Economics is a very broad field with a lot of differing points of view. Just like anything else, not everyone is going to agree with one another. Economists often disagree on what action will yield the best results. Economists excel at identifying trends and finding results in a vacuum. However, the economy cannot be studied in a vacuum. The goal of this post is to introduce these differing schools of thought on economic issues.
Classical Economics:
Classical Economics is oftentimes what gets studied in your high school or introductory economics class in college. An easy way to think of classical economics is a purely free-market capitalist society. Classical economics focuses on allowing the free market to run its course without outside intervention from the government. The idea is that supply and demand will bring the economy into harmony. External forces such as government interventions are cumbersome and lead to inefficient results. Libertarians are closely aligned with this ideology because they believe that the people and the market should be free to decide what is needed.
Classical economics is the easiest conceptually to understand, but it does not mean that advocates of classical economics believe that government intervention is always a bad thing. In economics, there is a concept known as the “free rider problem”. If someone cannot be excluded from a public service, they have little incentive to help pay for that service. Instead, people choose to enjoy that service while having others pay its cost. However, classical economics assumes that everyone will choose to utilize that public service and not pay, so classical economics does advocate for the government to step in and pay for some public services. However, there are differing opinions on which public services need funding. Most advocate for services like security and some basic utilities. Everything else should be left to the free market to handle without government intervention.
Keynesian Economics:
This idea of economics became very popular due to its success in combating the Great Depression. John Maynard Keynes, another key name you may remember from introductory economics courses, advocated that government intervention within economies would allow for more favorable market outcomes. This is distinctly different than the classical view of economics because this advocates that government spending can actually boost economic production. The idea is simple, the government spending money boosts economic activity which can allow an economy to grow. An increased government investment means there is going to be more consumption. More consumption will mean industries will be stimulated to provide goods and services for people to spend money on. Those industries will need workers. These workers getting paid will boost consumption more. The beginning government spending in the economy actually generated far more growth than the original investment. Democrats are more closely aligned with this economic school of thought because they believe government spending is a useful tool is helping boost an economy.
Keynesian economics is why the U.S. government spends more in times of economic uncertainty. For example, think back to 2020 when congress spent $5 trillion to stimulate the economy during the Covid-19 pandemic. Because of this high level of government spending, the Covid-19 recession was extremely mild compared to what could have happened. Given the large cultural and psychological effects of Covid-19, there really was not a commensurate effect in overall U.S. economic performance. U.S. GDP only shrunk by 2.16% in 2020 which was made up for by 2021’s growth of 6.06%. Keynesian economics works, but it does come at the cost of government spending. In this case, that money was borrowed which means U.S. taxpayers are now having to pay interest on that debt. The biggest criticism the Keynesian economics faces is that government spending comes at a cost. Most times, that cost is from taxation, either to fund the expenditure or finance the debt. This is unpopular with taxpayers who would rather spend the money elsewhere.
Trickle-Down Economics:
This is a similar concept to Keynesian economics, but it relies on government investment to be more favorable to large businesses and wealthy individuals. This concept is also referred to supply-side economics because it is designed to boost an economy’s supply. The idea is that economic growth is more felt when money is given to corporations rather than given to lower- and middle-class citizens. The trickle-down happens as corporations or wealthy individuals utilize that money to invest in the economy and generate more employment. Typically, only republicans support trickle-down or supply-side economic policies, but a lot of republican economic policies are actually closer to classical economics than trickle-down economics.
The criticisms of this economic way of thinking are pretty obvious. It seems unfair to those at the bottom of the economy. Some people find these policies unfair because it is up to wealthy people or corporations to actually utilize the funds in an efficient and effective way. Democrats in the U.S. are typically opposed to these policies as they believe it creates more income inequality. It is important to note that these economic policies are not designed to help the rich get richer. The goal of these policies is to boost the entire economy, which will help everyone. Reaganomics is an example of trickle-down economics. The policies were aimed at making conditions more favorable for businesses, and they did result in increased GDP and decreased inflation. However, there are concerns that these policies led to greater income disparity.
Marxist Economics:
If you thought trickle-down economics is controversial, this is far more controversial. Socialism is a system in economics like capitalism. While capitalism focuses on individual ownership and empowerment of private choices, socialism focuses on a collective ownership with the goal of economic equality. Each of these other economic schools of thought were more closely related to capitalism, Marxist economics is more closely related to socialism. Marxist economics suggests that capitalism leads to greed and exploitation. In a capitalist society, there will always be inequality. Marxist economics seeks to get rid of the inequality by having all resources managed and distributed by the government. This is designed to ensure that everyone gets what they need. While democrats in the U.S. support some policies that more in this realm, this type of economics is not ordinarily seen in practice in the U.S.
Marxist economics is very controversial, but not all the controversy can be attributed to economics. However, from an economics perspective, there are many concerns. Because everyone’s outcome is the same, there is less incentive to try to achieve more. This means that overall productivity is likely to go down, and the economy as a whole will slow down. The centralized nature of Marxist economics means that there also is an increased chance of corruption. Governments that control all the resources are more tempted to give their representatives unfair treatment.
Closing Thoughts:
There are a lot of different ways to look at an economic issue. All of these schools of thought have extensive research behind them and can be successful in certain circumstances and conditions. Politically, conservatives lean more towards classical and trickle-down economics while progressives lean more to Keynesian economic policies. However, like with anything, there are different degrees of commitment. There are many differing thoughts in economics, and none of them fit all situations perfectly.
Most people do not think about economic schools of thought when making decisions. People will do what they think is best given the circumstances, and a lot of their decisions are not consistent with economic ways of thinking. No matter which mindset more closely resembles your personal beliefs, most of the time we are all trying to achieve the same result: a more prosperous future for everyone.
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