The Three Major Schools of Economics. Part One.
There have been various schools of economic thought throughout history, but I will be focussing on three over the next few posts, which I find the most fascinating: Classical, this blog; Austrian, the free-market (capitalist) school (next blog), and Keynesian; the school which has the most supporters in the modern world (next-to-next blog).
The classical school of economics, founded by the father of economics, Adam Smith in the late 18 century. This was the school which revolutionised economics as its own separate study, different to philosophy. The classical school of economics made a vast number of contributions to economics. Such as the law of marginal utility. This law states that the more of something you buy/obtain, the less useful it is to you. This can be shown by using kettles as an example. If you were to buy one kettle, it would be very useful as you can now boil water efficiently. If you were to get two kettles, the second would still be useful, but not as much as the first, as now you can boil large amounts of water, but a third would not be very useful as it would only increase your ability to boil large amounts of water however because you already have two kettles you don’t need to boil larger amounts. This law is still accepted today.
Another of its contributions was the specialisation and division of labour. In Adam Smith’s “The Wealth Of Nations” he used the example of a pin. If one pin is to be made by one person, it would take them weeks if not months to make a single pin. This is because they would need to mine enough metal for a pin, then purify the metal, then forge the metal into a pin. And so, one person would not be able to make the pin in a day. However, according to his experiences, the pin makers could produce thousands in one day because they were purchasing the material for the pins and then, divided up the tasks. “One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head.” It seems obvious but people get better if they are specialised to do one distinct thing instead of a variety of things.
One of the most fascinating theories of the classical school (namely Adam Smith) is the “invisible hand” of the economy. This is theory which suggests that the economy only is only able to function through selfish intent. Through purchases, formed out of satiating one’s need to fulfil all aspects of their being. This can be described through a family. A parent cares for their children out of their requirement to satiate their love for them, the parent donates to charity to satiate their sense of happiness and humility. It sounds bad, but it is how all the economies of the world function. Out of need, people purchase goods and services, then the person who receives this money albeit in the form of a salary then spends the money, causing another business to receive the money, and the cycle continues. This is one of my favourite theories as it seems improbable however if I think about it, I cannot find a single place where this theory doesn’t apply. This theory is a perfect example of where the philosophy in economics is outlined.
One of its most important contributions was mercantilism, this was revolutionary in the economic systems at the time. Mercantilism meant that the duty of the government was to accumulate wealth by exporting more than its imports, and that colonies were another way to maximise imports for very low cost and export for large sums. This can be visualised using a pie representing all the wealth in the world. The goal was to take as much of the pie for yourself through means of gaining more pie than you give to others to become the largest, strongest power in the world. This is how all the governments of Europe worked until after the 2 ndWorld War for better or for worse.
To conclude this blog, I wanted to clarify that I am not calling anyone selfish, and I do not intend to offend anyone.
Originally published at https://mytakeonecon.blogspot.com on December 3, 2021.