Contents

MONETARY POLICIES...............................................................................................1
HISTORY.....................................................................................................................1
EXPANSIONARY AND CONTRACTION BY MONETARY POLICY.................4
EXPANSIONARY POLICY.........................................................................................4
CONTRACTIONARY POLICY................................................................................4
DIFFERENT BETWEEN EXPANSIONARY AND CONTRACTIONARY...........5
EXPANSIONARY POLICY.........................................................................................5
TYPES OF EXPANSIONARY POLICY..................................................................5
Expansionary Fiscal Policy......................................................................................5
Expansionary Monetary Policy...............................................................................5
CONTRACTIONARY POLICY.............................................................................7
UNDERSTANDING CONTRACTIONARY POLICIES.......................................7
TOOLS USED FOR CONTRACTIONARY POLICIES........................................7
Monetary Policy........................................................................................................7
Fiscal Policy...............................................................................................................7
THEORIES ON THE IMPACT OF MONEY BY VARIOUS SCHOOL OF
THOUGHT......................................................................................................................9
CONTEMPORARY ECONOMIC THOUGHT............................................................9
CONTEMPORARY HETERODOX ECONOMICS...............................................10
SCHOOL OF THOUGHT REGARDS TO THE IMPACT OF PRICE,
EMPLOYMENT AND OUTPUT................................................................................22
Keynesian Economics..................................................................................................22
Understanding Keynesian Economics...................................................................22
 MONETARY POLICIES
Monetary policy is the policy adopted by the monetary authority of a nation to control
either the interest rate payable for very short-term borrowing (borrowing by banks from
each other to meet their short-term needs) or the money supply, often as an attempt to
reduce inflation or the interest rate, to ensure price stability and general trust of the
value and stability of the nation's currency.
Monetary policy is a modification of the supply of money, i.e. "printing" more money,
or decreasing the money supply by changing interest rates or removing excess reserves.
This is in contrast to fiscal policy, which relies on taxation, government spending, and
government borrowing as methods for a government to manage business cycle
phenomena such as recessions.
Further purposes of a monetary policy are usually to contribute to the stability of gross
domestic product, to achieve and maintain low unemployment, and to maintain
predictable exchange rates with other currencies.
Monetary economics can provide insight into crafting optimal monetary policy. In
developed countries, monetary policy is generally formed separately from fiscal policy.
HISTORY
Monetary policy is associated with interest rates and availability of credit. Instruments
of monetary policy have included short-term interest rates and bank reserves through
the monetary base.
For many centuries there were only two forms of monetary policy: altering coinage or
the printing of paper money. Interest rates, while now thought of as part of monetary
authority, were not generally coordinated with the other forms of monetary policy
during this time. Monetary policy was considered as an executive decision, and was
generally implemented by the authority with seigniorage (the power to coin). With the
advent of larger trading networks came the ability to define the currency value in terms
of gold or silver, and the price of the local currency in terms of foreign currencies. This
official price could be enforced by law, even if it varied from the market price.
Paper money originated from promissory notes termed "jiaozi" in 7th century China.
Jiaozi did not replace metallic currency, and were used alongside the copper coins. The
succeeding Yuan Dynasty was the first government to use paper currency as the
predominant circulating medium. In the later course of the dynasty, facing massive
shortages of specie to fund war and maintain their rule, they began printing paper
money without restrictions, resulting in hyperinflation.
With the creation of the Bank of England in 1694, which was granted the authority to
print notes backed by gold, the idea of monetary policy as independent of executive
action [how?] began to be established. The purpose of monetary policy was to maintain
the value of the coinage, print notes which would trade at par to specie, and prevent
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coins from leaving circulation. The establishment of national banks by industrializing
nations was associated then with the desire to maintain the currency's relationship to the
gold standard, and to trade in a narrow currency band with other gold-backed
currencies. To accomplish this end, national banks as part of the gold standard began
setting the interest rates that they charged both their own borrowers and other banks
which required money for liquidity. The maintenance of a gold standard required
almost monthly adjustments of interest rates.
The gold standard is a system by which the price of the national currency is fixed vis-a-
vis the value of gold, and is kept constant by the government's promise to buy or sell
gold at a fixed price in terms of the base currency. The gold standard might be regarded
as a special case of "fixed exchange rate" policy, or as a special type of commodity
price level targeting.
Nowadays this type of monetary policy is no longer used by any country.
During the period 1870–1920, the industrialized nations established central banking
systems, with one of the last being the Federal Reserve in 1913. By this time the role of
the central bank as the "lender of last resort" was established. It was also increasingly
understood that interest rates had an effect on the entire economy, in no small part
because of appreciation for the marginal revolution in economics, which demonstrated
that people would change their decisions based on changes in their economic trade-offs.
Monetarist economists long contended that the money-supply growth could affect the
macro economy. These included Milton Friedman who early in his career advocated
that government budget deficits during recessions be financed in equal amount by
money creation to help to stimulate aggregate demand for production. Later he
advocated simply increasing the monetary supply at a low, constant rate, as the best
way of maintaining low inflation and stable production growth. However, when U.S.
Federal Reserve Chairman Paul Volcker tried this policy, starting in October 1979, it
was found to be impractical, because of the unstable relationship between monetary
aggregates and other macroeconomic variables. Even Milton Friedman later
acknowledged that direct money supplying was less successful than he had hoped.
Therefore, monetary decisions presently take into account a wider range of factors, such
as:
Short-term interest rates;
Long-term interest rates;
Velocity of money through the economy;
Exchange rates;
Credit quality;

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Bonds and equities (debt and corporate ownership);
Government versus private sector spending and savings;
International capital flows of money on large scales;
Financial derivatives such as options, swaps, and futures contracts.

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 EXPANSIONARY AND CONTRACTION BY MONETARY POLICY

Monetary policy is referred to as being either expansionary or contractionary.

EXPANSIONARY POLICY
Occurs when a monetary authority uses its procedures to stimulate the economy. An
expansionary policy maintains short-term interest rates at a lower than usual rate or
increases the total supply of money in the economy more rapidly than usual. It is
traditionally used to try to reduce unemployment during a recession by decreasing
interest rates in the hope that less expensive credit will entice businesses into borrowing
more money and thereby expanding. This would increase aggregate demand (the
overall demand for all goods and services in an economy), which would increase short-
term growth as measured by increase of gross domestic product (GDP). Expansionary
monetary policy, by increasing the amount of currency in circulation, usually
diminishes the value of the currency relative to other currencies (the exchange rate), in
which case foreign purchasers will be able to purchase more with their currency in the
country with the devalued currency.

CONTRACTIONARY POLICY
Maintains short-term interest rates greater than usual, slows the rate of growth of the
money supply, or even decreases it to slow short-term economic growth and lessen
inflation. Contractionary policy can result in increased unemployment and depressed
borrowing and spending by consumers and businesses, which can eventually result in
an economic recession if implemented too vigorously.

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 DIFFERENT BETWEEN EXPANSIONARY AND CONTRACTIONARY

EXPANSIONARY POLICY

Expansionary, or loose policy is a form of macroeconomic policy that seeks to

encourage economic growth. Expansionary policy can consist of either monetary policy
or fiscal policy (or a combination of the two). It is part of the general policy
prescription of Keynesian economics, to be used during economic slowdowns and
recessions in order to moderate the downside of economic cycles.

TYPES OF EXPANSIONARY POLICY

Expansionary Fiscal Policy
Expansionary fiscal policy are policies enacted by a government that often increases or
decreases the money supply to make changes to the economy. In other words,
governments can directly give money to individuals, businesses, or taxpayers.
Alternatively, to slow the economy, it can take it away.

During expansionary periods, governments can increase spending on infrastructure

projects, social programs, and other initiatives to boost demand and stimulate
economic growth. They may also enact tax cuts to reduce taxes, which puts more
money in consumers' pockets and stimulates spending. Governments can also increase
transfer payments such as welfare, unemployment, or other benefits to increase
household income.

Expansionary Monetary Policy

Expansionary monetary policy works by expanding the money supply faster than usual
or lowering short-term interest rates. It is enacted by central banks and comes about
through open market operations, reserve requirements, and setting interest rates. The
U.S. Federal Reserve employs expansionary policies whenever it lowers the
benchmark federal funds rate or discount rate, decreases required reserves for banks or
buys Treasury bonds on the open market. Quantitative Easing, or QE, is another form
of expansionary monetary policy.

For example, when the benchmark federal funds rate is lowered, the cost of borrowing
from the central bank decreases, giving banks greater access to cash that can be lent in
the market. When reserve requirements decline, it allows banks to lend a higher
proportion of their capital to consumers and businesses. When the central bank
purchases debt instruments, it injects capital directly into the economy.

EFFECTS OF EXPANSIONARY POLICY

When the government enacts expansionary policy, there are far-reaching effects that
impact economies in a number of ways.

5
When interest rates are lowered, the availability of credit is increased. This leads to an
increase in consumer spending, driving economic growth. After all, the end goal of
expansionary policy is to heat up the economy. The primary effect (or intended effect)
of expansionary policy is to make people acquire and spend more money.

This effect also translates into business activity. Expansionary policy can also
stimulate business investment by making it cheaper to borrow money for capital
expenditures, leading to increased job creation and economic growth. For this reason,
it's common for jobs to have more job openings or job creations during expansionary
policy since capital is easier to come by.

Because consumers have more money and companies are hiring more, expansionary
policy results in an increase in demand for goods and services. This often leads to more
favorable manufacturing information, especially for firms that also invest in expansion
using low cost of capital. This also creates a more balanced system of trades as
companies undergoing expansionary policy may be cheaper to export.

All of this activity is meant to stimulate an economy. Unfortunately, in order to reduce

unemployment, the primary negative effect of expansionary policy is inflation. An
increase in the money supply can lead to inflation if it outpaces the growth of the
economy. This means that prices, wages, and input costs increase; though people have
more money (or better access to money), the prices they pay will be higher.

EXAMPLES OF EXPANSIONARY POLICY

A major example of expansionary policy is the response following the 2008 financial
crisis when central banks around the world lowered interest rates to near-zero and
conducted major stimulus spending programs. In the United States, this included
the American Recovery and Reinvestment Act and multiple rounds of quantitative
easing by the U.S. Federal Reserve. U.S. policy makers spent and lent trillions of
dollars into the U.S. economy in order to support domestic aggregate demand and prop
up the financial system.

In a more recent example, declining oil prices from 2014 through the second quarter of
2016 caused many economies to slow down. Canada was hit especially hard in the first
half of 2016, with almost one-third of its entire economy based in the energy sector.
This caused bank profits to decline, making Canadian banks vulnerable to failure.

To combat these low oil prices, Canada enacted an expansionary monetary policy by
reducing interest rates within the country. The expansionary policy was targeted to
boost economic growth domestically. However, the policy also meant a decrease in net
interest margins for Canadian banks, squeezing bank profits.

6
CONTRACTIONARY POLICY
A contractionary policy is a monetary measure to reduce government spending or the
rate of monetary expansion by a central bank. It is a macroeconomic tool used to
combat rising inflation.

The main contractionary policies employed by the United States government include
raising interest rates, increasing bank reserve requirements, and selling government
securities.

UNDERSTANDING CONTRACTIONARY POLICIES

Contractionary policies aim to hinder potential distortions to the capital markets.
Distortions include high inflation from an expanding money supply, unreasonable asset
prices, or crowding-out effects, where a spike in interest rates leads to a reduction in
private investment spending such that it dampens the initial increase of total
investment spending.

While the initial effect of the contractionary policy is to reduce nominal gross domestic
product (GDP), which is defined as the gross domestic product (GDP) evaluated at
current market prices, it often ultimately results in sustainable economic growth and
smoother business cycles.

TOOLS USED FOR CONTRACTIONARY POLICIES

Both monetary and fiscal policies implement strategies to combat rising inflation and
help to contract economic growth.

Monetary Policy

 Increasing interest rates reduces inflation by limiting the amount of active

money circulating in the economy. This also quells unsustainable speculation
and capital investment that previous expansionary policies may have triggered.
 Increasing bank reserve requirements, the level of required reserves held by
banks effectively decreases the funds available for lending to businesses and
consumers.
 Selling assets like U.S. Treasury notes, the Federal Reserve uses open-market
operations as a tool. These sales lower the market price of such assets and
increase their yields.

Fiscal Policy

 Increasing taxes reduces the money supply and decreases the purchasing power
of consumers. It may also slow down unsustainable production or lower the
value of assets.
 Reducing government spending in areas such as subsidies, welfare programs,
contracts for public works, or the number of government employees.

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CONTRACTIONARY POLICY VS. EXPANSIONARY POLICY
A contractionary policy attempts to slow the economy by reducing the money supply
and fending off inflation.

An expansionary policy is an effort that central banks use to stimulate an economy by

boosting demand through monetary and fiscal stimulus. Expansionary policy is
intended to prevent or moderate economic downturns and recessions.

In the history of economic thought, a school of economic thought is a group of

economic thinkers who share or shared a common perspective on the way economies
work. While economists do not always fit into particular schools, particularly in
modern times, classifying economists into schools of thought is common. Economic
thought may be roughly divided into three phases: premodern (Greco-Roman, Indian,
Persian, Islamic, and Imperial Chinese), early modern (mercantilist, physiocrats) and
modern (beginning with Adam Smith and classical economics in the late 18th century,
and Karl Marx and Friedrich Engels' Marxian economics in the mid 19th century).
Systematic economic theory has been developed mainly since the beginning of what is
termed the modern era.

Currently, the great majority of economists follow an approach referred to as

mainstream economics (sometimes called 'orthodox economics'). Economists generally
specialize into either macroeconomics, broadly on the general scope of the economy as
a whole, and microeconomics, on specific markets or actors.

Within the macroeconomic mainstream in the United States, distinctions can be made
between saltwater economists and the more laissez-faire ideas of freshwater
economists. However, there is broad agreement on the importance of general
equilibrium, the methodology related to models used for certain purposes (e.g.
statistical models for forecasting, structural models for counterfactual analysis, etc.),
and the importance of partial equilibrium models for analyzing specific factors
important to the economy (e.g. banking).

Some influential approaches of the past, such as the historical school of economics and
institutional economics, have become defunct or have declined in influence, and are
now considered heterodox approaches. Other longstanding heterodox schools of
economic thought include Austrian economics and Marxian economics. Some more
recent developments in economic thought such as feminist economics and ecological
economics adapt and critique mainstream approaches with an emphasis on particular
issues rather than developing as independent schools.

8
 THEORIES ON THE IMPACT OF MONEY BY VARIOUS SCHOOL OF
THOUGHT
CONTEMPORARY ECONOMIC THOUGHT

Mainstream economics is distinguished in general economics from heterodox

approaches and schools within economics. It begins with the premise that resources are
scarce and that it is necessary to choose between competing alternatives. That is,
economics deals with tradeoffs. With scarcity, choosing one alternative implies
forgoing another alternative—the opportunity cost. The opportunity cost expresses an
implicit relationship between competing alternatives. Such costs, considered as prices
in a market economy, are used for analysis of economic efficiency or for predicting
responses to disturbances in a market. In a planned economy comparable shadow price
relations must be satisfied for the efficient use of resources, as first demonstrated by
the Italian economist Enrico Barone.

Economists believe that incentives and costs play a pervasive role in shaping decision
making. An immediate example of this is the consumer theory of individual demand,
which isolates how prices (as costs) and income affect quantity demanded. Modern
mainstream economics has foundations in neoclassical economics, which began to
develop in the late 19th century. Mainstream economics also acknowledges the
existence of market failure and insights from Keynesian economics, most
contemporaneously in the macroeconomic new neoclassical synthesis. It uses models
of economic growth for analyzing long-run variables affecting national income. It
employs game theory for modeling market or non-market behavior. Some important
insights on collective behavior (for example, emergence of organizations) have been
incorporated through the new institutional economics. A definition that captures much
of modern economics is that of Lionel Robbins in a 1932 essay: "the science which
studies human behaviour as a relationship between ends and scarce means which have
alternative uses." Scarcity means that available resources are insufficient to satisfy all
wants and needs. Absent scarcity and alternative uses of available resources, there is
no economic problem. The subject thus defined involves the study of choice, as
affected by incentives and resources.

Mainstream economics encompasses a wide (but not unbounded) range of views.

Politically, most mainstream economists hold views ranging from laissez-faire to
modern liberalism. There are also differing views on certain empirical claims within
macroeconomics, such as the effectiveness of expansionary fiscal policy under certain
conditions.

Disputes within mainstream macroeconomics tend to be characterised by disagreement

over the convincingness of individual empirical claims (such as the predictive power of
a specific model) and in this respect differ from the more fundamental conflicts over
methodology that characterised previous periods (like those between Monetarists and

9
Neo-Keynesians), in which economists of differing schools would disagree on whether
a given work was even a legitimate contribution to the field.

CONTEMPORARY HETERODOX ECONOMICS

In the late 19th century, a number of heterodox schools contended with the
neoclassical school that arose following the marginal revolution. Most survive to the
present day as self-consciously dissident schools, but with greatly diminished size and
influence relative to mainstream economics. The most significant are Institutional
economics, Marxian economics and the Austrian School.

The development of Keynesian economics was a substantial challenge to the dominant

neoclassical school of economics. Keynesian views entered the mainstream as a result
of the neoclassical synthesis developed by John Hicks. The rise of Keynesianism, and
its incorporation into mainstream economics, reduced the appeal of heterodox schools.
However, advocates of a more fundamental critique of neoclassical economics formed
a school of post-Keynesian economics.

Heterodox approaches often embody criticisms of perceived "mainstream" approaches.

For instance:

i feminist economics criticizes the valuation of labor and argues female labor is
systemically undervalued;

ii green economics criticizes instances of externalized and intangible ecosystems

and argues for them to be brought into the tangible capital asset model as natural
capital; and

iii post-keynesian economics disagrees with the notion of the long-term neutrality
of demand, arguing that there is no natural tendency for a competitive market
economy to reach full employment.

Other viewpoints on economic issues from outside mainstream economics include

dependency theory and world systems theory in the study of international relations.

Historical economic thought

Modern macro- and microeconomics are young sciences. But many in the past have
thought on topics ranging from value to production relations. These forays into
economic thought contribute to the modern understanding, ranging from ancient Greek
conceptions of the role of the household and its choices to mercantilism and its
emphasis on the hoarding of precious metals.

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Ancient economic thought

Chanakya (Kautilya)

Xenophon

Aristotle

Qin Shi Huang

Wang Anshi

Islamic economics

Islamic economics is the practice of economics in accordance with Islamic law. The
origins can be traced back to the Caliphate, where an early market economy and some
of the earliest forms of merchant capitalism took root between the 8th–12th centuries,
which some refer to as "Islamic capitalism".

Islamic economics seeks to enforce Islamic regulations not only on personal issues, but
to implement broader economic goals and policies of an Islamic society, based on
uplifting the deprived masses. It was founded on free and unhindered circulation of
wealth so as to handsomely reach even the lowest echelons of society. One
distinguishing feature is the tax on wealth (in the form of both Zakat and Jizya), and
bans levying taxes on all kinds of trade and transactions
(Income/Sales/Excise/Import/Export duties etc.). Another distinguishing feature is
prohibition of interest in the form of excess charged while trading in money. Its
pronouncement on use of paper currency also stands out. Though promissory notes are
recognized, they must be fully backed by reserves. Fractional-reserve banking is
disallowed as a form of breach of trust.

It saw innovations such as trading companies, big businesses, contracts, bills of

exchange, long-distance international trade, the first forms of partnership (mufawada)
such as limited partnerships (mudaraba), and the earliest forms of credit, debt, profit,
loss, capital (al-mal), capital accumulation (nama al-mal), circulating capital, capital
expenditure, revenue, cheques, promissory notes, trusts (see Waqf), startup companies,
savings accounts, transactional accounts, pawning, loaning, exchange rates, bankers,
money changers, ledgers, deposits, assignments, the double-entry bookkeeping system,
lawsuits, and agency institution.

This school has seen a revived interest in development and understanding since the
later part of the 20th century.

11
Muhammad

Abu Hanifa an-Nu‘man

Abu Yusuf

Al-Farabi (Alpharabius)

Shams al-Mo'ali Abol-hasan Ghaboos ibn Wushmgir (Qabus)

Ibn Sina (Avicenna)

Ibn Miskawayh

Al-Ghazali (Algazel)

Ibn Taymiyyah

Al-Mawardi

Nasīr al-Dīn al-Tūsī (Tusi)

Ibn Khaldun

Al-Maqrizi

Muhammad Baqir al-Sadr

Scholasticism

Main article: Scholasticism

Nicole Oresme

Thomas Aquinas

School of Salamanca

Leonardus Lessius

12
Mercantilism

Economic policy in Europe during the late Middle Ages and early Renaissance treated
economic activity as a good which was to be taxed to raise revenues for the nobility
and the church. Economic exchanges were regulated by feudal rights, such as the right
to collect a toll or hold a fair, as well as guild restrictions and religious restrictions on
lending. Economic policy, such as it was, was designed to encourage trade through a
particular area. Because of the importance of social class, sumptuary laws were
enacted, regulating dress and housing, including allowable styles, materials and
frequency of purchase for different classes. Niccolò Machiavelli in his book The
Prince was one of the first authors to theorize economic policy in the form of advice.
He did so by stating that princes and republics should limit their expenditures and
prevent either the wealthy or the populace from despoiling the other. In this way a state
would be seen as "generous" because it was not a heavy burden on its citizens.

Gerard de Malynes

Edward Misselden

Thomas Mun

Jean Bodin

Jean Baptiste Colbert

Josiah Child

William Petty

John Locke

Charles Davenant

Dudley North

Ferdinando Galiani

James Denham-Steuart

Physiocrats

The Physiocrats were 18th century French economists who emphasized the importance
of productive work, and particularly agriculture, to an economy's wealth. Their early
support of free trade and deregulation influenced Adam Smith and the classical
economists.
13
Anne Robert Jacques Turgot

François Quesnay

Pierre le Pesant de Boisguilbert

Richard Cantillon

Classical political economy

Classical economics, also called classical political economy, was the original form of
mainstream economics of the 18th and 19th centuries. Classical economics focuses on
the tendency of markets to move to equilibrium and on objective theories of value.
Neo-classical economics differs from classical economics primarily in being utilitarian
in its value theory and using marginal theory as the basis of its models and equations.
Marxian economics also descends from classical theory. Anders Chydenius (1729–
1803) was the leading classical liberal of Nordic history. Chydenius, who was a
Finnish priest and member of parliament, published a book called The National Gain in
1765, in which he proposes ideas of freedom of trade and industry and explores the
relationship between economy and society and lays out the principles of liberalism, all
of this eleven years before Adam Smith published a similar and more comprehensive
book, The Wealth of Nations. According to Chydenius, democracy, equality and a
respect for human rights were the only way towards progress and happiness for the
whole of society.

Adam Smith

Francis Hutcheson

Bernard de Mandeville

David Hume

Henry George

Thomas Malthus

James Mill

Francis Place

David Ricardo

Henry Thornton

John Ramsay McCulloch

14
James Maitland, 8th Earl of Lauderdale

Jeremy Bentham

Jean Charles Léonard de Sismondi

Johann Heinrich von Thünen

John Stuart Mill

Karl Marx

Nassau William Senior

Edward Gibbon Wakefield

John Rae

Thomas Tooke

Robert Torrens

American School

The American School owes its origin to the writings and economic policies of
Alexander Hamilton, the first Treasury Secretary of the United States. It emphasized
high tariffs on imports to help develop the fledgling American manufacturing base and
to finance infrastructure projects, as well as National Banking, Public Credit, and
government investment into advanced scientific and technological research and
development. Friedrich List, one of the most famous proponents of the economic
system, named it the National System, and was the main impetus behind the
development of the German Zollverein and the economic policies of Germany under
Chancellor Otto Von Bismarck beginning in 1879.

Alexander Hamilton

John Quincy Adams

Henry Clay

Mathew Carey

Henry Charles Carey

Abraham Lincoln

Friedrich List
15
Otto Von Bismarck

Arthur Griffith

William McKinley

French Liberal School

The French Liberal School (also called the "Optimist School" or "Orthodox School") is
a 19th-century school of economic thought that was centered on the Collège de France
and the Institut de France. The Journal des Économistes was instrumental in
promulgating the ideas of the School. The School voraciously defended free trade and
laissez-faire capitalism. They were primary opponents of collectivist, interventionist
and protectionist ideas. This made the French School a forerunner of the modern
Austrian School.

Frédéric Bastiat

Maurice Block

Pierre Paul Leroy-Beaulieu

Gustave de Molinari

Yves Guyot

Jean-Baptiste Say

Léon Say

Historical school of economics

The historical school of economics was an approach to academic economics and to

public administration that emerged in the 19th century in Germany, and held sway
there until well into the 20th century. The Historical school held that history was the
key source of knowledge about human actions and economic matters, since economics
was culture-specific, and hence not generalizable over space and time. The School
rejected the universal validity of economic theorems. They saw economics as resulting
from careful empirical and historical analysis instead of from logic and mathematics.
The School preferred historical, political, and social studies to self-referential
mathematical modelling. Most members of the school were also Kathedersozialisten,
i.e. concerned with social reform and improved conditions for the common man during
a period of heavy industrialization. The Historical School can be divided into three
16
tendencies: the Older, led by Wilhelm Roscher, Karl Knies, and Bruno Hildebrand; the
Younger, led by Gustav von Schmoller, and also including Étienne Laspeyres, Karl
Bücher, Adolph Wagner, and to some extent Lujo Brentano; the Youngest, led by
Werner Sombart and including, to a very large extent, Max Weber.

Predecessors included Friedrich List. The Historical school largely controlled

appointments to Chairs of Economics in German universities, as many of the advisors
of Friedrich Althoff, head of the university department in the Prussian Ministry of
Education 1882–1907, had studied under members of the School. Moreover, Prussia
was the intellectual powerhouse of Germany and so dominated academia, not only in
central Europe, but also in the United States until about 1900, because the American
economics profession was led by holders of German Ph.Ds. The Historical school was
involved in the Methodenstreit ("strife over method") with the Austrian School, whose
orientation was more theoretical and a prioristic. In English speaking countries, the
Historical school is perhaps the least known and least understood approach to the study
of economics, because it differs radically from the now-dominant Anglo-American
analytical point of view. Yet the Historical school forms the basis—both in theory and
in practice—of the social market economy, for many decades the dominant economic
paradigm in most countries of continental Europe. The Historical school is also a
source of Joseph Schumpeter's dynamic, change-oriented, and innovation-based
economics. Although his writings could be critical of the School, Schumpeter's work
on the role of innovation and entrepreneurship can be seen as a continuation of ideas
originated by the Historical School, especially the work of von Schmoller and
Sombart.

Wilhelm Roscher

Gustav von Schmoller

Werner Sombart

Max Weber

Joseph Schumpeter

Karl Polanyi

English historical school of economics

Although not nearly as famous as its German counterpart, there was also an English
Historical School, whose figures included William Whewell, Richard Jones, Thomas
Edward Cliffe Leslie, Walter Bagehot, Thorold Rogers, Arnold Toynbee, William
Cunningham, and William Ashley. It was this school that heavily critiqued the
deductive approach of the classical economists, especially the writings of David
Ricardo. This school revered the inductive process and called for the merging of
historical fact with those of the present period.
17
Edmund Burke

Richard Jones

Thomas Edward Cliffe Leslie

Walter Bagehot

Thorold Rogers

William J. Ashley

William Cunningham

French historical school

Clément Juglar

Charles Gide

Albert Aftalion

Émile Levasseur

François Simiand

Utopian economics

William Godwin

Charles Fourier

Robert Owen

Saint-Simon

Josiah Warren

Georgist economics

Georgism or geoism is an economic philosophy proposing that both individual and

national economic outcomes would be improved by the utilization of economic rent
resulting from control over land and natural resources through levies such as a land
value tax.

Harry Gunnison Brown

Raymond Crotty
18
Ottmar Edenhofer

Fred Foldvary

Mason Gaffney

Henry George

Max Hirsch (economist)

Wolf Ladejinsky

Philippe Legrain

Donald Shoup

Nicolaus Tideman

Ricardian socialism

Ricardian socialism is a branch of early 19th century classical economic thought based
on the theory that labor is the source of all wealth and exchange value, and rent, profit
and interest represent distortions to a free market. The pre-Marxian theories of
capitalist exploitation they developed are widely regarded as having been heavily
influenced by the works of David Ricardo, and favoured collective ownership of the
means of production.

John Francis Bray

John Gray

Charles Hall

Thomas Hodgskin

William Thompson

Marxian economics

Marxian economics descended from the work of Karl Marx and Friedrich Engels. This
school focuses on the labor theory of value and what Marx considered to be the
exploitation of labour by capital. Thus, in Marxian economics, the labour theory of
value is a method for measuring the exploitation of labour in a capitalist society rather
than simply a theory of price

David Harvey

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Eduard Bernstein

Grigory Feldman

Rosa Luxemburg

Richard D. Wolff

Rudolf Hilferding

Karl Kautsky

Karl Marx

Nikolai Bukharin

Nobuo Okishio

Paul Sweezy

Samir Amin

Vladimir Lenin

Yevgeni Preobrazhensky

Anarchist economics

Anarchist economics comprises a set of theories which seek to outline modes of

production and exchange not governed by coercive social institutions:

Mutualists advocate market socialism.

Collectivist anarchists advocate workers cooperatives and salaries based on the amount
of time contributed to production.

Anarcho-communists advocate a direct transition from capitalism to libertarian

communism and a gift economy with direct communal democracy.

Anarcho-syndicalists advocate worker's direct action and the general strike.

Thinkers associated with anarchist economics include:

Charles Fourier

Pierre-Joseph Proudhon

Peter Kropotkin
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Mikhail Bakunin

Distributism

Distributism is an economic philosophy that was originally formulated in the late 19th
century and early 20th century by Catholic thinkers to reflect the teachings of Pope
Leo XIII's encyclical Rerum Novarum and Pope Pius's XI encyclical Quadragesimo
Anno. It seeks to pursue a third way between capitalism and socialism, desiring to
order society according to Christian principles of justice while still preserving private
property.

G. K. Chesterton

Hilaire Belloc

Institutional economics

Institutional economics focuses on understanding the role of the evolutionary process

and the role of institutions in shaping economic behaviour. Its original focus lay in
Thorstein Veblen's instinct-oriented dichotomy between technology on the one side
and the "ceremonial" sphere of society on the other. Its name and core elements trace
back to a 1919 American Economic Review article by Walton H. Hamilton.

Gunnar Myrdal

Thorstein Veblen

John Rogers Commons

Wesley Clair Mitchell

John Maurice Clark

Robert A. Brady

Clarence Edwin Ayres

Romesh Dutt

John Kenneth Galbraith

Geoffrey Hodgson

Ha-Joon Chang

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SCHOOL OF THOUGHT REGARDS TO THE IMPACT OF PRICE,
EMPLOYMENT AND OUTPUT
Keynesian Economics
Keynesian economics is a macroeconomic theory of total spending in the economy and
its effects on output, employment, and inflation. It was developed by British economist
John Maynard Keynes during the 1930s in an attempt to understand the Great
Depression.
The central belief of Keynesian economics is that government intervention can stabilize
the economy. Keynes’ theory was the first to sharply separate the study of economic
behavior and individual incentives from the study of broad aggregate variables and
constructs.
Based on his theory, Keynes advocated for increased government expenditures and
lower taxes to stimulate demand and pull the global economy out of the Depression.
Subsequently, Keynesian economics was used to refer to the concept that optimal
economic performance could be achieved—and economic slumps could be prevented—
by influencing aggregate demand through economic intervention by the government.
Keynesian economists believe that such intervention can achieve full employment and
price stability.

Understanding Keynesian Economics

Keynesian economics represented a new way of looking at spending, output, and
inflation. Previously, what Keynes dubbed classical economic thinking held that
cyclical swings in employment and economic output create profit opportunities that
individuals and entrepreneurs would have an incentive to pursue, and in so doing, they
correct the imbalances in the economy.
According to Keynes’ construction of this so-called classical theory, if aggregate
demand in the economy fell, the resulting weakness in production and jobs would
precipitate a decline in prices and wages. A lower level of inflation and wages would
induce employers to make capital investments and employ more people, stimulating
employment and restoring economic growth. Keynes believed, however, that the depth
and persistence of the Great Depression severely tested this hypothesis.
In his book The General Theory of Employment, Interest and Money and other works,
Keynes argued against his construction of classical theory, asserting that, during
recessions, business pessimism and certain characteristics of market economies would
exacerbate economic weakness and cause aggregate demand to plunge further.
For example, Keynesian economics disputes the notion held by some economists that
lower wages can restore full employment because labor demand curves slope
downward like any other normal demand curve.

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Similarly, poor business conditions may cause companies to reduce capital investment
rather than take advantage of lower prices to invest in new plants and equipment. This
also would have the effect of reducing overall expenditures and employment.
Keynes argued that employers will not add employees to produce goods that cannot be
sold because demand for their products is weak.
Keynesian Economics and the Great Depression
Keynesian economics is sometimes referred to as “depression economics,” as Keynes’
General Theory was written during a time of deep depression—not only in his native
United Kingdom, but worldwide. The famous 1936 book was informed by Keynes’
understanding of events arising during the Great Depression, which Keynes believed
could not be explained by classical economic theory as he portrayed it in his book.
Other economists had argued that, in the wake of any widespread downturn in the
economy, businesses and investors taking advantage of lower input prices in pursuit of
their own self-interest would return output and prices to a state of equilibrium, unless
otherwise prevented from doing so. Keynes believed that the Great Depression seemed
to counter this theory.
Output was low, and unemployment remained high during this time. The Great
Depression inspired Keynes to think differently about the nature of the economy. From
these theories, he established real-world applications that could have implications for a
society in economic crisis.
Keynes rejected the idea that the economy would return to a natural state of
equilibrium. Instead, he argued that, once an economic downturn sets in, for whatever
reason, the fear and gloom that it engenders among businesses and investors will tend to
become self-fulfilling and can lead to a sustained period of depressed economic activity
and unemployment.
In response to this, Keynes advocated a countercyclical fiscal policy in which, during
periods of economic woe, the government should undertake deficit spending to make up
for the decline in investment and boost consumer spending to stabilize aggregate
demand.
Keynes was highly critical of the British government at the time. The government
greatly increased welfare spending and raised taxes to balance the national books.
Keynes said that this would not encourage people to spend their money, thereby leaving
the economy unstimulated and unable to recover and return to a successful state.

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