Economic Schools of Thought: Crash Course Economics #14

Summary

This Crash Course Economics episode explores various economic ideologies, from Adam Smith's free market capitalism to Marx's communism, and Keynesian economics' response to the Great Depression. It discusses how economic theories evolve and impact policy, highlighting the ongoing debate between government intervention and free markets.

Takeaways

• 📚 Economics is a field that evolves with time, reflecting different attitudes about human nature and societal needs.
• 🧐 Thomas Malthus' theory of population growth outpacing food production was proven wrong due to technological advancements in agriculture and transportation.
• 🌱 The concept of Social Darwinism, which emerged from Malthus' ideas, is considered incorrect and has been debunked.
• 🤔 Economics lacks the precision of a lab science and must draw conclusions about human behavior without perfect control groups.
• 🛑 Adam Smith's 'The Wealth of Nations' introduced the idea that individual self-interest could inadvertently benefit society at large.
• 🔄 David Ricardo's theory of comparative advantage showed that trade could be beneficial even when one party is more efficient in all areas of production.
• 📚 Karl Marx and Friedrich Engels' 'Communist Manifesto' and 'Das Kapital' challenged the notion that individual self-interest serves the common good.
• 🔄 The Great Depression highlighted the limitations of classical economics and led to the rise of Keynesian economics, advocating for government intervention in economic downturns.
• 🏛 The Austrian School of economics, with figures like Friedrich Hayek and Ludwig von Mises, opposed heavy state involvement and argued for the complexity of the economy as a reason against manipulation.
• 💼 Milton Friedman and the Chicago School promoted privatization and deregulation, blaming the Great Depression on poor monetary policy rather than capitalism itself.
• 🌐 Modern economics is a blend of classical and Keynesian theories, known as the new neoclassical synthesis, which guides policy decisions in various economic scenarios.
• 🔮 Predicting the future of economic ideologies and theories is challenging due to the complexity and unpredictability of global economic systems.

Q & A

What was the main argument of Thomas Malthus in 1798?

Thomas Malthus argued that population growth would outpace food production, leading to eventual starvation of humans.

Why was economics sometimes referred to as the 'dismal science'?

The term 'dismal science' was used to describe the pessimistic predictions of economists like Malthus, who believed in inevitable scarcity and hardship.

What was the significance of Adam Smith's 'The Wealth of Nations'?

Adam Smith's 'The Wealth of Nations' introduced the idea that individuals pursuing their own self-interest could inadvertently serve the common good and advocated for free trade.

What is the theory of comparative advantage as introduced by David Ricardo?

The theory of comparative advantage suggests that two people or countries can both benefit from trade by focusing on what they are best at and then trading with each other.

What was the main argument of Karl Marx and Friedrich Engels in the 'Communist Manifesto'?

Karl Marx and Friedrich Engels argued that history is driven by the conflict between workers and property owners, and that this would inevitably lead to a classless, stateless system called communism.

How did the Great Depression impact classical economics?

The Great Depression exposed the limitations of classical economics, which could not explain or provide solutions for the economic crisis, leading to a shift towards Keynesian economics.

What are the core principles of Keynesian economics?

Keynesian economics argues that market economies do not self-correct quickly and that government intervention through monetary and fiscal policy is necessary to increase output and decrease unemployment during recessions.

What is socialism and how does it differ from communism?

Socialism allows for private property and markets but includes government ownership of industry, significant regulation, and large public programs. Communism, on the other hand, advocates for the collective ownership of the means of production and the absence of a state.

What is the Austrian School of economics and what are its main arguments?

The Austrian School of economics, represented by Friedrich Hayek and Ludwig von Mises, argues against heavy state involvement and regulation, believing that the economy is too complex to be manipulated by government policies.

What is monetarism and how does it differ from Keynesian economics?

Monetarism focuses on price stability and argues for a slowly and predictably increased money supply to allow for steady economic growth, contrasting with Keynesian economics which emphasizes government intervention during economic downturns.

What is the new neoclassical synthesis in economics?

The new neoclassical synthesis is a unified economic theory that incorporates ideas from both classical economics, including monetarism, and Keynesian economics, reflecting a blend of free market principles and government intervention.

Outlines

00:00

📚 Introduction to Economic Theories

This paragraph introduces the Crash Course Economics series, highlighting the hosts' engagement with audience comments and their acknowledgment of the need to discuss various economic ideologies. The script delves into the historical context of economic theories, starting with Thomas Malthus' prediction of population outgrowth over food production, which was later proven incorrect due to technological advancements. It emphasizes the evolving nature of economic theories and their potential impact on millions of lives, particularly through the lens of Social Darwinism. The paragraph also introduces key figures in economic thought, such as Adam Smith and David Ricardo, and their contributions to the understanding of self-interest, free trade, and comparative advantage.

05:01

🌐 The Evolution of Economic Ideologies

This paragraph explores the development and interplay of various economic ideologies throughout history. It begins with the classical economics of the 19th century, represented by figures like Alfred Marshall, and the Marxist critique that led to the rise of communism. The script then discusses the emergence of Keynesian economics during the Great Depression, which challenged classical economic principles by advocating for government intervention in the economy. The paragraph also covers the rise of socialism, the Austrian School's critique of government intervention, and the Chicago School's emphasis on privatization and monetarism. It concludes with a reflection on the ongoing debates among economists and the unpredictable nature of economic theory evolution, drawing a parallel with Malthus' incorrect predictions.

Keywords

💡Economic Ideologies

Economic ideologies refer to the various sets of beliefs and theories about how economies should be organized and managed. In the video, different economic ideologies are discussed, such as Austrian School, Keynesianism, and Marxism, to highlight the diverse perspectives on economic systems and their impact on policy-making.

💡Thomas Malthus

Thomas Malthus was a British economist known for his theory of population growth outpacing food production, which he presented in 1798. His ideas, although later proven incorrect, were influential in shaping early economic thought. The video uses Malthus as an example of how economic theories can evolve over time.

💡Dismal Science

The term 'dismal science' is used to describe economics, often due to its historical association with pessimistic predictions like Malthus's population theory. The video script mentions this nickname to illustrate the sometimes negative or incorrect forecasts made by economists.

💡Industrial Revolution

The Industrial Revolution refers to the period of rapid industrialization that began in Britain in the late 18th century and spread to other parts of the world. The video mentions this period to highlight the technological and agricultural advancements that contradicted Malthus's predictions.

💡Social Darwinism

Social Darwinism is a theory that misapplies Darwin's concept of natural selection to social and economic life, suggesting that the strong should prosper while the weak should perish. The video critiques this ideology as a misinterpretation of both Darwin's work and economic theory.

💡Adam Smith

Adam Smith is considered the father of modern economics, known for his book 'The Wealth of Nations,' which introduced the concept of the 'invisible hand,' where self-interest in a free-market economy leads to a benefit for all. The video uses Smith's work to discuss the foundational ideas of economic liberalism.

💡Comparative Advantage

Comparative advantage is an economic concept introduced by David Ricardo, suggesting that even if one country can produce more of every good, it can still benefit from trade by specializing in what it does best. The video explains this concept as a key component of international trade theory.

💡Karl Marx

Karl Marx was a German philosopher and economist known for his critique of capitalism and his theories on historical materialism and class struggle. His work, along with Friedrich Engels, laid the foundation for Marxist economics and communism. The video discusses Marx's theories in the context of economic class conflict.

💡Classical Economics

Classical economics is a school of thought that dominated economic theory in the 19th century, emphasizing the efficiency of markets and the benefits of free trade and minimal government intervention. The video mentions this school in the context of economic theories before the Great Depression.

💡John Maynard Keynes

John Maynard Keynes was a British economist whose work during the Great Depression led to the development of Keynesian economics, which advocates for government intervention in the economy to manage unemployment and stabilize economic cycles. The video discusses Keynes's theories as a response to the limitations of classical economics.

💡Supply-Side Economics

Supply-side economics is a theory that argues for economic growth through lowering taxes and decreasing regulation to stimulate production and investment. The video mentions this as one of the economic theories that gained traction as a response to the challenges faced by Keynesian economics.

💡Neoclassical Synthesis

The neoclassical synthesis is a term used to describe the modern mainstream economic theory that combines elements of both classical and Keynesian economics. The video refers to this as the current consensus in economic thought, which includes a mix of free-market principles and government intervention.

Highlights

Crash Course Economics discusses various economic ideologies and their historical development.

Thomas Malthus' theory of population growth outpacing food production was proven wrong by advancements in technology and agriculture.

Economic theories are subject to revision and have significant impacts on policy and people's lives.

Adam Smith's 'The Wealth of Nations' introduced the concept of self-interest serving the common good and advocated for free trade.

David Ricardo's theory of comparative advantage showed mutual benefits from trade even if one party is more efficient.

Karl Marx and Friedrich Engels' 'Communist Manifesto' and 'Das Kapital' challenged the notion of individual self-interest with a focus on class conflict.

Classical economics, as represented by Alfred Marshall's 'Principles of Economics', was challenged by the rise of Marxist movements and the Great Depression.

John Maynard Keynes' 'A General Theory of Money, Interest, and Employment' introduced macroeconomics and the role of government in economic downturns.

Keynesian economics became mainstream, advocating for government intervention during recessions.

Socialism, with government ownership and public programs, has been adopted in various forms by different countries.

The Austrian School, with figures like Friedrich Hayek and Ludwig von Mises, argues against heavy state involvement in the economy.

Milton Friedman and the Chicago School advocate for privatization and deregulation, blaming the Great Depression on poor monetary policy.

Monetarism focuses on price stability and a predictable increase in the money supply for steady economic growth.

Supply-side economics promotes deregulation and tax cuts, especially for corporations, to stimulate economic growth.

The new neoclassical synthesis unifies ideas from classical and Keynesian economics, reflecting ongoing policy debates.

Economic policies, such as those in response to the 2008 recession, have real-world implications and continue to be debated among economists.

Economic ideologies are evolving, with countries like China and Cuba moving towards capitalism, while North Korea remains isolated.

The future of economic thought is unpredictable, with potential surprises that could challenge current models.

Transcripts

Welcome to Crash Course Economics. I'm Adriene Hill. And I'm Jacob Clifford.

Now, believe it or not, we actually read many of your comments on YouTube!

First! Some are productive, and others, not so much.

This guy looks like Mark Cuban, but not as attractive or rich.

We've noticed that some people are disappointed we haven't covered the different economic ideologies.

You're ignoring the Austrian School! What is this Keynesian trash?

Well guess what, today we're gonna talk about other schools of economic thought.

[Theme Music]

To understand these economic theories, we're gonna have to jump into a little bit of history.

In 1798, a British economist named Thomas Malthus argued that population growth would outpace food

production, so, eventually, humans will run out of food and starve.

You wonder why some people call economics the "dismal science..."

Well, Malthus was wrong. Dismally wrong.

The world population has grown from one billion in his time to over seven billion today.

And it turns out that the famines we have seen are largely manmade disasters

that have very little to do with our ability to produce food.

But Malthus was writing at the beginning of the Industrial Revolution;

he didn't factor in advancements in technology,

agriculture production, or transportation.

So with the information he had, he was kinda right. But he was still wrong.

Economic theories are constantly being proven, disproven, and revised. The problem is,

when these theories are wrong, millions of people can be adversely affected.

Take Malthus. Some scholars combine his ideas with those of Charles Darwin and concluded that giving

assistance to poor people and social programs like welfare are actually immoral.

This is called Social Darwinism, and it's completely wrong.

Now, economics is not an exact science. It aims to draw conclusions about human behavior

without the benefits of labs or perfect control groups. Economic theories reflect different attitudes about

human nature and those are likely to change over time. Let's go to the Thought Bubble.

The founder of modern economics was a Scottish philosopher named Adam Smith.

In 1776, his book, The Wealth of Nations, was published.

It was an organized discussion about production, markets, and economic theory.

And it was tremendously influential. Smith introduced the idea that a person

following their own self-interest could end up serving the common good.

He also advocated free trade. Many countries at the time

had heavy tariffs which protected their domestic manufacturers at the expense of trade.

A generation later, British economist David Ricardo expanded on Smith's ideas by introducing

the theory of comparative advantage: the idea that two people or countries can both benefit from trade,

even if one of them can produce more of everything.

When both focus on what they're best at and then trade, everyone benefits.

Anyway, the field of economics grew, advancing ideas like private property and free markets

and then along comes the Communist Manifesto in 1848. Rather than examining individual behavior,

German philosophers Karl Marx and Friedrich Engels looked at economic classes and argued that

history was explained by the conflict between workers and property owners.

This process would inevitably lead workers to overthrow their bosses, ushering in a new

stateless and classless system called communism. Marx followed this up with Das Kapital.

Political movements spawned by Marxist economics challenged Adam Smith's view that

individual self-interest serves the common good.

The end result was two main camps: free market capitalism supporting private property,

and communism, advocating collective ownership of the means of production.

Thanks, Thought Bubble. Despite Marx's challenge, market-based economic theory continued to dominate

through the end of the 19th century with contributions from French, British, and American economists.

This body of thought is called classical economics, and it was embodied in a book called

Principles of Economics, published in 1890 by English economist Alfred Marshall.

Marshall organized into fine concepts we still use today,

like supply and demand and marginal utility, which we're gonna get to soon,

but as capitalism was expanding around = the world, Marxist movements were, too.

By the early 20th century, this battle for hearts and minds, along with political and social unrest in Europe,

led to the establishment of the Soviet Union in 1922.

As communism was maturing in the Soviet Union, the Great Depression crushed the market economies

of the world's richest countries.

It also dealt a devastating blow to classical economics. The theories of Smith and Marshall

didn't have much to say about how something like this could happen or how to fix it.

The British economist John Maynard Keynes proposed new answers in his 1936 book,

A General Theory of Money, Interest, and Employment, which basically launched the field of macroeconomics.

Along with John Hicks, Keynes argued that market economies don't self-correct quickly

because prices and wages take time to adjust.

They claimed that during recessions it is necessary for the government to get involved using monetary and

fiscal policy to increase output and decrease unemployment.

Keynes wasn't supporting communism, but his views directly challenged classical economists,

who saw government intervention as universally harmful for the economy.

Now, eventually, Keynesian economics became part of mainstream economic theory.

See, I told you, economic theory changes over time!

And all it took in this case was a catastrophic global depression.

Keynes' ideas, combined with the ever-present Marxist critique, opened the door to more and more government involvement.

Since the Great Depression, many nations have pursued a political and economic ideology called socialism,

although socialist ideas and policies have been around since the 19th century.

In most cases, these economies allow for private property and markets,

but also have government ownership of industry,

significant regulation, and big public programs like universal health care.

The Scandinavian countries, like Norway and Sweden, they love these socialist policies.

Now, the US has rejected many of these socialist ideas,

but the US government, or at least the economists that advise politicians,

are clearly in favor of using Keynesian economic policies when the economy is in trouble.

But as socialism and Keynesian economics expanded, other groups continued to forcefully push

for private property and free markets. The most vocal was often the Austrian School of economics.

They also have a very vocal fan base in our comments section. Friedrich Hayek and Ludwig von Mises,

who were, unsurprisingly, from Austria, argued that heavy state involvement

has never produced the results it promised, and that regulation and government tinkering

is actually a problem, not a solution.

Rejecting nearly all forms of fiscal and monetary policy,

the Austrian School today argues the economy's just too complicated to manipulate.

This backlash against government intervention was carried forward in the US by Milton Friedman.

Like the Austrians, Friedman advocated privatization of many functions that have been assumed by government,

famously proposing school vouchers and deregulation of the economy.

He also concluded that the Great Depression could be blamed on botched monetary policy,

rather than some inherent fault of capitalism.

The theories of Friedman and his followers at the University of Chicago came to be called

the Chicago school of economics.

Friedman's views got a huge boost in the 1970s. At that time, inflation soared while output stagnated.

Remember stagflation? A combination that Keynesian economics had trouble reconciling.

Some macroeconomists drew on the insights of the Chicago school

to claim that these events disprove Keynesian economics.

Building on the ideas of Friedman, another theory of economics gained traction: monetarism.

Whew, Stan! So many -isms!

Monetarists focused on price stability and argue the

money supply should be increased slowly and

predictably to allow for steady growth.

At about the same time, another theory called

supply-side economics, or sometimes called trickle-down economics, entered the mainstream.

Supply-side economists advocated deregulation

and cutting taxes, especially corporate taxes.

Mainstream economics today takes ideas from both

classical economics, including monetarism, and Keynesian economics.

This unified theory is sometimes called the new neoclassical synthesis,

and, yeah, economists are bad at naming things, too.

But debates about how and when to implement policies continue,

and, remember, these are more than just intellectual classroom spats.

These policies affect millions of people.

The different reactions to the global recession in 2008 are a good example of this.

Some economists suggested using Keynesian policies, namely deficit spending.

Other economists suggested the more classical approach of reining in excess spending

to reduce budget deficits, something called austerity.

Believe it or not, economists are still fighting about which of these policies is the right approach and when to use them.

We can all agree that Keynes was right about at least one thing: when he said,

"Ideas shape the course of history."

So, where are all these economic ideologies and theories gonna take us in the future?

Most countries that once supported strict communism like China and Cuba have moved toward capitalism.

The only country that's really sticking with it is North Korea,

but they're too isolated to be a real test case for an economic system.

But this doesn't mean that Marxism is dead.

Many capitalist countries have adopted socialist looking programs.

It appears the world's economies are converging towards the middle.

But in the end, it turns out it's just really hard to predict the future,

especially when we're talking about something as complex as the world economy.

Remember Malthus' belief that we're all gonna starve?

Well, like Malthus, we don't know what kind of changes humanity's gonna face in the future.

If history has proven anything about economic thought, it's that we should expect surprises that will upset

our current economic models. Just like Malthus couldn't imagine that we'd all be alive today.

Thanks for watching. We'll see ya next week.

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Thanks for watching. We're glad Malthus was wrong and that you're alive!