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September 14, 2011 / 74

Schools of Economics

What is economics?

1. It is usually logical. Originally the term was used to refer to the orderly running of a household.

2. It is pervasive. Whether you realize it or not you use economics and economic principles in EVERY aspect of your life, and you make economic decisions every day.

3. It is universally available and, except for people who cannot understand or apply cause and effect to their daily lives, universally used.

Economics today is usually broken down into “micro” economics, the Greek prefix/word “micro” meaning small or smaller, and “macro”economics, also Greek, meaning “big” or “far”.

Microeconomics” is concerned with small economics – the details. So do not say “don’t sweat the small stuff” to a micro-economist. 😉

Macroeconomics” is the BIG picture – global, national, complex, grand theories and the philosophical principles.

To the best of my knowledge, currently there are essentially three current schools of economics. Austrian, Keynesian, and Monetarist.

Before them there were Classical Economists – such as Adam Smith (“Wealth of Nations” – 1776), David Ricardo (“Invisible Hand”), and John Stuart Mill (“Principles of Political Economy” – 1848). The classical economists seemed to regard the economy as a zero-sum pie – ie there is only so much to get/have, and to have one class (labor/capital owners) get more than their share came at the expense of another class.

I also remember being taught Ricardo’s “Principle of Comparative Advantage” in High School – which essentially said that each nation should make what it makes best, then trade that with other nations that make other stuff better than they do (which stuff is imported) – so everyone gets the highest quality of goods at a reasonable price. Made perfect sense to me at the time – but I can see holes in it now… 😉

The Cliff Notes version of exactly what Classical Economics is says:

The fundamental principle of the classical theory is that the economy is self-regulating. Classical economists maintain that the economy is always capable of achieving the natural level of real GDP or output, which is the level of real GDP that is obtained when the economy’s resources are fully employed. While circumstances arise from time to time that cause the economy to fall below or to exceed the natural level of real GDP, self-adjustment mechanisms exist within the market system that work to bring the economy back to the natural level of real GDP. The classical doctrine—that the economy is always at or near the natural level of real GDP—is based on two firmly held beliefs: Say’s Law and the belief that prices, wages, and interest rates are flexible.

According to Say’s Law, when an economy produces a certain level of real GDP, it also generates the income needed to purchase that level of real GDP. In other words, the economy is always capable of demanding all of the output that its workers and firms choose to produce. Hence, the economy is always capable of achieving the natural level of real GDP.

http://www.cliffsnotes.com/study_guide/The-Classical-Theory.topicArticleId-9789,articleId-9741.html

Or to put it another way, Say’s Law says that production is the source of  (global) demand. But the people who believed this never met a Madison Avenue Ad Exec. In my opinion, Say’s Law is hogwash, and classical Econ is a quaint and naive view of economics and the people it served.

And then we come to the NeoClassicals such as William Stanley Jevons (“The Theory of Political Economy” – 1871), Carl Menger (“Principals of Economics” – 1871 and founder of the Austrian School of Economics) and Leon Walras (“Elements of Pure Economics” – 1874).

One source says that the neoclassicals believe that people are rational logical beings and that they will behave rationally when making economic decisions. Obviously the people who came up with this idea spent most of their time locked away in tiny dusty offices writing economics theories – and never got out where the REAL people are. ;-D

Of note here, though, and germane to today’s world, is “Jevon’s Paradox” (1865) which basically says that increasing the (technological) efficiency of the use of a resource does NOT reduce it’s use, but rather increases it. (Which is counter-intuitive.) If we apply Jervon’s Paradox to our autos and to fuel efficiency (MPG), then the better mileage we get, the more gas we burn because it becomes CHEAPER to burn gas. The Green Lobby needs to learn some economics – specifically Jevon’s paradox.

And Walras applied mathematical analysis to the economic principle of equilibrium.

In an article like this, one might get the idea that the above classifications and schools are separate from each other – but they’re not. As with any  profession/organized attempt to better understand the world around us, the understanding has come in bits and chunks. This person comes to an understanding, and expounds on it. That person sees something that is not quite right to them, and they expound on that – and so on until we arrive at today – where we have the benefit of several hundred years of really smart folks writing about what odd thoughts have been hiding in the corners of their brains – and once in a while, we take a detour into fantasy land, and someone brings us back to the path to reality. And it all seems to be so OBVIOUS to us – here – today.

And it seems to me that fewer and fewer people today are capable of critical thought – the ability to examine an idea or a narrative with logic, and perhaps see the holes in it – if there are any. But maybe not. Maybe that’s just me – and maybe I don’t get out enough… 😀

Economics to me is not about money, or production, or consumption. It’s not about dusty books written in dustier times, or about formula on a chalk board. (So THAT’s where all the dust is coming from! ;-D) It’s about logic. It’s about the utility of what we see as truth. And it’s about the application of logic and truth to our daily lives so that we can make them better, and make the lives of those around us better.

‘Nuff said for now. More later – when I have the time to do it properly… Until then…

TTFN!

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