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!)
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.
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.
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.
“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.
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).
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).”
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
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.
Thanks Ben. I’ve been wondering whether to include something else from the Depression era. The “Liquidationists” are one, but maybe something Hooverish.
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.)
[…] The 50 Most Important Economic Theories, by 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.
How about Transactions Costs (Coase)?
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.
What about Public Choice theory? Buchanan and Tullock. Seems like the public might finally be looking at the stimulus bill through this lens.
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.
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!
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.”
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.
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?
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.
Cheap and easy way to do it: Examine the Nobel winners and write up their contributions.
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.
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
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
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.
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.
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
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.
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.
Too many copmlinemts too little space, thanks!
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?
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
Thank you for the sensible critique. Me & my neighbour were preparing to do many research about that. We got a excellent book on that matter from our regional library and most books where not as influensive as your information. I am really glad to see such information that I was searching for a long time.That created extremely glad Smile
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.
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
[…] The 50 most important economic theories and A list of the top 50 economic theories (search-engine optimized titles) […]
So where’s Pareto in all this? what did I miss?
what best economic theory for agriculture?
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?
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.
Thanks Patrick. Appreciate your help!
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.
[…] […]
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to evaluate the role of economic theory in the UK construction theory. Could anyone give me an idea or has something to say?
[…] 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 […]
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
[…] 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 […]
Hello!can i ask ur help?i’m doing term paper regarding vote buying. What economic theory should i use?thanks.
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
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…
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…
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?
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?