Major theories of Economics

Theories of economic behaviour and performance, which have developed along the lines of classical concepts, Marxist ideas, or a combination of both, drive the study of economics. Various models were established as a result of this process, each attempting to explain economic phenomena such as wealth generation, value, prices, and growth from a unique intellectual and cultural perspective, with some variables and relationships being more essential than others. Within the aforementioned historical context, economics has followed a path marked by a plethora of doctrines and schools of thought, each of which can be traced back to a thinker or thinkers whose thoughts and theories form the doctrine’s foundation.

Classical economics.

Classical economic ideology arose in the nineteenth century as a result of Adam Smith’s work. It claims that if the market system is left alone, it will ensure that economic resources are fully utilised.

Classical economists thought that, while economic and political events caused occasional deviations from full employment, automatic changes in market prices, wages, and interest rates would bring the economy back to full employment.

Two maxims define classical economic theory. For starters, it assumes that each person maximises his or her preference function under certain limitations, with preferences and constraints assumed to be constant. Second, it implies the presence of interdependencies between all persons’ acts, as embodied in markets.

These two characteristics will affect resource allocation and income distribution under the assumption of perfect and pure competition. That is, they will control demand and supply, production allocation, and social organisation optimization.

Keynesian economics 

Keynesian economics is a theory of economics that is based on the

Multiple macroeconomic theories and models based on Keynesian economics explain how aggregate demand—all of an economy’s spending—influences phenomena like economic output and inflation.

The core notion of Keynesian philosophy is that aggregate demand does not intrinsically equate to an economy’s productive capability, but rather is determined by a number of public and private factors. As a result, Keynesian economic methods promote a system in which changes in aggregate demand can affect employment and output but not prices.

Marxism 

Marxism is a socioeconomic theory that examines the effects of capitalism on economic development, labour, and productivity. According to this idea, a capitalist society is divided into two socioeconomic classes: the bourgeoisie (ruling class) and the proletariat (working class). The bourgeoisie controls the means of production in Marxism, whereas the proletariat owns the labour that generates valuable economic goods. The bourgeoisie’s objective is to extract as much work as possible from the proletariat while paying as little as possible in wages, resulting in an exploitative economic equilibrium. According to Marxist economists, this inequality could lead to revolution.

Monetarism 

Monetarism is a macroeconomic theory that advocates for governments managing monetary supply to ensure economic stability. Monetarism’s core principle is that the total amount of money flowing in an economy is the primary determinant of its growth. The quantity theory of money, which is also an element of Keynesian economics, states that the money supply (M) multiplied by velocity (V)—the rate at which an economy exchanges money each year—equals the nominal expenditures of an economy. As a result, the money supply influences employment, inflation, and output rates.

Institutional economics 

Institutional economics is concerned with how institutions alter and adapt, as well as how these changes affect economic systems, performance, and outcomes. Understanding the evolutionary process and the function of institutions in determining economic behaviour is the subject of institutional economics.

Constitutional economics 

Constitutional economics is a research program in economics and constitutionalism that aims to explain the reason behind people choosing “different sets of legal-institutional-constitutional laws that govern economic and political agents’ choices and activity.”

Demand and supply of goods and services 

Supply is the basic concept of economics which is the record of the total number of specific goods or services available for the consumers. 

Demand is referred to as the consumer’s desire to purchase a commodity or we can say that consumer’s willingness to pay for the particular commodity. All other factors remain constant demand decreases when there is an increase in the price of goods and services and vice-versa.

Conclusion 

An economic theory is a collection of concepts and principles that describe how various economies work. An economist may use theories for a variety of goals depending on their role. Some theories, for example, seek to explain why certain economic phenomena, such as inflation or supply and demand, occur. Other economic theories may give a framework for economists to evaluate, interpret, and predict financial market, industry, and government behaviour. Economists, on the other hand, frequently apply theories to the issues or events they see in order to gain helpful insight, provide explanations, and generate possible solutions to problems.