Mainstream economics

Mainstream economics is widely accepted economics as taught across prominent universities, in contrast to heterodox economics. It has been associated with neoclassical economics and with the neoclassical synthesis, which combines neoclassical methods and Keynesian approach macroeconomics.

In the U.S.

Mainstream economists are not generally separated into schools, but two major contemporary economic schools of thought have been the "saltwater and freshwater schools." In the early 1970s, so-called "fresh-water economists" challenged the prevailing consensus in macroeconomics research. Key elements of their approach was that macroeconomics had to be dynamic, quantitative, and based on how individuals and institutions make decisions under uncertainty. Many of the proponents of this radically new approach to macroeconomics were associated with Carnegie Mellon University, the University of Chicago, the University of Rochester and the University of Minnesota. They were referred to as the "freshwater school" since Pittsburgh, Chicago, Rochester, and Minneapolis are located nearer to the Great Lakes. The established consensus was primarily defended by economists at the universities and other institutions located near the east and west coast of the United States, such as Berkeley, Harvard, MIT, University of Pennsylvania, Princeton, Columbia, Stanford, and Yale. They were therefore often referred to as "the saltwater schools". Today, mainstream economists do not, in general, identify themselves as members of a particular school.

History

Economics has, in modern times, always featured multiple schools of economic thought, with different schools having different prominence across countries and over time; the current use of the term "mainstream economics" is specific to the post–World War II era, particularly in the Anglosphere, and to a lesser extent globally.

Prior to the development of modern academic economics, the dominant school in Europe was mercantilism, which was rather a loose set of related ideas than an institutionalized school. With the development of modern economics, conventionally given as the late 18th-century The Wealth of Nations by Adam Smith, British economics developed and became dominated by what is now called the classical school. From The Wealth of Nations until the Great Depression, the dominant school within the Anglosphere was classical economics, and its successor, neoclassical economics. In continental Europe, the earlier work of the physiocrats in France formed a distinct tradition, as did the later work of the historical school of economics in Germany, and throughout the 19th century there were debates in British economics, most notably the opposition underconsumptionist school.

During the Great Depression and the following Second World War, the school of Keynesian economics gained prominence, which built on the work of the underconsumptionist school, and present-day mainstream economics stems from the neoclassical synthesis, which was the post–World War II merger of Keynesian macroeconomics and neoclassical microeconomics.

In continental Europe, by contrast, Keynesian economics was rejected, with German thought dominated by the Freiburg school, whose political philosophy of ordoliberalism formed the intellectual basis of Germany's post-war social market economy. Within developing economies, which formed the majority of the world's population, various schools of development economics have been influential.

Since 2007, the financial crisis of 2007–2010 and the ensuing global economic crisis has publicly exposed divisions within mainstream economics and significantly intensified controversy about its status, with some arguing for radical overhaul or rejection of mainstream economics, others arguing for evolutionary change, and others still arguing that mainstream economics explains the crisis.

Term

The term "mainstream economics" came into common use in the late 20th century. It appears in 2001 edition of the seminal textbook Economics by Samuelson and Nordhaus on the inside back cover in the "Family Tree of Economics," which depicts arrows into "Modern Mainstream Economics" from J.M. Keynes (1936) and neoclassical economics (1860–1910). The term "neoclassical synthesis" itself also first appears in the 1955 edition of Samuelson's textbook.

Scope

Mainstream economics can be defined, as distinct from other schools of economics, by various criteria, notably by its assumptions, its methods, and its topics.

Assumptions

A number of assumptions may underpin many mainstream economic models, while being rejected by some heterodox schools. These include the neoclassical assumptions of rational choice theory, a representative agent, and, often, rational expectations. Much of modern economic modelling consists of exploring the effects that complicating factors have on models, such as imperfect and asymmetric information, incomplete markets, imperfect competition and transaction costs.

The starting point of orthodox economic analysis is the individual. People are generally defined as units with a common goal: maximisation through rational behaviour. The only differences consist of:

• the specific objective of the maximisation (individuals tend to maximise utility and firms profit);
• and the constraints faced in the process of maximisation (individuals might be constrained by limited income or commodity prices and firms might be constrained by technology or availability of inputs).

From this theoretical framework, orthodox economists derive that political action should not be used to solve the problems of the economic system. Instead, the solution ought to derive from an intervention on the above mentioned maximisation objectives and constraints. It is in this context that economic capitalism finds its justification. Capitalism and its arguments seem logic because orthodox economics theories think of the aggregate economy as the sum of the agents trying to maximise their utility or profit through exchange.

Methods

Mainstream economics has also been defined methodologically as work which mainstream economists are willing to engage, which requires conforming to the mainstream language of mathematical models, featuring calculus, optimization, and comparative statics. Under this definition, areas of thought which are typically thought of as heterodox because they do not work under the typical neoclassical assumptions, such as econophysics, behavioral economics, and evolutionary economics, can be considered mainstream when they are engaged in the mainstream, using mainstream methods. Geoffrey Hodgson has considered the possibility that evolutionary economics and institutional economics may eventually become a new mainstream.

Additionally, some economic fields include elements of both mainstream economics and heterodox economics: for example, the Austrian economics, institutional economics, neuroeconomics and non-linear complexity theory. They may use neoclassical economics as a point of departure. At least one institutionalist has argued that "neoclassical economics no longer dominates a mainstream economics."

A countervailing trend is the expansion of mainstream methods to such seemingly distant fields as crime the family, law, politics, and religion. The latter phenomenon is sometimes referred to as economic imperialism.

Topics

Mainstream economics includes theories of market and government failure and private and public goods. These developments suggest a range of views on the desirability or otherwise of government intervention.

Criticisms

Since the financial crisis of 2007–2010, considerable conflict has arisen, among both economic theorists and a wider cross-section of the public, regarding the status and future of mainstream economics. Some critics have argued that potentially promising approaches have been excluded in major mainstream publications by a focus on problems amenable to formal modeling.

Chartalists, who are generally considered part of the Post-Keynesian school of thought, criticise mainstream theory as failing to describe the actual mechanics of modern fiat monetary economies. Chartalism focuses on a detailed understanding of the way money actually flows through the different sectors of an economy. Specifically, Chartalism focuses on the interaction between central banks, treasury and the private banking system. Chartalism rejects critical mainstream theories such as the loanable funds market, the money multiplier, and the utility of fiscal austerity.

Some economists, in the vein of ecological economics, believe that the neoclassical "holy trinity" of rationality, greed, and equilibrium, is being replaced by the holy trinity of purposeful behavior, enlightened self-interest, and sustainability, considerably broadening the scope of what is mainstream. Ecological economics addresses sustainability issues, such as public goods, natural capital and negative externalities (such as pollution).

Energy related theories of economic concepts also exist within energy economics relating to thermodynamic concepts of economic thinking, such as Energy accounting. Biophysical economics relates to this area.

References

Survey articles

• Krugman, Paul (2009-09-02), How Did Economists Get It So Wrong?, New York Times