Economic Schools of Thought: Crash Course Economics #14 - YouTube

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!