Published Jan 19, 2023 Three major economic theories dominate the field of economics: neoclassical, Keynesian, and Marxian. Each of them has its own set of assumptions, regulations, and conditions. And, of course, all of these economic theories have their strengths and weaknesses. Thus, will look at each of them in more detail below. Neoclassical economics is based on the idea that individuals and firms make rational decisions to maximize their own utility or profit. It is arguably the most widely accepted economic theory today and has been since the late 19th century. This theory is also known as the “marginalist revolution” because it focuses on the marginal utility of goods and services, which is the additional satisfaction or benefit that a consumer receives from consuming one more unit of a good or service. Neoclassical economics relies on the following assumptions: (1) individuals and firms are rational and make decisions to maximize their own utility or profit (i.e., they act in their own self-interest), (2) markets are efficient and self-regulating, (3) prices are determined by supply and demand, (4) there is perfect competition, and (5) there is perfect information. Based on these assumptions, neoclassical theory can be used for the analysis and explanation of a wide range of economic phenomena, including consumer demand, decision-making, production, cost, competition, and market structures. In other words, the main strength of neoclassical economics is its ability to explain and predict the behavior of individuals and firms in a market economy. Starting from there, it is also used to develop economic models and theories that can be used to inform policy decisions. Most introductory economics classes and university courses teach this economic theory as it is relatively simple and easy to understand. However, it has been criticized for its unrealistic assumptions and its failure to account for externalities and other market imperfections. Keynesian economics is an economic theory developed by British economist John Maynard Keynes in the 1930s. It is based on the idea that government intervention can be used to stabilize the economy and reduce unemployment through fiscal and monetary policy (e.g., increasing government spending, cutting taxes, and increasing the money supply). This theory was especially popular among economists in the 1950s and 1960s. Keynesian economics relies on the following assumptions: (1) individuals and firms are not always rational and may make decisions based on expectations, (2) markets are not always efficient and may require government intervention, (3) prices are determined by supply and demand, but government intervention can influence them, (4) there is imperfect competition, and (5) there is imperfect information. Keynes’ theory also emphasizes the importance of aggregate demand in determining economic output and employment levels. It suggests that government intervention can be used to stimulate economic growth and reduce unemployment by increasing aggregate demand, which can speed up economic recovery during recessions. The main strength of Keynesian economics, according to its proponents, is its ability to explain and predict the behavior of the economy as a whole. However, it has been criticized for its reliance on government intervention (which can cause crowding-out) and has lost a lot of support following the occurrence of stagflation in the 1970s, which somewhat disproved Keynes’ fundamental assumptions. Marxian economics is an economic theory developed by German philosopher Karl Marx in the 19th century. It is based on the idea that the capitalist system is inherently exploitative and that it will eventually be replaced by a socialist system. Marx’s approach relies on the following assumptions: (1) individuals and firms are not always rational and may make decisions based on class interests, (2) markets are not always efficient and may require government intervention, (3) prices are determined by supply and demand, but government intervention can and should influence them, (4) there is imperfect competition, and (5) there is imperfect information. Marx’s theory is based on the so-called labor theory of value, which states that the value of a commodity is determined by the amount of labor required to produce it. It also emphasizes the class struggle in society and the need for a revolutionary overthrow of the capitalist system in the long run in order to create a more equitable and just society. Marxian economics has been influential in the development of economic thought and has had a major impact on the development of socialist and communist economic systems. However, since Marxian ideas clash with capitalist ideas, the former has lost a lot of support and significance in western economies in recent years. In economics, three major economic theories dominate the field: neoclassical, Keynesian, and Marxian. Neoclassical economics is based on the idea that individuals and firms make rational decisions to maximize their own utility or profit. Keynesian economics is based on the idea that government intervention can be used to stabilize the economy and reduce unemployment. Finally, Marxian economics is based on the idea that the capitalist system is inherently exploitative and that it will eventually be replaced by a socialist system.1. Neoclassical Economics
2. Keynesian Economics
3. Marxian Economics
Summary
Macroeconomics