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Schools of Thoughts - Coggle Diagram

Schools of Thoughts

Mercantilism:

When modern states started to develop the kings and dukes wanted to increase their control over trade.

Emphasis to manufacture and grow as much as possible in your own state. As little as possible should be imported.

If imported it should be raw material that could be improved and developed into goods that they in turn exported to earn more money. By doing this the idea was that the state should get a positive economy. By cheap raw material, put it together, sell it with profit.

Important for the state to protect the own manufacturing of goods.

One way to keep the possibility for own manufacturing was to use customs. The idea was that if import it should cost a lot of money so it was cheaper to continue to manufacture the goods in the own state.

Classical School:

In the late 18th and early-to-mid 19th century – Earliest in the modern Economic school of thought.

Adam Smith, David Ricardo, John Stuart Mill and Thomas Robert Malthus

Less government intervention in markets. Basic principle of Free Markets – “Laissez faire” - Let do (let the market do its own work) and “Invisible Hand“- to allocate resources where they will be best utilized.

Production of goods and services as important factors for economics analysis.

Value is determined by scarcity and cost of production.

Return to full employment level of real output through and automatic self-adjustment mechanism.

Neo Classical school:

William Jevous, Carl Menger and Leon Walras

Uses scientific methods to obtain general rules about behaviour of firms and consumers.

Predicts that economic agents are rational in their behaviour

Consumers wants max utility and producers/firm wants max profit from the basics of Demand and Supply theory.

 Marginal values, such as Marginal cost and Marginal utility

That markets will always remain in equilibrium of if forced on growth of supply factors and influence of money supply on price level.

Prices are determined by equilibrium of supply and demand.

New Classical school:

They attempted to explain microeconomics problems using economics concepts like Rational behaviour and Rational expectations

All agents try to maximize their utility and have Rational expectations.

Keynesian School:

Know to be the most important school of though of the 20th century

Kept the micro economic thoughts and changed the macro thoughts

Scepticism towards Free Markets that will not lead to a natural movement towards a full employment equilibrium.

Government should manage demand through Fiscal policy (spending more in recession) and Monetary policy (decrease rates level)

Certain issues like sticky prices and wages, prevent market from clearing

Monetarist School:

Evolved from neoclassical economics and Austrian economics

Government should control money supply in circulation to control inflation

Reject Keynesians idea of government managing demand

New Keynesian school:

Evolved from classical Keynesian economics

Add micro economics foundations to the traditional Keynesian theories

Accept that households and firms operate on basis of Rational expectations.

In case of sticky prices, government should intervene and improve condition of economy through Fiscal and Monetary policy.