Economical Theories

Economy has got different theories, which economists and politicians tend to follow Without moneyjust like in politics where politicians usually are convicted by, for instance the liberal ideology. While the world of politics has got three widespread ideologies – liberalism, conservatism and socialism – the world of economy has got four theories, respectively mercantilism, classic economical liberalism, Keynesianism and monetarism where the latter two have got the most followers in 21 century.

The origins of mercantilism can be traced back to the mid-1400 and was gradually contrived by rich merchants during the following centuries. A surplus on the balance of trade was prioritised just like saving up gold for the public treasury. Thus import was limited and domestic industries protected. Mercantilists found competition dangerous and aimed for monopoly. A big reserve of gold was seen as the road to wealth, and today’s economists’ attitude towards the theory is generally negative since it opposes free trade.

The British political economist Adam Smith was the man behind classic economical liberalism, which became known in 1776. He thought that the wealth of a nation would come from work sharing and specialisation, thus a bigger market would be preferable. Smith was also the mind behind the “invisible hand”, which he thought would regulate the market automatically by balancing demand and supply. Free trade was a necessity and all parts would benefit from it while protectionism, as known from mercantilism, was thought to harm the society. A country’s production is therefore the factor that creates wealth and it is the market mechanism – the “invisible hand” – that regulates it.

However, in the 20 century two new theories saw the light of day. Keynesianism was brought forward in the late 1930s as many had lost faith in the classic economical liberalism after the Wall Street Crunch in 1929 and the following depression. Most importantly it taught that the economy would not regulate itself and the thought was that it had to be controlled by the state by regulating the demand. Thus fiscal policy suddenly became a central means for politicians and central banks started using the tool of monetary policy. Keynesianism is therefore known as demand economy, as it is the total demand in a society that creates wealth.

Newest is, however, monetarism, which seriously got tail wind during the 1960s and 1970s. After having experienced difficulties controlling the economy many economists and politicians went back to the thought that the economy is self-regulating. But, it is guided via a stable development in the supply of money. In general, economical policies are seen as rubbish though monetary policy is accepted to an extend. Instead of fiddling with the demand monetarists focus on supply, which is why this economical theory also is known as supply economy.

After most of the world was sent into a deep recession due to the credit crunch many politicians and economists have returned to Keynesianism trying to increase the demand on the world market, however, the ugly face of protectionism has also influenced the agenda.


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