Economic Theories

Merging Representative Economic Thoughts Into A Grand Framework

Many great economists contributed their visionary economic thinking (Faccarello & Kurz, 2016). Following the economic thought clues of classical economics, Keynesian economics, neoclassical synthesis, monetarist economics and neo-neoclassical synthesis, we will inherit and integrate some representative theoretical ideas and methodologies, especially those from Adam Smith (Adam Smith, Alfred Marshall, Maynard Keynes, Milton Friedmann, and Paul Samuelson’s economic thinking, and methodological models including Arrow-Debreu model, Mundell-Fleming model, Cobb-Douglas model, Solow-Swan model, Laffer curve, Phillips curve).

Adam Smith (1723–1790) contributed his economic thought, characterized by emphasizing the importance of the market’s function as an ‘invisible hand’. The main point of his theoretical insight is that we can act in our own interests and help others through ‘invisible hands’, so all social individuals benefit from their own interests. Competition is self-regulating. Unless free market competition is protected, the government should not participate in commercial activities through tariffs, taxes or other means. Because of his pioneering academic contributions, Adam Smith is revered as the ‘father of modern economics’.

Alfred Marshall (1842–1924) applied mathematical principles to economic problems and established economics as a scientific discipline. Combined with the marginal utility theory proposed by him, William Stanley Jevons and the Austrian school, following the idea that value is determined by production costs, Marshall believed that demand and supply factors (respectively, production costs and utility costs) determine prices, and establish the relationship between demand and supply functions and price changes. This created the so-called ‘marginal revolution’ and put forward the ‘price elasticity of demand’ as an extension of these ideas. Marshall raised the mathematical model of economy to a new level and introduced many new concepts, such as economies of scale, marginal utility, economic welfare (including the ‘Marshall surplus’ of ‘producer surplus’ and ‘consumer surplus’), etc., and created the British neoclassical school of economics, the so-called Cambridge school.

John Maynard Keynes (1883–1946) is one of the greatest economists. In his excellent epoch-making work, The General Theory of Employment, Interest and Money (referred to as General Theory), Keynes provided the economic foundation for the government's work plan to solve the problem of high unemployment. The influence of General Theory is known as the Keynesian Revolution. It is one of the most influential economic works in history and has made outstanding contributions to macroeconomic policies. From the late 1940s to the late 1980s, Keynesianism was a core part of economics textbooks, however, as economists paid more and more attention to economic growth and became more aware of inflation and unemployment, Keynesianism gradually lost its dominance. Keynesian theory believes that the government can play a strong role in the economy and society by implementing expansionary fiscal and monetary policies to avoid economic recession. It believes that the way to reduce unemployment is to increase government spending and maintain budget deficits. However, it also seems to imply that lowering the wage rate will not reduce unemployment, which led economists to face reality and controversy later.