The 50 Most Important Economic Theories

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The 50 Most Important Economic Theories

August 17, 2009 by Donald

Be sure to read the follow-up post in July 2010

What are the 50 most important economic theories of the last century? That’s the question a publisher recently asked me to ponder for a book they are developing.

I’ve noodled on this over the past week and have some initial ideas. But I would be remiss if I didn’t solicit suggestions from my insightful readers.

So, what do you think have been the most important economic theories over the past century?

To spark your thinking, here are some very preliminary ideas, albeit without much respect for the publisher’s century limitation. (Apologies for the higher-than-usual amount of jargon and economic short-hand.)

I think the items in the first list are more likely to make the cut than those in the second list. There is otherwise no importance to the ranking.

25 Theories To Get You Started

Supply and Demand (Invisible Hand)
Classical Economics
Keynesian Economics
Neoclassical Synthesis (Keynesian for near-term macro; Classical for micro and long-term macro)
Neo-Malthusian (Resource Scarcity)
Marxism
Laissez Faire Capitalism
Market Socialism
Monetarism
Solow Model (growth comes from capital, labor, and technology)
New Growth Theory (Romer & endogenous growth)
Institutions and Growth (rule of law, property rights, etc.)
Efficient Markets Hypothesis
Permanent Income / Life Cycle Hypothesis
Rational Expectations
Rational Choice Theory
Something Behavioral (e.g., Prospect Theory)
Adverse Selection and the Lemons Problem
Moral Hazard
Tragedy of the Commons
Property Rights as a solution to the Tragedy of the Commons
Game Theory (e.g., Prisoner’s Dilemma)
Comparative Advantage
New Trade Theory
The Trilemma (exchange rates, capital flows, and monetary policy)

37 More Theories

Washington Consensus
Financial Accelerator
Theory of Independent Central Banks
Bagehot Theory of Central Bank Lending
Creative Destruction (Schumpeter)
Ricardian Equivalence
Dynamic Consistency
Diversification and Investment Portfolio Design
Capital Asset Pricing Model
Option Valuation (Black-Scholes et al.)
Austrian Economics
Speculative Bubbles (e.g., Minsky)
Liquidationist View of Downturns
Time Value of Money (incredibly important but very old)
Public Choice / Economic Theory of Regulation (politicians and government workers as self-interested maximizers)
Arrow’s Impossibility Theorem
Welfare Theorems
Veblen and Conspicuous Consumption
Polluter Pays Principle (e.g., Piouvian Taxes)
Offsetting Behavior (e.g., people drive safe cars more aggressively)
Heckscher-Ohlin Trade Theory
Optimal currency areas
Exchange Rates and Purchasing Power Parity
Mercantilism
Rubinomics
Supply-side Economics
Laffer Curve
Phillips Curve
Theories of Economic Geography
Fisher Theory of Interest Rates
Liquidity Traps
Resource Curse (Dutch Disease)
Exchange Rate Overshooting (Dornbusch)
Auctions
Mechanism Design
Principal-Agent Theory (e.g., separation of management and ownership)
Theory of Optimal Taxation (e.g., broad base, low rate, tax less-elastic activities)

I could go on, but you get the idea. As the list illustrates, there are nuances about what constitutes a theory — some try to describe how the world works, and others try to describe how it should work. And, of course, they vary widely in how well they accomplish those goals. There are certainly economic theories that are wrong, but nonetheless deserve to be on the list.

As the list may suggest, I am a mainstream economist with a U.S. focus, so my first round of brainstorming undoubtedly overlooks some worthy non-U.S. theories or less orthodox theories. (And I probably overlooked some mainstream ones too!)

Posted in Economy | Tagged Economics | 56 Comments

56 Responses

on August 17, 2009 at 2:44 am Greg Ransom

You missed a few:

1. the impossibility of socialist calculation (Mises/Hayek)

2. the division of knowledge & the coordination function of prices (Hayek)

3. entrepreneurial learning and adaptive judgment in the context of changing relative prices and local conditions (Alchian, Kirzner, Hayek, Mises).

4. the logic of the valuation of non-permanent production goods taking more or less time (Hayek & Bohm-Bawerk)

5. development of the explanatory logic of “methodological individualism” (Hayek & Schumpeter)

6. Identification and diagnosis of the scientistic tradition in economics (Hayek & Mirowski)

7. the institutional foundations of the market processes provided by private property and the the legal tradition of the rule of law (Hayek & North & Mises)

Chew on that.
- on August 17, 2009 at 5:47 pm Donald Marron
  
  Thanks Greg. I was hoping someone would respond with some Hayek and Mises; I was feeling lazy last night and so included just a placeholder for Austrian.
  
  Among the seven, (1) and (2) [or some combination] strike me as the most important. Do you agree? Nice counterpoint to the idea of market socialism.
  - on August 19, 2009 at 2:53 am Greg Ransom
    
    Yep, 1 & 2 are the big deal in the history of 20th century economic thought — and are directly related.
    
    Yet Hayek would argue that #3 and #4 are things that separates the men from the boys when it comes to understanding what significance #1 and #2 have for the science of economics.
    
    The problem with socialism is that it cannot price production goods, and the big failure of “neoclassical” economics is the failure to understand that math “modeling” is not what is truly significant in understanding the driving force and explanatory cause illuminated by economic science — which is entrepreneurial learning in the context of changing relative prices and local conditions.
    
    And the fatal problem with “mainsteam” macroeconomics is that it fails to address the bedrock causal process of the economy, the very stuff of money, interest and production cycles — i.e. adaptive valuational choice across time involving non-permanent production processes that take more or less time and produce more or less output.
    
    So #4 is directly linked to #5 and #6 for Hayek, via nos. 1, 2 and 3.
  - on August 19, 2009 at 3:00 am Greg Ransom
    
    “Market socialism” was an invention of those in England who read or listened to Hayek in the 1930s, but who didn’t “get it” — i.e. they failed to get #3 and #4. Hayek’s students Abba Lerner and Oskar Lange were the king of these — and it is worth noting that Lerner’s mistakes were massively influential upon 20th century “mainstream” economics.
  - on August 19, 2009 at 2:26 pm Donald Marron
    
    There were certainly many times during my public service, when I realized that our system does indeed include elements of market socialism (e.g., policy debates over reimbursement rules in Medicare).
  - on August 20, 2009 at 1:07 am Greg Ransom
    
    The word “market socialism” gets used for different purposes by different people.
    
    I’m not sure what you are talking about here has anything to do with the economic models of “market socialism” which were developed by Lange, Lerner, Dickinson, and others.
    
    Donald writes:
    
    “our system does indeed include elements of market socialism (e.g., policy debates over reimbursement rules in Medicare).”
- on May 9, 2013 at 7:57 am saidat
  
  good day, i am writing a thesis on the impact of cashless banking on a national economy. what theories in economics can i adapt for this write up,thanks
on August 17, 2009 at 9:45 am BenStanford

These may have other names but a few I have read about lately, (Reading “The Forgotten Man” by Amity Shleas):

1. Hoovers “the Beneficient Hand”

2. Roosevelt’s “experimentation” “Keynesian influenced. Later became identity politics/economics via taxation and transfer payments/welfare

3. The economic impacts of facist or corpratism countries??

These are probably best described as hybrid theories. borrowing aspects of 2 or more fundamental or ideal economic theories.
- on August 17, 2009 at 5:49 pm Donald Marron
  
  Thanks Ben. I’ve been wondering whether to include something else from the Depression era. The “Liquidationists” are one, but maybe something Hooverish.
  - on August 19, 2009 at 3:04 am Greg Ransom
    
    How about “secular stagnation” theory of the sort popularized by Hansen, Keynes, and some of the folks at the U. of Chicago?
    
    Another good one is the massively influence work of Foster & Catchings which made “deficient demand” theory all the rage — and which popularize the fiscal and monetary policy prescription of public works programs and inflationary “stimulus” in the _1920s_ (Sen. Wagner, FDR, and Hoover were all on board in the _1920s_, years before Keynes every wrote a word on the topic.)
on August 17, 2009 at 11:30 am Assorted Links (8/17/2009) – Jim Garven's Blog

[…] The 50 Most Important Economic Theories, by Donald Marron […]
on August 17, 2009 at 5:46 pm Donald Marron

I love the fact that WordPress decided the most similar post in all of WordPress-land is one about the failures of string theory in physics.
on August 17, 2009 at 6:12 pm Greg Rosston

How about Transactions Costs (Coase)?
- on August 18, 2009 at 12:14 am Donald Marron
  
  Another good idea. Perhaps two ideas, actually. One being the line of work that begins with the Problem of Social Cost and the distribution of property rights. The other that begins with the Theory of the Firm and leads through Williamson to the contemporary theories of the line between firms and markets. Thanks.
on August 18, 2009 at 7:38 am Ward

What about Public Choice theory? Buchanan and Tullock. Seems like the public might finally be looking at the stimulus bill through this lens.
- on August 19, 2009 at 10:27 am Donald Marron
  
  That’s an important one. I had it as #15 on the second list, but it really deserves to be on the first. As noted, I’ll combine this will Stigler et al. and the economic theory of regulation, which treads some similar ground.
on August 18, 2009 at 2:33 pm pia

dear sir, i need a marketing theory that best suits the business of “fortune-telling” and the likes…
i think you could help me..thank you!
- on August 19, 2009 at 10:29 am Donald Marron
  
  I hope the theory is something like “people will pay for personalized entertainment,” but I worry that it may be “there’s a sucker born every minute.”
on August 19, 2009 at 7:04 am once_in_DC

I think I would lump a couple of categories together under “Rules versus Discretion for Monetary Policy”. This groups together dynamic inconsistency, central bank independence, expectations augmented Phillips curve, and to a large extent Taylor Rules. Since 1979, I think this has guided the behavior of most central banks.

I would also think that there should be some category that includes the work of Gary Becker, Kevin Murphy, and Sherwin Rosen. I think human capital is a very important concept that appears to be taken for granted.

Also, the market for superstars and CE0 compensation are things that are topical now, but I am not sure that they should be classified as top 50 economic ideas.
on August 19, 2009 at 7:10 am once_in_DC

I think I would lump a coupe of categories into one and call it “Rules versus Discretion and the Role of Central Banks.” This would put together dynamic consistency, expectations augmented Phillips Curve, central bank independence and Taylor Rules. Since the late 1970s, this idea has guided the behavior of most central banks.

I also think there should be some room for the work of Gary Becker and Sherwin Rosen. The idea of human capital pioneered by Becker and Mincer has been an important innovation to both labor and growth.

Lastly, more topical, should there be room for the Market for Superstars and CEO Compensation?
- on August 19, 2009 at 10:37 am Donald Marron
  
  Thanks SB (er, once_in_DC). Not sure why your comment got caught in the spam filter — thanks for entering twice. I am definitely in the market for ways to consolidate the ideas.
on August 19, 2009 at 1:42 pm D. Watson

Cheap and easy way to do it: Examine the Nobel winners and write up their contributions.
- on August 19, 2009 at 2:22 pm Donald Marron
  
  Thanks D. That is indeed one of the things I tried. Some Nobel-worthy ideas don’t really translate into this project (e.g., advances in econometric technique), but it did remind me of some important ones.
on August 19, 2009 at 3:07 pm Edward Clarke

Someone might also glean a list not only of theories, but more general but related activities such as the integration of economics and ethics (Henry George). See Foldvary (2008)

http://www.progress.org/2008/fold574.htm
on August 21, 2009 at 11:01 am Javier Ortiz

How about the Miller Modigliani Theorem? Essentially, Firm Value cannot be enhanced via capital structuring, absent the role of taxes. The value of a leveraged firm and the value of an unleveraged firm should be the same.

One can relate this to arbitrage theory as well.

Javier
- on August 21, 2009 at 5:59 pm Donald Marron
  
  Thanks Javier, M&M is a good one. The publisher told me today that they wanted to pass on some of the financial suggestions I made (including Efficient Markets, CAPM, and Portfolio theory) so that they have more room for classic theories (I had omitted Comparative Advantage and Marxism, for example, given their age). So I am afraid there won’t be too much finance. Oh well. Maybe that can be another list.
on August 26, 2009 at 12:03 am Peter Papoofnik

One of my favorite theories is the Theory of Yes Men – essentially having proved that butt kissing in an organization costs that organization. This applies to all organizations – especially government. I also think we need to acknowledge the Peter Principle as a corollary to this theory.
- on August 26, 2009 at 2:24 pm Donald Marron
  
  Those are fun thoughts. I’ve always been impressed with organizations that create an anti-Yes man culture. I’m not sure, though, that I would characterize the Peter Principle (does the name bother you?) as a corollary. Maybe a cousin. After all, the PP starts with a legitimate vision of advancement (let’s promote the good people), while pure Yes Man ism seems much less legitimate. Thanks, Donald
  - on August 26, 2009 at 7:36 pm Peter Papoofnik
    
    The name does not bother me. But adding to your list is the always popular Conspiracy Theory. Many economic decisions- or lack thereof -, and perhaps personal choices are based upon it, or at a minimum influenced by it. One could even say the Goldmann Sachs phenomenon. Much in vogue, and one that cannot be dismissed are the Elliot Wave and Kondratieff Waves/Cycles. Equally more pragmatic are the “principles”, that Harry Dent jr. espouses, and has for years, which are based upon demographics, spending patterns, and technological innovation. In fact, if any sets of theories explain the world economic cycles, his certainly are the most logical, and more important, they are not two-dimensional, and even more important, they are easily explainable. Which gets us to the KISS principle – theory, or fact??. Food for thought.
on August 26, 2009 at 8:39 pm Donald Marron

Wow, I didn’t realize that Elliott Waves were still in fashion.

One friend of mine suggesting including the Jevons theory of business cycles — that they originate in sun spots — as the forerunner of later cyclical theories. Fun idea, but it didn’t make the cut.
- on August 18, 2011 at 12:58 pm Geralyn
  
  Too many copmlinemts too little space, thanks!
on August 28, 2009 at 10:40 am Tim Savage

Althought they wouldn’t stack too neatly, organizing this list in a serial fashion might be helpful.

And while I gather the list is not in order of “importance,” I would conjecture that Minsky and some variant of adaptive expectations ought to be somewhere in the single digits. How many Minsky Moments does an economist need to see in a lifetime to recognize the value of a particular framework?
on December 29, 2010 at 10:52 am Amy

Hello Greg,

I am looking for a theory called Economic Burden Theory in Health Care. I am working on my dissertation on economic impact of small business ower respective to the implementation of one states manadtory health care plan. Do you have any suggestions?

Thank you

Amy
on May 29, 2011 at 3:18 pm Rachel Pfisterer

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on September 28, 2011 at 4:03 pm Patrick Corliss

Thank you, Donald. I was looking for economic theories because I had a feeling that the Western system of Fractional Reserve Banking would be completely upset by any form of Islamic banking or finance.

I really doubt whether Western economists have performed much in the way of empirical studies of possible economic systems without interest probably because they are not well-developed internationally.

Whilst it could be that the West would see such alternative theories as a threat, it is equally possible that they are ignored as utterly non-viable.

To put it another way, a modern mixed economy could tax with an income tax, a capital gains tax or a consumption tax (Goods and Services Tax in Australia) or some combination of these (as we do in Australia). But the framework is basically the same with minor variations.

Would I make sense by asking how many different ‘economic frameworks’ could there be? Barter, laissez-faire, banditry, centralised government?

In what way would you define them? Is it likely that some ivory tower academic will come up with a new ‘economic framework’ that nobody has thought of yet?

The present systems seem to have failed completely.

Regards, Patrick.
on November 17, 2011 at 5:30 am Aenesh A Sengupta

This was really Good…
I am a sixteen year old and i love Economics and doing research in it is my Favourite. Can you please come up with certain economic theories which pertain to the world…
Thankyou
on December 30, 2011 at 8:16 am Top Posts of 2011 « Donald Marron

[…] The 50 most important economic theories and A list of the top 50 economic theories (search-engine optimized titles) […]
on January 3, 2012 at 3:04 pm al/

So where’s Pareto in all this? what did I miss?
on March 6, 2012 at 5:33 am donita

what best economic theory for agriculture?
on August 8, 2012 at 10:56 pm Griffin

Sorry for tagging on here but I’m looking for an economic theory and if anyone would know, it would be you guys. I need an economic theory about how organisations weigh up two competing needs to arrive at a course of action – an outcome that produces the ‘least overall harm’ to the organistion. Does such a theory exist?
on August 8, 2012 at 11:43 pm Patrick Corliss

Hey Griffin

I don’t know that there is a fully-fledged economic theory but there is certainly a moral principle, or ethical standard, of “least harm” which has been called the Utilitarian Approach. Some ethicists emphasize that an ethical action is “the one that provides the most good or does the least harm”.

This is outlined at the Markulla Center for Applied Ethics at the Santa Clara University at http://www.scu.edu/ethics/practicing/decision/framework.html.

Economically, the principle has been applied to making a determination whether to eat meat or be a vegetarian. Use Google to search on “least harm” and you will find a comparison, or cost—benefit analysis, for the choice.
- on August 15, 2012 at 10:18 pm Griffin
  
  Thanks Patrick. Appreciate your help!
on December 7, 2012 at 7:01 am Kristine

Good day sir, I’m currently taking up bachelor of science in economics here at the university of the Philippines, and I’m wondering if in every economic theories, are there also economic models?? or, economic model should be studied separate from the theorems?? because, everytime our professor would ask about examples of econ. theorems, and we can’t answer, she would give an econ. model, and vice versa.

Thank you for spending your time and effort in answering my question. Have a good day.
on January 7, 2013 at 11:45 pm Millions out of work - a crumbling infrastructure - I have an idea! - Page 37 - US Message Board - Political Discussion Forum

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on January 28, 2013 at 7:35 am Eunice

Pls I would love you to help me out, am having a research on impact of economic recession, please, I need a workable n applicable theory that will go wit this topic. Thanks
on January 31, 2013 at 8:11 am Eunice

Please I need help on d theory that is applicable to impact of economic recession on advertising practise
on February 5, 2013 at 2:00 pm Omoby

Please I nid help on how
to evaluate the role of economic theory in the UK construction theory. Could anyone give me an idea or has something to say?
on February 13, 2013 at 4:19 am Grasshopper – Wally & Volstead « A Serious Look At Life

[…] with each other. I would suggest that following the industrial revolution, the complexity of economic theory began to rise significantly, which may – or may not – have improved any understanding […]
on May 9, 2013 at 7:55 am saidat

good day, i am writing a thesis on the impact of cashless banking on a national economy. what theories in economics can i adapt for this write up,thanks
on May 27, 2013 at 10:07 am Yankov Theory of Hipster Asset Equivalence in Ann Arbor Riemannian Manifolds | 1oclockbuzz

[…] rational choice theory and Ricardian equivalence… I have no idea what any of those are (I found them here) but the economic activity in Ann Arbor is poking holes in each of these behemoths of economic […]
on September 9, 2013 at 6:50 am jenelyn

Hello!can i ask ur help?i’m doing term paper regarding vote buying. What economic theory should i use?thanks.
on November 24, 2013 at 10:50 pm matt

hi! i am writing a thesis on the impact of intwernal revenue allotment (intergovernmental grant) to the gross regional domestic product in the Philippines. what theories in economics can i adapt for this write up? pls….,thanks
on November 27, 2013 at 10:12 pm Orongan Nestlie

hi sir,can i ask if what economic theory will fit in my study.. the impact of interest rate to exchange rate..tnx sir,,,it will surely help a lot…
on December 16, 2013 at 9:14 am omega juicer online

I want to to thank you for this very good read!!

I absolutely enjoyed every bit of it. I have you book marked to look at new stuff you
post…
on February 4, 2014 at 8:34 am tsega

Dear all, I found the 50 most important theories on Economics and the discussions very imperative. And am undertaking a research on individual household saving determinants, could you please suggest me a best theory on it?
on March 11, 2014 at 5:39 pm glenjones

Evaluate the impact of unemployment from a macroeconomic perspective and analyse the impact of jobs creation with respect to building sustainable economic growth? any ideas with relation to theories mentioned?