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Economic Theories

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Economic Theories

What are Economic Theories

Economic theories try to explain economic phenomena, to interpret why and how the economy behaves and what is the best to solution - how to influence or to solve these economic phenomena.

Economics

Keynesian economics

New classical economics

Economic theories try to explain economic phenomena, to interpret why and how the economy behaves and what is the best to solution - how to influence or to solve the economic phenomena. They are comprehensive system of assumptions, hypotheses, definitions and instructions what should be done in a certain economic situation. In principle, the approach to economic theory is divided into positive and normative.

All economic theories used to explain specific situations or problems in the economy of some of its models. These models of economic systems try to explain the situation and solve it using approaches that are typical of the economic theory (eg. Keynesian theory subdued stimulate the economy through government money).

What economic theory is correct, the right one?

There are multiple approaches, schools, hypotheses interact and in many ways and often contradict. Economics is not an exact science and how it develops (during the time), evolves and changes with the theory. It’s about access (like politics or philosophy) - and there never will be the only one true and correct economic theory.

What are the major economic theories?

Classical economic theory - roughly the 50s
Keynesian theory - 1936 to 80s
Monetarism - roughly from the late ’50s
New Classical theory - from the 70s to date
New Keynesian theory - from the 80s to date.

Related terms and methods:

Hypothesis
Keynesian economics
Monetarism
Monetary policy
New classical economics
Normative approach

Related discipline:

Economics
Economics and Econometrics

https://en.wikipedia.org/wiki/Economics#Theory

Theory

Mainstream economic theory relies upon a priori quantitative economic models, which employ a variety of concepts. Theory typically proceeds with an assumption of ceteris paribus, which means holding constant explanatory variables other than the one under consideration. When creating theories, the objective is to find ones which are at least as simple in information requirements, more precise in predictions, and more fruitful in generating additional research than prior theories.^[86] While neoclassical economic theory constitutes both the dominant or orthodox theoretical as well as methodological framework, economic theory can also take the form of other schools of thought such as in heterodox economic theories.

In microeconomics, principal concepts include supply and demand, marginalism, rational choice theory, opportunity cost, budget constraints, utility, and the theory of the firm.^[87] Early macroeconomic models focused on modelling the relationships between aggregate variables, but as the relationships appeared to change over time macroeconomists, including new Keynesians, reformulated their models in microfoundations.^[71]

The aforementioned microeconomic concepts play a major part in macroeconomic models – for instance, in monetary theory, the quantity theory of money predicts that increases in the growth rate of the money supply increase inflation, and inflation is assumed to be influenced by rational expectations. In development economics, slower growth in developed nations has been sometimes predicted because of the declining marginal returns of investment and capital, and this has been observed in the Four Asian Tigers. Sometimes an economic hypothesis is only qualitative, not quantitative.^[88]

Expositions of economic reasoning often use two-dimensional graphs to illustrate theoretical relationships. At a higher level of generality, Paul Samuelson's treatise Foundations of Economic Analysis (1947) used mathematical methods beyond graphs to represent the theory, particularly as to maximizing behavioural relations of agents reaching equilibrium. The book focused on examining the class of statements called operationally meaningful theorems in economics, which are theorems that can conceivably be refuted by empirical data.^[89]

Empirical investigation

Main articles: Econometrics and Experimental economics

Economic theories are frequently tested empirically, largely through the use of econometrics using economic data.^[90] The controlled experiments common to the physical sciences are difficult and uncommon in economics,^[91] and instead broad data is observationally studied; this type of testing is typically regarded as less rigorous than controlled experimentation, and the conclusions typically more tentative. However, the field of experimental economics is growing, and increasing use is being made of natural experiments.

Statistical methods such as regression analysis are common. Practitioners use such methods to estimate the size, economic significance, and statistical significance ("signal strength") of the hypothesized relation(s) and to adjust for noise from other variables. By such means, a hypothesis may gain acceptance, although in a probabilistic, rather than certain, sense. Acceptance is dependent upon the falsifiable hypothesis surviving tests. Use of commonly accepted methods need not produce a final conclusion or even a consensus on a particular question, given different tests, data sets, and prior beliefs.

Criticisms based on professional standards and non-replicability of results serve as further checks against bias, errors, and over-generalization,^[92]^[93] although much economic research has been accused of being non-replicable, and prestigious journals have been accused of not facilitating replication through the provision of the code and data.^[94] Like theories, uses of test statistics are themselves open to critical analysis,^[95] although critical commentary on papers in economics in prestigious journals such as the American Economic Review has declined precipitously in the past 40 years. This has been attributed to journals' incentives to maximize citations in order to rank higher on the Social Science Citation Index (SSCI).^[96]

In applied economics, input-output models employing linear programming methods are quite common. Large amounts of data are run through computer programs to analyse the impact of certain policies; IMPLAN is one well-known example.

Experimental economics has promoted the use of scientifically controlled experiments. This has reduced the long-noted distinction of economics from natural sciences because it allows direct tests of what were previously taken as axioms.^[97] In some cases these have found that the axioms are not entirely correct; for example, the ultimatum game has revealed that people reject unequal offers.

In behavioural economics, psychologist Daniel Kahneman won the Nobel Prize in economics in 2002 for his and Amos Tversky's empirical discovery of several cognitive biases and heuristics. Similar empirical testing occurs in neuroeconomics. Another example is the assumption of narrowly selfish preferences versus a model that tests for selfish, altruistic, and cooperative preferences.^[98] These techniques have led some to argue that economics is a "genuine science".^[99]