Mainstream economics

In the United States, economists are not generally separated into schools, but two major contemporary economic schools of thought have been the "saltwater and freshwater schools". In the early 1970s, so-called "fresh-water economists" challenged the prevailing consensus in macroeconomics research. Key elements of their approach were that macroeconomics had to be dynamic, quantitative, and based on how individuals and institutions make decisions under uncertainty.

Many of the proponents of this radically new approach to macroeconomics were associated with Carnegie Mellon University, the University of Chicago, the University of Rochester and the University of Minnesota. They were referred to as the "freshwater school" since Pittsburgh, Chicago, Rochester, and Minneapolis are located nearer to the Great Lakes. The established consensus was primarily defended by economists at the universities and other institutions located near the east and west coast of the United States, such as Berkeley, Harvard, MIT, University of Pennsylvania, Princeton, Columbia, Stanford, and Yale. They were therefore often referred to as "the saltwater schools". Economists generally tend not to identify themselves as members of a particular school, though in the political arena they are sometimes categorized.

Economics has always featured multiple schools of economic thought, with different schools having different prominence across countries and over time. The current use of the term "mainstream economics" is specific to the post–World War II era, particularly in the English-speaking world, and to a lesser extent globally.

Prior to the development and prevalence of classical economics, the dominant school in Europe was mercantilism, which was rather a loose set of related ideas than an institutionalized school. With the development of modern economics, conventionally given as the late 18th-century The Wealth of Nations by Adam Smith, British economics developed and became dominated by what is now called the classical school. From The Wealth of Nations until the Great Depression, the dominant school within the English-speaking world was classical economics, and its successor, neoclassical economics.[4] In continental Europe, the earlier work of the physiocrats in France formed a distinct tradition, as did the later work of the historical school of economics in Germany, and throughout the 19th century there were debates in British economics, notably the opposition underconsumptionist school.

During the Great Depression and the following Second World War, the school of Keynesian economics gained attention, which built on the work of the underconsumptionist school, and present-day mainstream economics stems from the neoclassical synthesis, which was the post–World War II merger of Keynesian macroeconomics and neoclassical microeconomics.

In continental Europe, by contrast, Keynesian economics was rejected, with German thought dominated by the Freiburg school, whose political philosophy of ordoliberalism formed the intellectual basis of Germany's post-war social market economy. Within developing economies, which formed the majority of the world's population, various schools of development economics have been influential.

Since 2007, the financial crisis of 2007–2010 and the ensuing global economic crisis has publicly exposed divisions within economics and spurred discussion.[5]

Mainstream economics can be defined, as distinct from other schools of economics, by various criteria, notably by its assumptions, its methods, and its topics. It is however also useful to challenge this distinction in light of the mutation of mainstream economics.

Some argue that basic neoclassical economics has a normative content and that studying economics tempts individuals to behave more in accordance with the homo economicus paradigm, with negative effects on the socioeconomic order. Another position is that economics as a field of study attracts individuals with preferences that differ from those of noneconomists. The existing evidence is mostly ambiguous.[13]

Since the financial crisis of 2007–2010, considerable conflict has arisen, among both economic theorists and a wider cross-section of the public, regarding the status and future of short-term macroeconomics which was confused with the entire mainstream economics.[5][14][15] Some critics have argued that potentially promising approaches have been excluded in major mainstream publications by a focus on problems amenable to formal modeling.[16][17]

Chartalists, who are generally considered part of the post-Keynesian school of thought, criticise mainstream theory as failing to describe the actual mechanics of modern fiat monetary economies. Chartalism focuses on an alternative model of the way money flows through the different sectors of an economy. Chartalists reject mainstream theories such as the loanable funds market, the money multiplier, and the utility of fiscal austerity.

Some economists, in the vein of ecological economics, believe that the neoclassical "holy trinity" of rationality, greed, and equilibrium, is being replaced by the holy trinity of purposeful behavior, enlightened self-interest, and sustainability, considerably broadening the scope of what is mainstream.[18] Ecological economics addresses sustainability issues, such as public goods, natural capital and negative externalities (such as pollution).[19]

Energy related theories of economic concepts also exist within energy economics relating to thermodynamic concepts of economic thinking, such as energy accounting.[20] Biophysical economics relates to this area.[21]