Economic Thought

Classical Economics (late 1700s–1800s) — Adam Smith, David Ricardo, John Stuart Mill.

Adam Smith's The Wealth of Nations (1776) argued that markets, guided by self-interested individuals, produce social good as if by an "invisible hand". The government's role was limited to law and order, defence, public goods.

David Ricardo developed the theory of comparative advantage — the basis for international trade theory.

Marxian Economics (mid 1800s) — Karl Marx critiqued capitalism in Das Kapital. Argued:

• Labour creates all value; capitalists extract surplus → exploitation.
• Booms and busts are inherent to capitalism.
• Eventually, class conflict will lead to socialism.

His policy prescriptions were largely rejected after the failures of 20th-century command economies, but his analysis of capitalism's instability remains influential.

Neoclassical Economics (late 1800s) — Alfred Marshall and others. Formalised:

• Demand and supply curves.
• Marginal utility theory.
• Market equilibrium.
• Mathematical modelling of economic behaviour.

This became the foundation of mainstream economics teaching — including most of what's in the IB syllabus.

Keynesian Economics (1930s) — John Maynard Keynes' General Theory of Employment, Interest and Money (1936). In response to the Great Depression:

• Markets can stay in equilibrium below full employment for long periods.
• Sticky wages mean unemployment doesn't self-correct.
• AGGREGATE DEMAND drives short-run output.
• Government spending and tax cuts can boost AD and end recessions.
• "In the long run, we are all dead" — short-run problems demand short-run action.

Keynesian ideas dominated post-WWII policy — extensive government intervention, welfare states, demand management.

Monetarism (1970s) — Milton Friedman.

• The 1970s stagflation (high inflation + high unemployment) defied Keynesian explanations.
• Friedman argued: "Inflation is always and everywhere a monetary phenomenon."
• The role of monetary policy is to keep inflation low and stable.
• Markets generally clear; government intervention often worsens outcomes.

Monetarism informed the central-bank independence movement of the 1980s-90s and modern inflation-targeting frameworks.

Supply-side Economics (1980s) — Reagan in the US, Thatcher in the UK.

• Reduce taxes and regulations to boost incentives.
• Privatise state-owned industries.
• Weaken trade unions to allow flexible labour markets.
• Laffer curve — beyond some tax rate, raising taxes REDUCES revenue.

Often controversial — improved growth in some measures but increased inequality and reduced bargaining power for workers.

Behavioural Economics (1980s-present) — Daniel Kahneman, Richard Thaler.

• Real decisions deviate from rational models.
• Use psychology to inform economic prediction and policy.
• "Nudges" use defaults and framing to improve choices without coercion.
• Kahneman won Nobel Prize (2002); Thaler (2017).

Modern Mainstream (post-2008). After the Global Financial Crisis, economists revisited:

• Importance of financial markets and instability (Hyman Minsky).
• Limits of monetary policy (zero lower bound).
• Need for fiscal stimulus in severe downturns (return of Keynesianism).
• Rising inequality as a macro problem.

Today's policy debates draw from MULTIPLE schools. A modern central banker might use monetarist tools (interest rates) while applying behavioural insights (forward guidance language) within a fundamentally Keynesian framework (demand management).

For your IB essays. Knowing the lineage helps you contextualise policy debates. When evaluating a fiscal stimulus: "From a Keynesian perspective... However, monetarists would argue... Behavioural insights suggest..."