Economic Systems and Schools of Thought
Episode #2 of the course Introduction to macroeconomics by Doha Soliman, CFA
Welcome back! Today, we’re going to discuss some of the main schools of thought in economics and get a deeper understanding of what the differences are between their economic systems.
A great place to start is to introduce Adam Smith, commonly referred to as the Father of Economics. Smith was a great philosopher, a free thinker, and the author of two highly renowned works: The Wealth of Nations and The Theory of Moral Sentiment.
Smith coined the term, “the Invisible Hand.” This concept is based on the idea that if all members of society operated in their own best interest, the market would work most efficiently and there would be a collective gain. He emphasized that there is no need for government intervention even in times of crisis, as the markets would find a rational response to any economic shock. His work is referenced frequently when discussing modern-day capitalism, i.e. the belief in the efficiency of free markets. Capitalism advocates for low government intervention, privatization of all means of production, and operating for profit. This is the economic system under which most nations operate worldwide. It results in competition and free markets.
Another school of thought that has ruled many nations over history is Marxism, founded on the theories of Karl Marx. Marxism is based on the theories that the exploitation of labor that capitalism is based on will result in a revolution and a quest for a social economy—one in which the laborers are not exploited, and capitalists and owners of the means of production do not generate high profits that lead to economic inequity. This is an argument often used by advocates for labor workers and opponents of the modern-day capitalism economies many countries operate under. It tends to demonstrate the wage inequality and the increasing class disparity and has led to the now common term, the 1% vs. the 99%, referring to the wealthiest members of society who control the means of production vs. the others who simply operate within this system.
The answer to this dilemma, according to Marxists, is communism. This is the belief that in a society, the working class owns the means of production and all members of society work towards a communal goal. To control this equal division, there is a large emphasis on the government.
Socialism is the third school of thought we’ll introduce today. While it is often confused with Marxism, there are distinct differences between the two. Like communism, socialism is focused on equality among all society members. However, in a socialist society, it’s the government that owns the means of production, not the workers. In addition, employees can earn wages and spend them as they wish, as opposed to rationing from the government as would be the case in a Marxist or communist system.
While there are many political and economic structures, most countries operate on a basis of these three systems or a combination of their parts.
As we have developed a deeper understanding of economic schools of thought, tomorrow, we’ll explore the business cycle and its fluctuations over time.
The Wealth of Nations by Adam Smith
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