Economic Approaches

Most teaching time is currently devoted to economic theory. Little time is, however, devoted to letting students understand what economic theory is and what its basic foundations are. Therefore, we propose to always introduce perspectives before teaching the topic specific theory (which are the focus of Pragmatic Pluralism). This will help students become familiar with the core assumptions on which theories are based and prevent them from misunderstanding theories as direct representations of reality. Furthermore, this basic knowledge about the different perspectives helps students make sense of and situate the specific theories that are taught later in the program. Rather than seeing theory courses as an endless stream of seemingly random insights, it allows students to see the bigger picture and connect the dots.

Introducing all the approaches listed below is probably too ambitious for an introductory level course. We therefore advise to select the most important perspectives for the program as a whole. This can be determined by looking at the main topics that are being taught and what the most important perspectives for these are (in Pragmatic Pluralism we give suggestions for this). In a program focusing mainly on financial economics, for example, post-Keynesian, neoclassical, complexity, Austrian, cultural and behavioural economics seem to be the most relevant perspectives and could be selected for the introductory theory course. 

The different economic approaches can be introduced by explaining to students, preferably with the help of examples, what their core assumptions are as well as a brief discussion of how the approach emerged and developed. Who were their key thinkers, what were their main concerns, in what intellectual and societal context did they operate, on which ideas did they build and which did they oppose, and what was their impact on economic thinking and society? In this chapter, we provide a brief description of the core foundations and history of the different individual approaches, accompanied by an overview of materials which delve deeper into them. 

For every approach, we have listed the following key assumptions and practices: (1) its main motivation and goal; (2) what it considers to be the basic elements of economies; (3) what it considers to be the fundamental characteristics of human beings; (4) how it considers economies to change; (5) the research methods it generally uses; and (6) the policy recommendations it typically prescribes.

For the interdisciplinary approaches, coming mainly from sociology, the more normative aspects (1 and 6 in particular) are less clear. One could say that most economic sociological approaches try to emphasize and shed light on the social foundation of the economy and wealth creation, countering individualistic accounts of economic processes. But while normative discussions are more often made explicit in sociology, it is less policy focused and its approaches have less strongly associated values and policy recommendations as approaches within economics do. For this reason, key assumptions and practices 1 and 6 are not listed for social network analysis, the cultural approach and field theory.

While core assumptions of individual approaches are most important, similarities between various perspectives are also relevant. Some have, for example, argued that a number of approaches, such as post-Keynesian, institutional, Austrian, Marxian and feminist economics, collectively also known as heterodox economics, have many core assumptions in common (Lawson, 2006; Lee, 2009). Each of these approaches, for example, thinks of the economy as a dynamic open system of social interactions situated in historical time characterized by fundamental uncertainty, in contrast to the neoclassical assumptions of hyperrational atomistic individuals that with probabilistic risks are able to optimize their utility in formalistically defined market equilibria. Others, however, believe there is more diversity and fewer meaningful similarities between the different heterodox approaches, which makes such broad categories less helpful (Davis, 2008; Dequech, 2007). Irrespective of whom one agrees with, it is important to explore with students how the different approaches relate to each other. Therefore, we encourage to actively discuss the differences and similarities between approaches, especially in more advanced courses.

For each approach, materials are listed that are useful for introducing its core assumptions and history. There are, however, a couple of resources that are useful for introducing the majority of perspectives. Chapter four in Economics: The User’s Guide of Ha-Joon Chang introduces most approaches in a highly accessible and brief manner, providing short descriptions of their core ideas in only one chapter. The textbook Rethinking Economics: An Introduction to Pluralist Economics as well as the online platform Exploring Economics provide more in depth introductions with chapters per approach. 

Approaches
Austrian School
Behavioural Economics
Classical Political Economy
Complexity Economics
Cultural Approach
Ecological Economics
Evolutionary Economics
Feminist Economics
Field Theory
Historical School
Institutional Economics
Marxian Political Economy
Neoclassical Economics
Post-Keynesian Economics
Social Network Analysis
Structuralist Economics

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The Austrian school came into existence during the marginalist revolution at the end of the 19th century in Austria. In opposition to the historical school of economics and Marxian political school, it tried to explain economic reality by deducing it from certain universal principles such as subjective value, spontaneous order and opportunity costs. It argues that individuals always know what is best for themselves. Because the world is complex and even unknowable to a large extent, unconstrained markets are viewed as the best institution as they convey crucial information through price mechanisms. The school became more distinctly organized as such after the Second World War when neoclassical economics went through its formalistic revolution and thus moved further away from the Austrian school; at first the two were very similar.

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Human beings are understood as boundedly rational, because of their limited cognitive capabilities. People use heuristics, such as rules of thumb and mental shortcuts, and are influenced by framing in their decision making. Behavioural economics can be said to consist of two groups. The first group, sometimes also referred to as old behavioural economists, with scholars such as Herbert Simon, George Katona, and Gerd Gigerenzer, propose an alternative framework in opposition to the dominant unrealistic neoclassical one as they argue human behavior follows fundamentally different logics. The other group, also known as new behavioural economists, with people such as Amos Tversky and Daniel Kahneman, tried instead to improve neoclassical economics by analysing departures from its assumptions about human behavior. Recently, new behavioural economics in particular has become influential both within academia and policy making with various ‘Behavioural Insights Teams’. 

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With the rise of capitalism, classical political economy arose at the end of the 18th century to understand how it was possible that through private ownership and markets, goods and services were provided to people. Classical political economists systematically analysed the economy by looking at the tendency of markets to move towards equilibrium and the power struggles between landowners, capitalists and workers. They argued that labour is the source of all value in opposition to physiocracy, with its focus on agriculture, and mercantilism, with its focus on exports, money and extraction. Based on the labour theory of value, most classical political economists argued for free trade and free markets. After being highly influential during the 19th century, classical political economic thought moved to the background of economic thinking in the 20th century.

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Complexity economics is still a very young and developing approach. It has mainly arisen out of the application of methods from mathematics, physics and biology to economic problems. Econophysics, therefore, also overlaps with complexity economics. While only a relatively small number of people engage with complexity economics, its status within the discipline is already quite high, as various prestige scholars and projects focus upon it. Humans are understood as rule followers, as they emulate others and are adaptive to changes in their environment. Not everyone follows the same ‘rules’, and ‘rules’ are not constant over time. Hence, the system is always subject to change.

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The cultural approach is a broad category which is defined by its focus on the importance of culture in how economies work. As such, it pays attention to the meaning people give to things and how these meanings are constructed and influence economic life. The origins of this approach go back to the beginning of the social sciences, with scholars such as Max Weber, Bronislaw Malinowski and Marcel Mauss. It has many forms and names, such as the culturalist approach, cultural economics, anthropological economics, cultural sociology, and constructivist political economy, which each refer to something slightly different. It should however be noted that it does not refer to the economics of the culture industry, which is a topic, not a perspective. One could also argue that a recent development within this broad category is performativity theory, which revolves around the idea that economic ideas do not merely (aim to) describe the world, but actively shape (perform) it. A famous example, mentioned earlier, is the Black–Scholes model, which initially described derivatives markets poorly, but after it changed financial regulations and began to be used by many traders, it came to explain derivatives markets very well (MacKenzie, 2006).

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During the 1970s, ecological economics arose out of the incorporation of material and energy flows in economic analyses. The fact that human economic activity had caused climate change, made it clear that nature had to have a more central place in economics than simply as a resource. Human societies and their economies are embedded in the environment and therefore fundamentally depend on it. Well-being is not reduced to material consumption, but redefined more broadly and socially. Similarly, economic development is not reduced to growth in material production and/or consumption (or monetary / market). Ecological economics often positions itself in opposition to neoclassical environmental economics, arguing that the economy and market should follow the rules of nature and the biosphere rather than the other way around.

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Since the 19th century, evolutionary thinking has had substantial impact on various economic thinkers such as Thorstein Veblen, Joseph Schumpeter, and Kenneth Boulding. More recently there have been attempts to create a more coherent intellectual school called evolutionary economics. Although the impact of evolutionary economics on the discipline has so far been quite limited, it is recognized as providing important contributions and is often considered to be one of the promising approaches for the future. It is argued that people adapt themselves to their natural but also social environment. Based on evolutionary principles such as variation, selection and replication, it tries to understand how markets, firms, and national economies develop.

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Since the 1960s, feminist thinking have had a tremendous impact on the social sciences. However, in economics, this process only started in the 1990s and is still marginal as compared to other social sciences. Nevertheless, feminist economists have made important contributions to the study of unpaid work, well-being, care, households and of course gender. Human beings are seen as products of social interactions, engaging in conflict, competition as well as cooperation with each other at different moments in time. Instead of focusing on the ‘economic man’ who engages only in market transactions, feminist economists study the entire fabric of provisioning, investigating the ways people organize themselves to make a living as interdependent social processes.

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Field theory, sometimes also called the political-cultural approach, is a young approach, at least in its application to economic topics, as its first studies were conducted during the 1990s. One could distinguish two main branches of field theory, one located in the US of which Fligstein is a core proponent, and the other in France in which Bourdieu is central. Fligstein’s version of field theory overlaps significantly with the sociological neo-institutionalist approach. Not to be confused with institutional economics, these two approaches have some links, as both field theory and sociological institutionalism emphasize the importance of institutions, legitimacy and the focus of organizations on survival. The core idea of field theory is that actors (people or organisations) orient their behavior to one another within meso-level social orders, called fields. Fields could be seen as social arenas in which constant games of jockeying for position are being played. In this game, it is necessary for actors to understand both the shared meanings and rules of a field and what others are doing, in order to act themselves. The structure of the field and an actor’s position in it, shape the actor’s interests and way of thinking, but do not fully determine it as the actors have the freedom to pursue their own strategies within fields. 

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The German historical school, together with the partially overlapping American school (or national system), arose as a reaction to classical political economy which argued free markets and free trade create prosperity. Furthermore, it was opposed to the deductive approach which had become dominant within classical political economy, and developed inductive historical and statistical approaches to studying the economy. Human beings were understood as part of cultural and historical specific nations. To understand how people behave and economies work, one thus has to look at the history of a specific place instead of just making assumptions about individuals that are supposed to be universal. Germany was the centre of academic life during the 19th century, in doing so it inspired an English (and French) historical school of economics and institutional economics in the US. But because of the rise to power of the Nazi’s and the Second World War, the influence of the historical school was abruptly ended.

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Institutional economics arose in the beginning of the 20th century out of the desire to make economics an empirical science. Instead of assuming that people behave according to universal and ahistorical principles, they argue that people derive habits and value-orientations from their institutional environment, which they in turn influence through their interactions with other people. The economy is, therefore, studied holistically, instead of looking at isolated individuals and markets. During the interwar period, institutional economics obtained great importance. After the Second World War, however, it was pushed to the margins of the discipline by the dominance of the neoclassical synthesis. Since the 1970s, there has been an attempt, under the name of new institutional economics, to include institutions in a neoclassical framework by thinking about institutions as transaction costs minimizers. This has caused institutional economists, who do not start from neoclassical assumptions, to call themselves original or old institutional economists.

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Marxian political economy arose out of the attempt of Karl Marx to bring together English classical political economy, German Hegelian philosophy and French socialist thought. Humans are understood as creative beings who realize their ideas through their work. Within the capitalist system, the class struggle between workers and capitalists is dominant. The drive for private profit leads to continuous technological advances and accompanying economic instability. Since the existence of Marxian political economy, it has been one of the emblematic heterodox approaches in most capitalist societies and a mainstream approach in socialist economies. Furthermore, it has not only been an influential school of thought in economics – Marxian scholars can be found in every social science discipline.

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Neoclassical economics arose out of the marginalist revolution, during the long depression which started in the 1870s. Neoclassical economics was largely a reaction against Marxian political economy as it argued that markets create harmony, not conflict. Human beings were assumed to be rational and selfish, as their decisions are solely motivated by expected utility maximization based on their given and stable preferences. Mathematically deduced from these assumptions about individuals, an analysis of market equilibria arises. These markets work mainly through price mechanisms; their efficiency as well as their potential failures are analysed. Neoclassical economics quickly became an important strand of thinking after its birth in the late 19th century, and after the Second World War it became the dominant theoretical approach in most countries. The increase in its practitioners gave rise to many different sub-branches of neoclassical economics, such as general equilibrium and neoclassical growth theory. Sometimes neoclassical economics is lump together with neoliberalism. While there is overlap between neoliberal thought and neoclassical sub-branches, such as monetarism and new classical macroeconomics, the two are not the same. Many economists, among which neo-Keynesians for example, use and build on neoclassical (microeconomic) models to oppose neoliberal ideas. To this day, neoclassical economics remains a highly influential approach, in research, policy making, and especially education. Many have been arguing for, or predicting, its demise for already a couple of decades. New approaches, such as behavioural, evolutionary and complexity economics, are often thought to replace neoclassical economics as core of the mainstream discipline. Whether this will indeed be the future remains to be seen.

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Building on older underconsumption theories, Keynesian economics arose during the 1930s in order to explain and develop ideas to solve the economic depression. In doing so, it considerably overlaps with the Stockholm school. Keynesian economics argues that people compare themselves to others and build their decisions partly on rules of thumb and habits, because of psychological reasons and fundamental uncertainty. Effective demand, consumption and investment, therefore depends to a large extent on animal spirits and herd behavior. In the post-war period until the stagflation of the 1970s, it was highly influential, especially its neo-Keynesian (sometimes also called old Keynesian) branch which synthesized Keynes’ ideas with neoclassical microeconomics, this period is therefore often called the neoclassical synthesis. After the 1970s, post-Keynesians (sometimes also called Cambridge Keynesians), who radically broke with neoclassical economics as they constructed a fundamentally new approach to economics with Keynes as main inspiration, became organized as a distinctive heterodox approach. At the same time, new Keynesians introduced imperfections in then influential neoclassical models of new classical macroeconomics, and in doing so came to Keynesian (pro government intervention) rather than new classical (free market) conclusions (but theoretically they are furthest removed from Keynes’ own work and thinking).

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Social network analysis originated in the beginning of the 20th century in sociology, but has only been systematically applied to economic topics since the 1980s. In doing so, it helped initiate a revival of economic sociology. More recently, it has inspired economists to focus on networks, done often under the name “the economics of networks”. Social network analysis also has some overlap with complexity economics and interacts with the broader academic field of network science. Social network analysis applied to economic topics looks at how economic life is embedded in social life. Instead of analysing economies as if individuals operate rationally as atoms in markets, the focus lies on social relations and structures in which people interact with each other. As such, social network analysis neither focuses on individuals and their characteristics (such as preferences and rational or irrational behavior), nor on collectives (such as classes and nations). Instead it looks at how networks are structured by analysing the relations (also called ties, edges or links) between the nodes (which can be people, organizations or things). 

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Structuralist economics emerged in Latin America during the 1950s out of a quest to better understand global inequality and how developing countries could grow. The Ricardian and neoclassical theories of comparative advantage did not seem to be able to explain why many developing countries experienced so many difficulties growing. While the use of military force had previously been crucial for colonial oppression and economic extraction, structuralist economists tried to understand how unequal development could continue through more invisible processes. A key insight economists, such as Raúl Prebisch, developed was that the economic structures of countries, such as sectoral specialization patterns, technological capacities, and the institutional arrangements concerning labour, financial and international commodity markets, were crucial in these matters. Unequal economic development is possible because of contrasting international economic structures, with a hegemonic industrial centre and a dependent agricultural periphery. A key source of inspiration for structuralist economics was Keynesian economics, but many other strands of economic thinking such as historical, institutional, neoclassical and Marxian economics, also influenced the approach. There is also overlap with other approaches, such as world system and dependency theory, which also emphasize unequal global economic relations, although they build more on Marxian ideas.

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Davis, J. B. (2008). The nature of heterodox economics. In Ontology and Economics (pp. 95-104). Routledge. 

Dequech, D. (2007). Neoclassical, mainstream, orthodox, and heterodox economics. Journal of Post Keynesian Economics, 30(2), 279-302. 

Lawson, T. (2006). The nature of heterodox economics. Cambridge journal of economics, 30(4), 483-505. 

Lee, F. (2009). A history of heterodox economics: challenging the mainstream in the twentieth century. Routledge. 

MacKenzie, D. (2006). Is economics performative? Option theory and the construction of derivatives markets. Journal of the History of Economic Thought, 28(1), 29-55.