Throughout history, numerous economists and philosophers have studied the economic patterns of societies and developed theories to explain how economic systems function. Each thinker has made contributions towards better understanding how and why individuals and societies make particular economic choices. These philosophers have also developed theories that serve as recommendations as to what they believe are the best choices a society can make with respect to its economy.
- The free enterprise system of today reflects various economic philosophies.
- An individual country's societal values and culture can affect its economic development.
- What are the economic philosophies of John Maynard Keynes, Adam Smith, Milton Friedman, and Friedrich Hayek?
- How did these philosopher's ideas contribute to the current U.S. free enterprise system?
Video: Economic Schools of Thought
Adam Smith (1723-1790)
Adam Smith, a Scottish economist and philosopher, is known within the field of economics as "The Father of Capitalism." Smith introduced capitalist ideas such as the importance of the division of labor and worker productivity in his book The Wealth of Nations. Smith also put forth the idea that a free market system succeeds due to mutual self-interest. This concept is called "the invisible hand." Essentially, the invisible hand is an unseen force that helps the supply and demand of goods and services in a free market remain in balance. Smith believed in the concept of laissez-faire, an idea that suggests the government should play a minimal role in the economy. Instead, the invisible hand should be allowed to dictate the flow of goods in the market.
The Wealth of Nations
To read more about the ideas in Adam Smith's book The Wealth of Nations, follow this link.
John Maynard Keynes (1883-1946)
John Maynard Keynes was a British economist whose theories have greatly influenced modern views of macroeconomics as well as the economic policies of governments. Writing during the Great Depression, Keynes argued that the government could employ fiscal and monetary measures to help neutralize to some extent the effects of economic recessions and depressions. Keynes wrote the book The General Theory of Employment, Interest, and Money. In this text, Keynes explained that he believed underspending was a primary cause of financial depression; his solution was for the government to taken an increased role in stabilizing a nation's economy during challenging financial times. These ideas were considered revolutionary; his theories changed people's thinking about role of government in the economy.
Video: Keynesian Economics
View the video below by economics teacher Jacob Clifford for a quick review of the theories of John Maynard Keynes:
Friedrich Hayek (1899-1992)
Friedrich Hayek was an Austrian economist who argued in support of capitalism and free markets. He is known for the school of thought known as Austrian Economics. Two of his most famous books, The Road to Serfdom and The Fatal Conceit: The Errors of Socialism, both attack communist and socialist models and defend free-market capitalism. He was awarded the Nobel Memorial Prize in Economic Sciences in 1974.
Hayek and the Free Market
To read more about Hayek's views of the free market and his opposition to socialist theories, read the following two internet articles.
Videos: Keynes vs. Hayek Rap Battles
View the following two videos to see a modern interpretation of the contrasting views of John Maynard Keynes and Friedrich Hayek.
Milton Friedman (1912-2006)
Milton Friedman was another economist who also supported free-market capitalism; he believed that government intervention in a nation's economy should be limited. In fact, Friedman held that often times the government's or the Federal Reserve Bank's interference in the economy led to economic instability. Friedman supported the Monetarist view of the economy. This view believes that an economy's money supply is important, but that the money supply should be allowed to grow in tandem with the economy itself without the Federal Reserve Bank increasing or decreasing the money supply.
Read the article below to learn more about Friedman's theories.
Video: Four Ways to Spend Money
View the video below to see economics teacher Jacob Clifford demonstration Milton Friedman's claim that "nobody spends somebody else's money as carefully as he spends his own."
Video: Government and the Economy
In this video, Jacob Clifford uses the movie Terminator to talk about the government's role in the economy, as well as the views of Milton Friedman.
Self Check Questions
- Who is the “father of capitalism” and why is he given this title?
- What is Keynesian economics?
- According to the videos, what were the contrasting views of Keynes and Hayek?
- Explain Friedman's views of government intervention in the economy. How are his views demonstrated in Jacob Clifford's video using “The Terminator”?