Schools of ECONOMIC THOUGHT

Introducing the men who launched the 3 major schools of economics.

All political decisions and actions are economic in nature.

Three schools of Economics have prevailed at different times over the past 150 years. Two of them favour the concentration of powers under centralized institutions with the legislated authority to plan and control the economy and human choices. The third advocates for comparatively free markets in which suppliers and consumers can engage in trade with a minimum of institutional oversight.

John Maynard Keynes (1883-1948)

Father of Keynesian economics, his academic alma mater was King’s College, Cambridge, UK. Also known as the “London School of Economics‘, John Maynard Keynes became popular during the 1930s Great Depression when political leaders were desperate for a cure for a very sick economy. Keynes travelled to America and convinced President Roosevelt, among others, that generous government spending combined with restrictive economic policies could lead to recovery.

On Keynes’s advice, FDR launched massive public projects intended to generate employment for millions of unemployed Americans. He also introduced a series of public policy mandates, such as price controls, which were alleged to make life more affordable for impoverished victims of the Depression.

In summary, Keynesianism was the prescription for government ‘FISCAL’ policies that promised to heal the economic malaise of the day. In 1936, Keynes published his magnum opus in The General Theory of Employment, Interest and Money.

Milton Friedman (1912-2006)

An American Economist and Professor at the University of Chicago, Milton Friedman is considered the father of the “Chicago School” of economics. It championed the use of ‘MONETARY’ policies to manage economic surges and contractions under the guidance of the US central banking authorities. The Federal Reserve System was created in 1914 to perform the functions of a central bank. Among its powers, the “Fed” controls bank interest rates as well as the supply of money in the economy.

The Fed’s biggest customer,  the US Treasury Department, has borrowed $trillions over the last century at very low rates in order that the American governments could execute their fiscal policies. These loans have financed much of the US governments’ spending on massive undertakings including major wars.

One mechanism used to generate funds for the Treasury is the sale of debt instruments such as Treasury bonds to the Fed in exchange for cash. Politicians claim that this is the same as the American people borrowing from themselves in a manner similar to taking out a long term mortgage on a house in which they can live today.

The consequences of these monetary policies are many. Monetary inflation and the steady erosion of the purchasing power of the American dollar is now accepted as the norm today. Saving money for the future is a concept that has faded into history; personal and corporate debt levels are at record levels. Public debt levels have exceeded unsustainable levels long ago as governments have perennially spent beyond their means.

These Chicago ‘school’ monetary powers enabled by the Fed and the US Treasury have been a boon for politicians who boldly make big campaign promises knowing that federal institutions will be provided the cash to fund them. Generations of average citizens, however, have paid the bills and will continue to do so in perpetuity.

Carl Menger (1840-1921)

An economist from Austria, Carl Menger published the Subjective Theory of Value which has earned him lasting respect and honour as the father of “Austrian Economics”. This theory revolutionized the public’s understanding of market economics.

Menger’s life work inspired subsequent generations of like-minded economists who have build a robust catalogue of Economic literature in the Austrian tradition. This extensive library of indispensable works can be readily accessed today via the Mises Institute at www.Mises.org.

Unlike the other two ‘schools’, Austrian economists prescribe a very limited role for governments to play in the realm of human affairs. Perhaps the best known Austrian Economist was Ludwig von Mises (1881-1973). In his brilliant magnum opus, Human Action - A Treatise On Economics first published in 1949, Mises outlined the acceptable roles that public institutions may play in order to support peaceful trade between individuals (consumers and workers) and enterprises (producers).

The fundamental understanding of the Austrian school: human prosperity flourishes much better under less government than under the restrictions and burdens imposed by massive administrative and centralized power centres. We have all experienced the latter over the past century.

For a brief summary of how economic decisions have influenced national and international spheres of governance and politics, read:

https://corporatefinanceinstitute.com/resources/knowledge/economics/political-economy/