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0 Introduction
Economics is an evolving subject. Theories and economic models are suggested by economists and
are used to explain and predict outcomes. They are tested in the real world and if they fail to
explain or predict outcomes reasonably accurately they might be abandoned or amended.
Interestingly, some theories might make accurate predictions in some societies and not in others; or
might make accurate predictions for a certain period of time but then seem to fail. This is because
theories have to make assumptions about how individuals and groups behave in certain situations.
Human behaviour depends on the environment in which an individual lives, and over time this can
change.
In this module, an outline of the main schools of thought is presented. Further details on some of
the schools of thought are given at relevant places throughout the course.
Although some of the individual theories of some of the schools of thought have been discussed in
previous syllabuses, the Subject CB2 syllabus gives a more complete picture of the range of schools
of thought and greater emphasis to the development of economic thought.
This module is presented slightly differently from the others. Since the textbook reading is not
covered until later in the course, this module contains only ActEd Course Notes and additional Core
Reading.
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1 Main strands of economic thinking
1.1 What’s included in this section
A timeline showing the development of economic thinking
ActEd Course Notes and Core Reading on:
– the classical approach
– Marxist socialism
– the neoclassical approach
– Keynesian schools of thought
– the monetarist approach
– the new classical approach
– the Austrian school
1.2 Guidance
This is an introduction to the schools of thought that are covered in this course and a reference
that can be consulted throughout the course.
In the checklist that follows the descriptions of each school, priority has been given to the
concepts and issues that are not likely to be referred to in subsequent modules.
1.3 Reading
Task when completed
Read the following ActEd Course Notes and Core Reading.
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1.4 A timeline
1.5 The classical approach
Adam Smith is regarded as the founding father of classical economics. He argued that a free
market economy, in which individuals acted in their own self-interest, would bring about
maximum social benefit. He said that intervention by the state would generally reduce the
nation’s wealth, though he did support some state intervention for the common good, especially
in the control of monopoly power.
Other classical economists supported the free market economy too, though there were some who
were concerned that the capitalist system could result in unemployment. The views of these
dissenters were dismissed for over 100 years, largely because the 19th century saw the mainly
free market economy delivering growing output and low unemployment. Classical economists
believed that even if unemployment did occur there was an automatic self-regulating mechanism
that would return the economy to a full-employment level of output.
Classical economists (who were then called political economists) were mainly interested in the
process of wealth creation and the distribution of income among the classes (workers, landlords
and capitalists). They argued that wealth could be increased by specialisation and trade, and
argued among themselves about the contribution that each of the classes made to output.
From their work on production, they concluded that the value of a product is determined by its
cost of production, ie the value of the resources used in its production. However, this theory was
never fully developed and was later largely displaced by the subjective theory of value of the
neoclassical economists. They believed that a product’s value to a consumer depends on the
consumer’s wants and needs. Alfred Marshall built on these two strands and developed the
equilibrium model in which price is determined by supply and demand.
A detailed explanation of the classical approach to macroeconomics is covered in Module 16. 1800 1900 2000
Karl Marx's
Capital
1867
Adam Smith's
Wealth of Nations
1776
J.M. Keynes'
General Theory
1936
Milton Friedman's
Chicago School
1960s and 70s
Other classical
economists, eg Malthus,
Ricardo, Say,
late 18th/early 19th
centuries
Neoclassical
economists,
eg Jevons, Walrus,
late 19th/early 20th
centuries
New classical
economists, and
increased influence
