higher-quality) land. This meant that the share of profit was gradually falling, threatening investment and growth. His recommendation was to abolish the protection for grain producers (called the Corn Laws in Britain at the time) and import cheaper food from countries where good-quality land was still available, so that the share going to profits, and thus the ability of the economy to invest and grow, could be raised.

Please summarize and analyze (500 words minimum)

Explanation / Answer

The given prose has identified more than nine school of thoughts on Economics.It has rightly pointed out that it is not necessary that all these different school are actually enemies to each other or their propositions are always very conflicting in nature.Infact on some grounds they are very similar and it is very difficult to differentiate between their views as the boundaries are not clearly outlined.Each school has tried to explain the economy in their own ways and none of them has tried to claim superiority over others by completely discarding others’ theories.A single theory is not good enough to explain each aspect of an economy.Every school of thoughts has their own shortcomings and strengths too.
The main difference of Economics being a social science with other natural sciences is that it entails value judgements in its theories – the theories deal with the greater good of the society as a whole.Although neoclassical economists never accepted value judgements in their theories.
So let us discuss the main aspects of the different school of thoughts.First comes as the name suggests classical school of economics.Adam Smith the main proponent of this school was regarded as the father of economics too.The other three main theories of this school will be Ricardo’s free trade,Say’s law of supply creates its own demand and Malthus’s invisible hand theory.
Let us elaborate on this theories one by one.The classical theory has always talked about ensuring perfect competition in the economy and discarded monopolistic theory.According to them competition will always ensure producing optimum level of goods and supply them at minimum possible prices.Otherwise the market itself will throw him away from the competition.The market itself will ensure the socially optimum output. This is market’s invisible hand theory.
According to Say’s Law supply creates its own demand. Any economic activity generates incomes of the factors which is equivalent to the value of the output.Therefore, according to this theory recession has to be an exogenous factor and it cannot arise due to a decrease in market demand.
The Classical school rejected any government intervention to regulate the free market or restrict free trade.Ricardo’s theory of free trade talks about comparative advantage in production.So according to him when a country produces a good at a cheaper relative cost than another country in terms of factor costs,then it allows that country to trade that good in exchange of another good in which it has higher relative cost of production.This free trade will allow both the countries to maximize their outputs and also to specialize on those products in which they have comparative advantage.
The Classical school identified three social classes constituting an economy i.e, capitalists, workers and landlords. The profits go to the capitalist class as they invest and generate economic growth.The workers are too poor to save and invest.They just consume their income.Ricardo recommended to abolish the Corn Laws in Britain and import cheaper food from countries with comparative advantage in corn production so that share of profits and in turn investments increase.

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