Continue with the blog Keynesianism and Monetarism. Here is the summary of school of economic theory.
Classical Economics
Starting with The Wealth of Nations, 1776, by Adam Smith. The central idea is that the market can be self-correcting. The central assumption implied is that all individuals choose to maximise their utility.
Neoclassical Economics
Neoclassical economics is formalised by Alfred Marshall (Marshallian demand, and Cambridge quantitative theory of money). The school is based on the mathematical formulation of the general equilibrium by Léon Walras (Walras’ Law).
Neoclassical economics states that the production, consumption and valuation (pricing) of goods and services are driven by the supply and demand model. Value is determined by maximising utility s.t. constraints.
Assumptions: 1. people have rational preferences (complete and transitive, see R100 at the Cambridge uni); 2. individuals maximise their utility and firms maximise profits; 3. people act independently on the basis of full and relevant information.
Neoclassical schools dominated until the Great Depression during the 1930s. However, John Maynard Keynes led with the publishment of The General Theory of Employment, Interest and Money. Keynesian dominated until 1973-1975 recession triggered by the 1973 oil crisis (stagflation crisis resulted from oil price increase) that Keynesian policy failed to reduce unemployment and also lead to hyperinflation. Phillips curve also failed because high unemployment and inflation came together. Then, new classical took the dominant.
New Neoclassical Economics
The new classical school works on real business cycle (Real Business Cycle model) theory that used fully specified general equilibrium models and used changes in technology to explain fluctuations in economic output.