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Famous Economic Theories

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Mercantilism

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Thomas Mun; Mercantilism revolves around the idea that a nation's wealth and power were best served by increasing exports and collecting precious metals in return.

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Classical Economics

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Adam Smith; Classical Economics is based on the idea that free markets can regulate themselves through the invisible hand of supply and demand, without need for government intervention.

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Marxian Economics

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Karl Marx; This theory posits that economics is the base upon which the superstructure of social, political, and ideological conditions is built, focusing on class struggle and labor exploitation under capitalism.

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Marginalism

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William Stanley Jevons, Carl Menger, and Léon Walras; Marginalism explains value as determined by the marginal utility of goods, where prices are set by the last unit of a good supplied or demanded.

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Keynesian Economics

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John Maynard Keynes; Argues that aggregate demand is the primary driving force in an economy, and that governments should use fiscal and monetary measures to mitigate the adverse effects of economic recessions, depressions, and booms.

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Monetarism

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Milton Friedman; Advocates controlling the supply of money that flows into the economy while allowing the rest of the market to fix itself.

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Supply-Side Economics

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Arthur Laffer; Focused on stimulating economic growth by increasing supply rather than demand, typically through tax cuts, deregulation, and decreasing government spending.

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Rational Expectations Theory

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John F. Muth; Asserts that individuals make decisions based on their rational outlook, available information, and past experiences, challenging the Keynesian view that economic agents are led by 'animal spirits' and thus need government intervention.

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Austrian Business Cycle Theory

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Ludwig von Mises and Friedrich Hayek; The theory suggests that business cycles are caused by excessive expansion of bank credit, due to artificially low interest rates set by a central bank or fractional reserve banking.

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Real Business Cycle Theory

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Finn E. Kydland and Edward C. Prescott; Real Business Cycle Theory posits that cyclical fluctuations within an economy are largely the result of exogenous technological shocks, rather than monetary or demand shocks.

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Behavioral Economics

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Daniel Kahneman and Amos Tversky; Combines insights from psychology and economics to explore how actual human behavior often deviates from the predictions of traditional economic theory due to biases and cognitive limitations.

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New Trade Theory

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Paul Krugman; Challenges the traditional notion that international trade is based only on the comparative advantage by incorporating economies of scale in production and network effects.

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Endogenous Growth Theory

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Paul Romer; This theory holds that economic growth is primarily the result of internal forces, such as investment in human capital, innovation, and knowledge, rather than external ones like the accumulation of capital.

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Game Theory

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John von Neumann and Oskar Morgenstern; Game Theory is the study of mathematical models of strategic interaction between rational decision-makers, which has applications in economics, political science, and psychology.

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Public Choice Theory

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James Buchanan and Gordon Tullock; Explores how political decision-making results from the interaction of participants who are all pursuing their own self-interest, analogous to economic markets.

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Comparative Advantage

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David Ricardo; Comparative Advantage is an economic law referring to the ability of any given economic actor to produce goods and services at a lower opportunity cost than other economic actors.

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Creative Destruction

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Joseph Schumpeter; Creative Destruction refers to the incessant product and process innovation mechanism by which new production units replace outdated ones.

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The Law of Diminishing Returns

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David Ricardo; This law states that in all productive processes, adding more of one factor of production, while holding all others constant, will at some point yield lower incremental per-unit returns.

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The Coase Theorem

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Ronald Coase; The theorem asserts that when trade in an externality is possible and there are sufficiently low transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property.

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Mundell-Fleming Model

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Robert Mundell and Marcus Fleming; The model describes an open economy's short-term equilibrium under both floating and fixed exchange rate regimes, and includes the relationship between the economy's nominal exchange rate, interest rate, and output level.

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Heckscher-Ohlin Model

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Eli Heckscher and Bertil Ohlin; The model suggests that countries will export goods that make intensive use of locally abundant factors of production and import goods that make intensive use of factors that are locally scarce.

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Impossible Trinity

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Robert Mundell and Marcus Fleming; States that it is impossible to have all three of the following at the same time: a fixed foreign exchange rate, free capital movement (absence of capital controls), and an independent monetary policy.

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Permanent Income Hypothesis

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Milton Friedman; The hypothesis suggests that an individual's consumption at any given time is determined not just by their current income but also by their expected income in future periods—their 'permanent income'.

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Liquidity Preference Theory

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John Maynard Keynes; Proposes that the demand for money as an asset is determined by the interest rate since the opportunity cost of holding cash is the interest forgone on bonds.

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Theory of Optimum Currency Areas

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Robert Mundell; The theory defines the optimal geographical region for a currency area that maximizes economic efficiency and has criteria such as labor mobility, price and wage flexibility, and similar business cycles.

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