The economic theory assumes that investors and consumers act as rational and efficient beings, making optimal decisions for their own benefit.
A laboratory test shows that real investor behavior is much more complex than what is typically expected in economic theories.
Consequently, economists and psychologists are researching actual economic behavior instead of relying on normative predictions from models, either in real life or in a controlled setting.
Economists have significantly transformed economic theories. Let’s delve deeper into the study of economic theory and its various forms. Of if you want to learn it from a literal viewpoint, we would suggest you visit this website: aceyourecons.sg.
Economic Theory: What is It, Really?
An economic theory consists of ideas and rules that explain the functioning of different economies. An economist could use theories for different purposes, based on their role.
Certain theories aim to understand the reasons behind specific economic occurrences like inflation and supply and demand.
Different economic theories will provide you with a structure for thinking that assists economists in assessing, comprehending, and predicting the actions of markets, businesses, or governments.
Nonetheless, economists often use theories to analyze the challenges or occurrences they observe to acquire valuable understanding, provide interpretations, and formulate resolutions to issues.
Economic Theory – The Types
1: Market Socialism
Market socialism is an important concept where the public or a collective group holds the means of production, and resources are distributed on the basis on market principles in product, labor, and capital markets.
In regards to present socialist economies, the term is often employed broadly to include systems that closely resemble it in a strict manner (such as the Yugoslav system post-1965 reform) and those that shift from direct control and distribution of producer goods to financial regulations and incentives for central planning (like the regulated market in the Hungarian ‘new economic mechanism’ after the 1968 reform).
2: Classical Economics
Classical economics is a broad term referring to the dominant school of economic theory in the 18th and 19th centuries.
The originator of classical economic theory, according to most, is Scottish economist Adam Smith. But, earlier contributions were made by Spanish scholastics and French physiocrats.
David Ricardo, Thomas Malthus, Anne Robert Jacques Turgot, John Stuart Mill, Jean-Baptiste Say, and Eugen Böhm von Bawerk were other important contributors to classical economics.
Most national economies were administered by a top-down, command-and-control, monarchic government policy framework before the emergence of classical economics.
Many of the most well-known ancient thinkers, like Smith and Turgot, developed their ideas as alternatives to the protectionist and inflationary policies of mercantilist Europe.
3: Malthusian Economics
The Malthusian Theory of Population is based on the sole idea of population growth being in line with the growth of food supply. Thomas Robert Malthus put forward the theory.
He believed that establishing preventive and positive measures may help maintain an equilibrium between population growth and food availability.
The theory of Malthus about population is the most famous theory.
Thomas Robert Malthus published his essay “Principle of Population” in 1798 and later revised some of his conclusions in 1803. The quickly increasing population of England, combined with a flawed Poor Law, greatly disturbed him.
He thought England was close to destruction, feeling it was his moral obligation to alert others about the looming catastrophe. He emphasized the strange difference in the way animals are carefully bred compared to the lack of care in breeding humans.
4: Marxism
Marxism is a brilliant socioeconomic theory that analyzes how capitalism influences the growth, workforce, and efficiency of an economy.
This idea suggests that in a capitalist society, there are two socio-economic classes:
- The bourgeoisie, known as the ruling class, and
- The proletariat, referred to as the working class.
In Marxism, the bourgeoisie holds power over production while the proletariat has the labor that creates valuable economic goods.
This means that the bourgeoisie aims to maximize the proletariat’s labor output while minimizing wage payments, leading to an exploitative economic equilibrium.
Marxist economists suggest that this disparity could result in a revolution.
5: Laissez-Faire Capitalism
Karl Marx and Friedrich Engels created Marxism and ideological and socioeconomic theories. The foundation of communism lies in the belief that all individuals should reap the rewards of their labor, a concept that is unattainable in a capitalist framework characterized by a division between laborers and non-working property owners.
Marx identified the outcome as “alienation,” and he was convinced that by reclaiming control over the products of their labor, one could overcome alienation and eradicate class distinctions.
In Marxism, the capitalist economy is defined by the struggle between social classes, specifically the bourgeoisie and the proletariat, which will lead to revolutionary communism in the end.
Marx thought that the interaction between capitalists and labor was quite exploitative, leading to class conflict. He predicted a scenario in which the working class would overthrow the capitalist class during the peak of the conflict and seize control of the economy.
6: Demand and Supply
The law of supply and demand defines the economic relationship between sellers and buyers of different goods. As per the theory of supply and demand, the price of a product is established by its supply and customer desire.
The basis of this theory lies in the law of demand and the law of supply. The actual market price and volume of products are influenced by the interaction of the two laws.
However, maintaining a high price could negatively impact the way customers view the product. If customers do not see the value in the product despite its high price, they’ll opt for a cheaper option. An increase in price could lead to lower demand, which could lead to a drop in supply.
7: Monetarism
Monetarism’s foundation lies in the Quantity Theory of Money.
The hypothesis is a fact in accounting that necessitates being accurate. It is said that the product of money supply and velocity equals the economy’s nominal expenditures.
This equation is widely accepted as a fundamental principle in accounting.
Speed is what can be argued. Monetarist theory suggests that velocity remains constant, meaning that nominal income primarily depends on the money supply.
Nominal income fluctuations are indicative of shifts in both real economic activity (the amount of goods and services sold) and inflation (the average price of these goods and services).