Cases Where Traditional Economics DoesnÐ²Ð‚™T Work
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Cases Where Traditional Economics DoesnÐ²Ð‚™T Work
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Traditional economics theories Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦.4
Cases where traditional economics doesnÐ²Ð‚™t workÐ²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦Ð²Ð‚¦.6
Economic theory is described as the result of the accumulation of knowledge. It is assumed that the opinions dominant today represent the highest stage of knowledge about the economy as todayÐ²Ð‚™s physics is superior to that of the 19th century. This superiority can be questioned. Theories are always embedded in certain paradigms, worldview and perspectives that change on account of political-economic developments. Thus the neoclassical theory prevailing today is different than the Keynesian theory that marked the decades after the 2nd World War. However it is not inevitably better.
Economic theories are constantly changing. Keynesian theory, with its emphasis on activist government policies to promote high employment, dominated economic policymaking in the early post-war period. But, starting in the late 1960s, troubling inflation and lagging productivity prodded economists to look for new solutions. Economic theories will be debated and tested. Some will be accepted, some modified, and others rejected as we search to answer these basic economic questions: How do we decide what to produce with our limited resources? How do we ensure stable prices and full employment of resources? How do we provide a rising standard of living both for now and the future? This process continues today and its motivating force remains the same as that three centuries ago: to understand the economy so that we may use it wisely to achieve societys goals.
The purpose of this assignment is to provide an understanding of what an economic theory is, describe some cases where limited possibilities of traditional economic theories appear and try to determine why it happens.
2. Traditional economics theories.
The word “economics” is derived from Ð²Ð‚ÑšoikonomikosÐ²Ð‚Ñœ, which means skilled inhousehold management. Although the word is very old, the discipline of economics as we understand it today is a relatively recent development. Modern economic thought emerged in the 17th and 18th centuries as the western world began its transformation from an agrarian to an industrial society [ 1 ].
Economics is the social science that studies the production, distribution, and consumption of goods and services. The function of economic theory, according to the neoclassic theorist Friedrich von Wieser, consists in
“scientifically explicating and developing the content of common economic experience. The consciousness of every economically active human being provides him with a fund of experiences that are the common possession of all who practice economy. These are experiences that every theorist already finds within himself without first having to resort to special scientific proceduresÐ²Ð‚Ñœ [ 7 ].
Economic thought may be roughly divided into three phases:
premodern (Greek, Roman, Arab),
early modern (mercantilist, physiocrats);
modern (since Adam Smith in the late 18th century) [ 9 ].
Major Schools of Economic Theory are the follows:
Systematic economic theory has been developed mainly since the birth of the modern era. The first fully developed economic theory was that of mercantilism, which dealt primarily with the economies of imperialist powers and the underdeveloped nations that they occupied.
The Spanish Scholastics of 14th through 17th century Spain had produced a body of thought largely similar to our modern understanding of economics. Physiocrats, a group of 18th century French philosophers, developed the idea of the economy as a circular flow of income and output [ 3 ].
The Classical School of economic theory began with the publication in 1776 of Adam Smiths monumental work, The Wealth of Nations. This Adam SmithÐ²Ð‚™s work emerged as the standard by which all future literature in the field of economics would be measured. Smith is still regarded as the father of modern economics and the first of the group that historians have dubbed the classical economists [ 13 ].
The Marxist School challenged the foundations of Classical theory. Writing during the mid-19th century, Karl Marx saw capitalism as an evolutionary phase in economic development. He believed that capitalism would ultimately destroy itself and be succeeded by a world without private property.
Keynesian School developed reacting to the severity of the worldwide depression. John Maynard Keynes in 1936 broke from the Classical tradition with the publication of the General Theory of Employment, Interest, and Money. The Classical view assumed that in a recession, wages and prices would decline to restore full employment [ 14 ].
Very roughly speaking, each school of thought differs by the set of economic phenomena they wish to explain, the economic methodology