Can you combine the theories of different schools of economic thought? If not, how do you choose which approach is best? Essay Example
Economic Schools of Thoughts
Economic theories refer to set of beliefs concerning the behavior of individuals and groups in relation to production and consumption of commodities. There are different Economic Schools of Thoughts. They include; monetarism, Austrian, supply-side economics, Neo-classical analysis, Institutional Economics and Keynesian Economics. The proponents (economists) of these schools of thoughts have demonstrated wide divergence of their view showing lot of disagreements among themselves. They have varied significant viewpoints and assumptions in buildup of their theories thus it becomes very hard to combine different schools of thoughts.
For instance, a distinctive characteristic relating cost and price manifests between Austria and Neoclassical school of thoughts. The neoclassical economists argue that the price of a commodity prevails in relation to the cost incurred in its production while Austrian economists hold that a producer is free to decide what to produce and once that commodity has been produced, its cost of production has no relevance on its final price and its price is determined by what the customer is willing to pay for the commodity. For example, if a neoclassical economist builds a hotel to sell, his expectation is that the selling price will be based on the costs incurred plus incorporation of some profits while an Austrian economists would hold that after the hotel is built, the selling price will depend on the best price offered by the willing buyers regardless of the cost incurred in building.
Classical School of Thought by Adam Smith contends that capital, land and labor referred to as factors of production are the main contributors to the wealth of a nation. He argues that an ideal economy is self regulated by the forces of the market thus automatically meets the economic needs of the population. Adams argued that a market mechanism is an “invisible hand” that guides people in quest for their personal self-interests and the society as a whole. Landowners, capitalists and workers was a further concern in classical theory on income distribution as Ricardo argued that there was a possibility of a conflict arising between landowners and on the other hand, labor plus capital. This is because; there is tremendous growth and increase in population and capital, impacting on the fixed land and thus pushing up rents withholding down profits and wages. Automatic market in this school of thought results to full employment arguing that full employment acquisition was hampered by an economy limiting its spending by too much saving. John Stuart Mill who came at the end of the classical tradition objected the notion classical economists on income distribution by distinctly differentiating the allocation of resources and distribution of income. He argued that a market may be effective and efficient in resource allocation unlike income distribution.
While classical economists contended that a commodities price is determined by the cost incurred in its production, Marginalist School of Thought argue that commodities price is determined by the level of demand dependent on the level of consumer’s satisfaction given by each goods and service. Marginalist economists further argues that production contribution of factors of production (labor, capital and land) receives equal returns. Marxist school of thought criticized classical theory by disregarding the essence of capitalism and advocated a labor theory of value contending that all production is solely dependent on labor saying that all society production is dependent on the workers. He argued that capitalists who are the owners of factories and machineries exploit the workers by denying them a good pay out of their contribution in production capacity and further capitalist adopts labor intensive machinery thus enhancing growing workers misery creating unemployment.
Institutional School of Thought argues that economic behavior of individuals is part of a great social structure influenced by the individual’s present living standards and ones thoughts. Institutional economists criticized economic self-motivated aspects of individuals as contended by the classical economists and further opposed laissez-faire of the government’s responsibility towards the economy and referred to the government control in the economy and social reforms as a measure towards ensuring effective and equal income distribution.
Keynesian school of thought by John Maynard Keynes broke from the classical view that prices and wages in recession would decrease to restore full employment and argued that opposite is true i.e. government involvement/intervention through spending would correct the economy where there was a decline in people’s income due to declining wages and prices. Thus government spending and taxation stabilizes the economy.
Monetarism School of Thought was fronted by Milton Freidman who supported a little government involvement in a primarily free market economy where government controls money supply. Milton contended that increase in productivity without a corresponding increase in the money supply, the prices of the commodities will fall thus government intervention will ensure stability in money supply to conform to the productivity level.
Therefore, proponents of the different economic schools of thoughts vary in their viewpoints concerning their theories makes it very hard to combine different schools of thoughts. Thus the choice of the school of thought depends on the motive and the interest of the producer.
Roover D. Raymond J (1958), The Concept of the Just Price: Theory and Economic Policy. Journal of Economic History 18:418–434.
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