An economy is a collection of production and
consumption processed that are all working towards solving the central economic problem. The problem is that we only have access to
a finite amount of resources, but the potential for human consumption of goods and services
is pretty much limitless. This is the foundation of economics, every
study, every paper, every theory, economic policy, or experiment is ultimately an attempt
to find a solution to a problem, that by its very nature, has no solution. Economics is considered a social science,
and although some other scientists from more “rigorous” fields don’t always welcome
it into their little club, it still follows the same processes to explore the world around
us. And, as with science, or anything that is
extremely complex for that matter, there are disagreements between practitioners at all
levels of academia and throughout the entire history of the subject. The economic schools of thought are very broad
ways that economists are clumped into basic groups. Now the first thing to know about all of these
schools of thought is that they all agree with one another on most issues. In the same way that two physicists will obviously
agree with one another that and object at rest will remain at rest, but might disagree
about string theory. Two economists will obviously agree that there
are opportunity costs for every unit of production, but they might disagree on the long term implications
of a consumption tax. The reason you are much more likely to hear
about disagreements in economics rather than physics are threefold. One, the foundation of economics is an unanswerable
question, so there is a certain element of philosophy and morality in this academic pursuit,
no matter how much economists attempt to sterilize it with mathematics. Two, economies are really hard to experiment
on. If there is some radical new theory about
effective taxation, the only real way to see if it will work is to get that tax law passed
in a country and study the results. If the experiment doesn’t work, then oh
well you just destroyed a nation. This difficulty in testing theories also means
that a lot of fringe ideas are hard to disprove in the same way they would be in a chemistry
lab. And three, economics is something we all feel
day in and day out. The economy impacts our financial situations,
our governments, retirements, environments, crime rates, and basically anything else that
is going to make news headlines. As with anything that people are invested
in they form opinions around it. And those opinions are held by everybody from
nobel laureate career economists to that crazy guy advocating for a seed-based economy. If this contention wasn’t enough then there
is one other issue that makes these schools of thought difficult to deal with, and that
is that there are no strong borders between them. There are plenty of economists that agree
with some of the principles of one school of thought and then disagree wildly on some
other area’s. Which is actually a good thing. But more on that later. For now, to try and make sens of this wild
world we are going to look at three major schools, Classical, Austrian, and Keynesian. To show the differences between these schools
we are going to look at the way they suggest solving the central economic problem in key
areas. What they suggest the role of government is. What do they think the role of the individual
is. What they propose doing in an economic crisis. And finally what is the key to delivering
a wealthier happier economy? [ INTRO AD – START ] [ INTRO AD – END ] Now economies have always been a thing, and
before people even knew what they were doing they were attempting to satisfy their desires
with the limited resources they had available to them. This went on for an extremely long time and
great empires rose and lived and died all harboring economies that they didn’t think
to specifically study. Everybody from Aristotle to Jesus presented
an answer to the question, but nobody had yet thought to ask what the question was. (insert jeopardy) Can I have how to satisfy
unlimited demands with limited resources for 1,000 alex? --- (“that is correct”) this all turned around though in the 18th
century with a man called adam smith, who gave birth to economics and formed the foundation
of what is now known as the Classical School The classical school of economics, as the
name would suggest was the first incarnation of economics as a separate academic pursuit,
distinct from finance, governance and philosophy. The early practitioners of economics, namely
adam smith started studying and writing about how the world was operating to increase the
wealth of nations. They found that the world at that time was
ruled by theory that went on to be known as mercantilism. Which could realistically be it’s own economic
school of thought, had it not been so fundamentally flawed. This system relied on economies just desperately
trying to hoard as much gold as they could, by either exporting more than they imported,
mining more of it within their borders or colonies or by plundering it through hostile
conflict. Now we have explored mercantilism and adam
smith before on this channel, so if you want more insight on that, go and watch those videos. But the big takeaway here is that mercantilism
was realistically, just fine for most nations throughout history. These nations were extremely basic and their
economic success primarily revolved around the strength of the harvest in any given year,
and later turned into how many colonies they could claim. More or less it was a zero-sum game, if someone
or some country was getting richer, it was because someone else was getting poorer, and
mercantilism perfectly mirrored this reality. Having a perfectly run fiscal and monetary
policy would not have meant very much to the overall prosperity of these types of very
basic nations. It would have been like putting nitrous on
a horse-drawn carriage. It wasn’t going to do anything and it would
probably just make everybody very confused with its needless complexity. This was all starting to change though when
adam smith was putting pen to paper to write the wealth of nations. The first steam-powered factories had sprung
into existence and for the first time ever, wealth was not been grown or mined it was
being created en masse. This was a chance for all people to become
wealthier " ."== Now this sounds like some commie nonsense
but what smith was trying to say here is that there is an optimal distribution of wealth
creation for all members in a society. It definitely should not be equal, but it
shouldn’t be a swelling peasant class holding up a tiny nobility either. The Reason for this was not some virtuous
quest to feed the poor, but rather it was to develop markets and divide labor. To show the importance of this Smith used
the example of a pin. A small sharp poky metal stick, which sounds
like an extremely simple product. But if a single worker was to wake up in the
morning and dedicate themselves to making 1 single pin they probably wouldnt be able
to do it, because they would need to mine the materials, refine the steel, forge it,
and sharpen it all to make 1 pin. Of course, if all of these tasks were done
by separate workers, then they could just focus on their role and producing pins would
be a lot easier. So much so that there would be an abundance
of pins that could then be shared around all of the workers that contributed to this process. Now this example of one person making a pin
sounds silly to us, but for a long time this was effectively how economies operated. Feudal villages would produce pretty much
everything they needed and even individual households would be more or less self-sufficient. The reason why people did this is that there
was no real alternative, village markets were basic at best and most peasant workers didn’t
even receive an income as you or I might know it. But, by moving into factories and earning
a cash wage individuals now had the ability to make purchases, which gave the entire economy
the ability to specialize. Immanuel Kant a legendary philospher of all
people may have said it best in his 1785 book the Groundwork and Metaphysics of Morals. Where he quoted that. “All crafts, trades and arts have profited
from the division of labour; for when each worker sticks to one particular kind of work
that needs to be handled differently from all the others, he can do it better and more
easily than when one person does everything. Where work is not thus differentiated and
divided, where everyone is a jack-of-all-trades, the crafts remain at an utterly primitive
level.” So with this new understanding of how to build
a better world, these were the prescriptions of these early philosophers and financiers
turned economists. Markets should be free because the more that
people are allowed to trade freely with one another the more they can specialize and count
on others to specialize to deliver all of the goods that they need. Nations should also do the same thing, stop
trying to hoard gold and instead realise who does what well, once this is known trade amongst
other nations to to increase wealth. Production is the most important part of the
economy and great efforts should be made to making this more efficient so that more wealth
can be created from turning raw materials into complex products. Government intervention in free markets should
be limited exclusively to making sure that contracts are upheld and fraud is not allowed
to take place. And of individuals, classical economics assumes
that everybody buying and selling and working is perfectly rational and will always make
the most logical decision possible to forward their own selfish interests. More or less classical economics argues that
we can all work together to make the world a better place by being extremely selfish. I guess Gordon Gecko was a classical economist
(cutaway clip) Now these theories worked very well, and when
applied the age of industry they were a guiding force behind the development of jobs, companies,
and markets as we know them today. But these ideals weren’t perfect,and now
that the foundation was set, the great thinkers from around the world. The first to really shake up this new way
of thinking were a collection of economist from vienna who went on the form the, Austrian School The Austrian school shares a lot of similarities
with classical economics and most of the economists that have now gone on to define this field
didn’t even know that they were, in the same way, adam smith didn’t know he would
create the academic discipline of economics. Rather what these early academics were trying
to do was fix up some loose ends of classical economics primarily by realizing that an economy
wasn’t some amorphous blob of production but rather it was a collection of individuals. With this, these scholars started adding in
more allowances for how individuals acted, and specifically how they valued things. Carl Menger was the father of the Austrian
School of Economics and is credited with contributing to the theory of Marginal Utility along side
his student Friedrich von Vieser. The theory of marginal utility was an extremely
important contribution to economics as a whole. It argued that goods provide a utility, but
their utility is decreased for every extra unit of that good there is. For example the extra utility someone gets
from having 1 kettle as opposed to zero kettles is pretty big. Suddenly they can boil water and make tea
or coffee where they wouldn’t have otherwise been able to in the past. Going from 1 kettle to 2 kettles also has
its benefits, you can now boil more water at any given time, and if one breaks down
you have a spare ready to go for redundancy ready tea and coffee making duties. But 3 kettles 4 kettles 20 kettles? Th ere is only so much tea and coffee a household
really needs and eventually, these items start taking up so much space that people want less
of them meaning at extreme levels an extra item can have a negative marginal utility
value to the consumer. This ran contrary to the classical school
of economics which simply advocated for making as much stuff as possible and then letting
the free market decide what went where. Now again this might sounds obvious to us
now, but you have to remember 2 important things. The first was that this theory was a huge
contribution towards solving the central economic problem, sure they still had unlimited desires
and only limited resources in which to fulfil those desires, but they added the Asterix
that actually, some specific desires can be over satisfied so an economy must avoid that
at all costs so that there is more leftover to satisfy other desires that haven’t been
met yet. The second was that this was the first inkling
of economic theory adapting to a world of genuine sustained growth. Before the 1800’s the idea that anybody
could have too much of something was pretty bizarre, but with factories all across Europe
working day and night to produce all manner of everything, the decisions that everybody
was making was starting to shift from, can I afford this, to, would I rather have this
or that. This deeper understanding in a world that
was becoming more and more plentiful eventually culminated in the Subjective Theory of Value. This theory argues that an item is not worth
the sum of the materials and labor that go into making it, but rather it is worth a function
of how important it is. For example, a worker could spend their entire
life digging the deepest hole in the ground the world has ever seen, but that hole is
going to have less actual value than one that was dug 3 feet deep before hitting a solid
gold nugget. Or as it relates to industry, a factory could
build car out of titanium and sure it would probably be better than a car made out of
steel, but it would take 10 times the manhours and 10 times the costs of materials to make
that car, and it might be 20% lighter and stronger. Now since people are not going to pay 300
thousand dollars for a titanium edition Toyota Camry, these types of subjectively inferior
goods don’t get made. Who is it that decides that these goods dont
get made? Rational consumers. So suddenly the Austrian school of economics
added a second role to the free market, not only was it a medium of exchange that let
people specialise and produce more, it also decided what it is that would be produced
and what it is that would not. Suddenly, the most important thing in the
world was not how much you could manufacture, but how carefully you could decide what to
manufacture. Consumers were no longer units of labor, no
no, consumers were now king. Austrian economics is today seen by most conventional
economists as a very fringe idelology for a few reasons. The first reason is because as we will see
soon, consumers can be really dumb and irrational, it’s no good to just give them free rein
and hope for the best. And secondly it is very controversial because
it relies pretty heavily on conjecture rather than rigorous mathematics and statistics. This makes alot of their theories non-falsifiable. Which is plain English means impossible to
prove wrong, which sounds great, but in reality it just means that because there are no rigorous
models drawn or prescriptions set it’s very hard to say this outcome here proves something
contrary to your theory. Now because economics is a science, it is
extremely important that all theories have robust framework for being tested. You write a hypothesis, you conduct an experiment,
measure the results and record them. If you can’t do that it is not science. For this reason people like Paul Krugman have
noted the Austrian School more as a branch of philosophy rather than economics. Ouch. Outside of academics, the Austrian school
remains very popular in part because of it’s simple logical nature, in part because it
tends to support free-market principles, in part because it does away with alot of the
modeling and mathematics that can make economic boring and in part because it contributed
a lot to our modern understanding of how to world works. Just because modern academics snob this school
and its pundants does not mean that its contributions were any less important. Today things like marginal utility, consumer
choice and opportunity costs are the first things that students will learn in their introduction
to economics classes. But there were still ways to improve upon
this and turn these understandings, and insights into a workable framework for how to run a
nation, outside of let people do what they do. Which is where John Maynard Keynes Came in. If a regular person has heard of any economists
it would be Keynes, he is touted as the most influential economist of the 20th ceturary
and has today defined the way that almost all governments around the world manage their
economic affairs. His contributions were plentiful and too extensive
to explore in a single video but one of that was of particular importance during his lifetime
was the introduction of countercyclical fiscal policy. Since the role out of classical economics
in the wealth of nations, economies had become many many times more complex. Factories, markets, advanced financial systems,
consumer debt, public corporations were all now commonplace and the ebs and flows of national
prosperity were no longer determined by the harvest but rather by the business cycle. Around the early 1800’s economies started
experiencing ups and downs that could not be explained exclusively by outside forces,
but rather by the sentiment of the people within the nation. Since consumers were the center of modern
economies their feelings impacted the economy as much as if not more so than real forces
like natural disasters, wars, or plagues. This again shows that this school of economic
though was a product of it’s time, keynes started writing his most widely recognized
work, “the general theory of employment interest and money” during the great depression. Now these types ups and downs could be very
unsettling and could impact the health of an economy in the long term. For example, who would want to invest in a
company if they knew a devastating recession was going to come about every ten years which
could send that business bankrupt? Well nobody, but businesses needed funding
to continue to grow the economy. The solution was to try and smooth out this
business cycle by artificially influencing the spending of consumers. Nations would do this through fiscal policy,
which called for taxing people more and spending less government money during economic booms,
and then taxing less and spending more during an economic downturn. Higher taxation effectively forces people
into having less money which means they can’t go quiet as crazy with their spending and
taking on of debt making the good times not quiet as crazy, conspicuous and gatsby esque. On the flipside when that tax is lowered and
the government starts spending lots of money well suddenly people have a whole lot of extra
money in their pocket that they can go out and spend to make the economy not as terrible
during a recession. Keynses plan was not to completely remove
the business cycle, but make it go from looking like this, to like this. Now the benefits of this are kind of hard
to see, sure the bad times are not as bad but the good times are not as good, so what
gives? Well the argument is that by making both of
these less severe, the economy was more consistent and people could plan for long term growth,
rather than just surviving the next catastrophic downturn. The Austrian school hated this idea because
it was tampering with the free market which would limit efficiency. This disagreement often saw Keynes at odds
with his Austrian contemporary Friedrich Hayek culminating in some fantastic debates and
a cringe-inducing rap battle which you should definitely go and watch after this. Now you can see keynsian economics in practice
today. In response to the economic fallout of the
coronavirus governments around the world have dropped their taxes and rolled out massive
government stimulus packages, all in an attempt to make the downturn a little less severe. The one critique that most modern economists
give to this practice is that governments are very quick to roll out the keysian fiscal
stimulus during a downturn, but normally forget about the higher taxation and lowered spending
during the good times. In the next video Economics is a very diverse study that is
founded on an unanswerable question. By its very nature it is going to cause some
disagreements, conflicting ideologies and yes even some controversy. Now this is not that much different from any
other scientific pursuit, if you ask any group of scientists about a new theory in their
respective field they are ging to have different opinions on it, its just that the opinions
of economists garner a lot more attention because in many ways it is us who are being
experimented on. These three schools of economic though, classical,
austrian, and keysian agree on far more than they disagree on, but as with any competing
ideologies they are defined by their differences. Now so far as we have seen these have been
more of an evolution on one another rather than a revolution, which seques us nicely
into the next video in this series... Marxism. But for now at least remember that amongst
all of these disagreements economists are still all working towards a common goal, solving
the central economic problem. They agree on far more, then they disagree
on, and one of thing that everybody can agree on is the importance of investing in the future. Fortunately, this is made a lot easier....
right, i mean i guess i would expect this take from a keynesian, props for at least mentioning austrian economics, i would say 5/10.
lots of things were omitted that he should've included, like ABCT if he was going to talk about the business cycle...
also the characterization that Austrians assume all "consumers" or rather individuals are rational isn't true either, they believe individuals act to achieve an end, not that its necessarily rational. its just more rational than having a small group of individuals (power elite) try to plan the economy.. like including krugmans take is the cherry on top, calling austrian economics not an economic school of thought... he should've included krugman to this day refuses to debate an austrian, even after intense scrutiny.
like for me its obvious, central planners aren't trying to "plan" for everyone they're trying to loot everyone and save themselves. like anyone who gives more than a seconds thought about recent economic crises would question Keynesian economics, some people just want to remain ignorant i guess i don't know. I find keynesians generally underplay the potential for avarice and special interest inherent in central planning while they ignore recent events. like why is bitcoin even a thing. why is gold or silver so expensive today.... care to explain that? also i wish he included rothbard and mises.
He gets a bunch of basic shit wrong.
Claims pre-industrial societies were zero sum.
He heavily implies that political policy determines economic law. That is, economic law is subject to political variation and is not based on objective rules.
Claims that subjective value is the comparative value of goods rather than a personal relative valuation.
Claims that rational actors must be logical.
Claims that the benefit to trade is due to specialization rather than the probable benefit of trade. Specialization on it's is not sufficient.
Ignores Austrian business cycle theory.
And other stuff.
I'm not sure where he found that pronunciation of mercantilism.
He comes off as someone who doesn't quite know what he's talking about.
Economics Explained is terrible. Over on AskEconomics we now try to delete every reply that refers to it. The people who make it have no idea even about Mainstream Economics. Below esdraelon lists some of the problems in this video.
EE is way further central than even Keynesian.