Assignment

Economics school of thoughts

Submitted By: M.Awais
Reg No: L1S15MBAM0094
Sec (D)

Submitted to: Prof. Ghulam Sagheer

1) Classical School
Classical economists hold that prices, wages and rates are flexible and markets always clear. As
there is no unemployment, growth depends upon the supply of production factors. (Other
economists built on Smith's work to solidify classical economic theory. The Classical school,
which is regarded as the first school of economic thought, is associated with the 18th Century
Scottish economist Adam Smith, and those British economists that followed, such as Robert
Malthus and David Ricardo. The main idea of the Classical school was that markets work best
when they are left alone, and that there is nothing but the smallest role for government. The
approach is firmly one of laissez-faire and a strong belief in the efficiency of free markets to
generate economic development. Markets should be left to work because the price mechanism
acts as a powerful 'invisible hand' to allocate resources to where they are best employed. In terms
of explaining value, the focus of classical thinking was that it was determined mainly by scarcity
and costs of production. In terms of the macro-economy, the Classical economists assumed that
the economy would always return to the full-employment level of real output through an
automatic self-adjustment mechanism. It is widely recognized that the Classical period lasted
until 1870.

2) Neoclassical
Neoclassical economics assumes that people have rational expectations and strive to maximize
their utility. This school presumes that people act independently on the basis of all the
information they can attain. The idea of marginalize and maximizing marginal utility is attributed
to the neoclassical school, as well as the notion that economic agents act on the basis of rational
expectations. Since neoclassical economists believe the market is always in equilibrium,
macroeconomics focuses on the growth of supply factors and the influence of money supply on
price levels.
The Neo-Classical school of economic thought is a wide ranging school of ideas from which
modern economic theory evolved. The method is clearly scientific, with assumptions, and
hypothesis and attempts to derive general rules or principles about the behavior of firms and
consumers. For example, neo-classical economics assumes that economic agents are rational in
their behavior, and that consumers look to maximize utility and firms look to maximize profits.
The contrasting objectives of maximizing utility and profits form the basis of demand and supply
theory. Another important contribution of neo-classical economics was a focus on marginal

values, such as marginal cost and marginal utility. Neo-classical economics is associated with the
work of William Jevons, Carl Merger and Leon Walras.

3) New Classical
The New Classical School is built largely on the Neoclassical school. The New Classical School
emphasizes the importance of microeconomics and models based on that behavior. New
Classical economists assume that all agents try to maximize their utility and have rational
expectations. They also believe that the market clears at all times. New Classical economists
believe that unemployment is largely voluntary and that discretionary fiscal policy is
destabilizing,
while
inflation
can
be
controlled
with
monetary
policy.
New Classical macro-economic dates from the 1970s, and is an attempt to explain macroeconomic problems and issues using micro-economic concepts like rational behavior, and
rational expectations. New classical economics is associated with the work of Chicago
economist, Robert Lucas.

4) Keynesian economics
Keynesian economics was largely founded on the basis of the works of John Maynard Keynes.
Keynesians focus on aggregate demand as the principal factor in issues like unemployment and
the business cycle. Keynesian economists believe that the business cycle can be managed by
active government intervention through fiscal policy (spending more in recessions to stimulate
demand) and monetary policy (stimulating demand with lower rates). Keynesian economists also
believe that there are certain rigidities in the system, particularly "sticky" wages and prices that
prevent
the
proper
clearing
of
supply
and
demand.
Keynesian economists broadly follow the main macro-economic ideas of British economist John
Maynard Keynes. Keynes is widely regarded as the most important economist of the 20th
Century, despite falling out of favor during the 1970s and 1980s following the rise of new
classical economics. In essence, Keynesian economists are skeptical that, if left alone, free
markets will inevitably move towards full employment equilibrium. The Keynesian approach is
interventionist, coming from a belief that the self-interest which governs micro-economic
behavior does not always lead to long run macro-economic development or short run macroeconomic stability. Keynesian economics is essentially a theory of aggregate demand, and how
best to manipulate it through macro-economic policy.

5) New-Keynesian:
The New Keynesian School attempts to add microeconomic foundations to traditional Keynesian
economic theories. While New Keynesians do accept that households and firms operate on the
basis of rational expectations, they still maintain that there are a variety of market failures,
including sticky prices and wages. Because of this "stickiness", the government can improve
macroeconomic conditions through fiscal and monetary policy. Economics is a school of

macroeconomic thought that was developed after World War II from the writings of John
Maynard Keynes. A group of economists (notably John Hicks, Franco Modigliani, and Paul
Samuelson) attempted to interpret and formalize Keynes' writings, and to synthesize it with the
neo-classical models of economics. This model, the IS/LM model, is nearly as influential as
Keynes' original analysis in determining actual policy and economics education. It relates
aggregate demand and employment to three variables, that is, the amount of money in
circulation, the government budget, and the state of business expectations. This model was very
popular with economists after World War II because it could be understood in terms of general
equilibrium theory. Their work has become known as the neo-classical synthesis. It created the
models that formed the core ideas of neo-Keynesian economics. These ideas dominated
mainstream economics in the post-war period, and formed the mainstream of macroeconomic
thought in the 1950s, 60s and 70s.
In the 1970s a series of developments occurred that shook neo-Keynesian theory. The developed
world suffered from slow economic growth and high inflation at the same time (stagflation).
Also, the work of monetarists like Milton Friedman cast doubt on neo-Keynesian theories. The
result was a series of new ideas to bring tools to Keynesian analysis that would be capable of
explaining the economic events of the 1970s. The next great wave of Keynesian thinking began
with the attempt to give Keynesian macroeconomic reasoning a microeconomic basis. The new
Keynesians helped create a "new neo-classical synthesis" that currently forms the mainstream of
macroeconomic theory. Following the emergence of the new Keynesian school, neo-Keynesians
have sometimes been referred to as Old-Keynesians.