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  • Welcome to Crash Course Economics. I'm Adriene Hill. And I'm Jacob Clifford.

  • Now, believe it or not, we actually read many of your comments on YouTube!

  • First! Some are productive, and others, not so much.

  • This guy looks like Mark Cuban, but not as attractive or rich.

  • We've noticed that some people are disappointed we haven't covered the different economic ideologies.

  • You're ignoring the Austrian School! What is this Keynesian trash?

  • Well guess what, today we're gonna talk about other schools of economic thought.

  • [Theme Music]

  • To understand these economic theories, we're gonna have to jump into a little bit of history.

  • In 1798, a British economist named Thomas Malthus argued that population growth would outpace food

  • production, so, eventually, humans will run out of food and starve.

  • You wonder why some people call economics the "dismal science..."

  • Well, Malthus was wrong. Dismally wrong.

  • The world population has grown from one billion in his time to over seven billion today.

  • And it turns out that the famines we have seen are largely manmade disasters

  • that have very little to do with our ability to produce food.

  • But Malthus was writing at the beginning of the Industrial Revolution;

  • he didn't factor in advancements in technology,

  • agriculture production, or transportation.

  • So with the information he had, he was kinda right. But he was still wrong.

  • Economic theories are constantly being proven, disproven, and revised. The problem is,

  • when these theories are wrong, millions of people can be adversely affected.

  • Take Malthus. Some scholars combine his ideas with those of Charles Darwin and concluded that giving

  • assistance to poor people and social programs like welfare are actually immoral.

  • This is called Social Darwinism, and it's completely wrong.

  • Now, economics is not an exact science. It aims to draw conclusions about human behavior

  • without the benefits of labs or perfect control groups. Economic theories reflect different attitudes about

  • human nature and those are likely to change over time. Let's go to the Thought Bubble.

  • The founder of modern economics was a Scottish philosopher named Adam Smith.

  • In 1776, his book, The Wealth of Nations, was published.

  • It was an organized discussion about production, markets, and economic theory.

  • And it was tremendously influential. Smith introduced the idea that a person

  • following their own self-interest could end up serving the common good.

  • He also advocated free trade. Many countries at the time

  • had heavy tariffs which protected their domestic manufacturers at the expense of trade.

  • A generation later, British economist David Ricardo expanded on Smith's ideas by introducing

  • the theory of comparative advantage: the idea that two people or countries can both benefit from trade,

  • even if one of them can produce more of everything.

  • When both focus on what they're best at and then trade, everyone benefits.

  • Anyway, the field of economics grew, advancing ideas like private property and free markets

  • and then along comes the Communist Manifesto in 1848. Rather than examining individual behavior,

  • German philosophers Karl Marx and Friedrich Engels looked at economic classes and argued that

  • history was explained by the conflict between workers and property owners.

  • This process would inevitably lead workers to overthrow their bosses, ushering in a new

  • stateless and classless system called communism. Marx followed this up with Das Kapital.

  • Political movements spawned by Marxist economics challenged Adam Smith's view that

  • individual self-interest serves the common good.

  • The end result was two main camps: free market capitalism supporting private property,

  • and communism, advocating collective ownership of the means of production.

  • Thanks, Thought Bubble. Despite Marx's challenge, market-based economic theory continued to dominate

  • through the end of the 19th century with contributions from French, British, and American economists.

  • This body of thought is called classical economics, and it was embodied in a book called

  • Principles of Economics, published in 1890 by English economist Alfred Marshall.

  • Marshall organized into fine concepts we still use today,

  • like supply and demand and marginal utility, which we're gonna get to soon,

  • but as capitalism was expanding around = the world, Marxist movements were, too.

  • By the early 20th century, this battle for hearts and minds, along with political and social unrest in Europe,

  • led to the establishment of the Soviet Union in 1922.

  • As communism was maturing in the Soviet Union, the Great Depression crushed the market economies

  • of the world's richest countries.

  • It also dealt a devastating blow to classical economics. The theories of Smith and Marshall

  • didn't have much to say about how something like this could happen or how to fix it.

  • The British economist John Maynard Keynes proposed new answers in his 1936 book,

  • A General Theory of Money, Interest, and Employment, which basically launched the field of macroeconomics.

  • Along with John Hicks, Keynes argued that market economies don't self-correct quickly

  • because prices and wages take time to adjust.

  • They claimed that during recessions it is necessary for the government to get involved using monetary and

  • fiscal policy to increase output and decrease unemployment.

  • Keynes wasn't supporting communism, but his views directly challenged classical economists,

  • who saw government intervention as universally harmful for the economy.

  • Now, eventually, Keynesian economics became part of mainstream economic theory.

  • See, I told you, economic theory changes over time!

  • And all it took in this case was a catastrophic global depression.

  • Keynes' ideas, combined with the ever-present Marxist critique, opened the door to more and more government involvement.

  • Since the Great Depression, many nations have pursued a political and economic ideology called socialism,

  • although socialist ideas and policies have been around since the 19th century.

  • In most cases, these economies allow for private property and markets,

  • but also have government ownership of industry,

  • significant regulation, and big public programs like universal health care.

  • The Scandinavian countries, like Norway and Sweden, they love these socialist policies.

  • Now, the US has rejected many of these socialist ideas,

  • but the US government, or at least the economists that advise politicians,

  • are clearly in favor of using Keynesian economic policies when the economy is in trouble.

  • But as socialism and Keynesian economics expanded, other groups continued to forcefully push

  • for private property and free markets. The most vocal was often the Austrian School of economics.

  • They also have a very vocal fan base in our comments section. Friedrich Hayek and Ludwig von Mises,

  • who were, unsurprisingly, from Austria, argued that heavy state involvement

  • has never produced the results it promised, and that regulation and government tinkering

  • is actually a problem, not a solution.

  • Rejecting nearly all forms of fiscal and monetary policy,

  • the Austrian School today argues the economy's just too complicated to manipulate.

  • This backlash against government intervention was carried forward in the US by Milton Friedman.

  • Like the Austrians, Friedman advocated privatization of many functions that have been assumed by government,

  • famously proposing school vouchers and deregulation of the economy.

  • He also concluded that the Great Depression could be blamed on botched monetary policy,

  • rather than some inherent fault of capitalism.

  • The theories of Friedman and his followers at the University of Chicago came to be called

  • the Chicago school of economics.

  • Friedman's views got a huge boost in the 1970s. At that time, inflation soared while output stagnated.

  • Remember stagflation? A combination that Keynesian economics had trouble reconciling.

  • Some macroeconomists drew on the insights of the Chicago school

  • to claim that these events disprove Keynesian economics.

  • Building on the ideas of Friedman, another theory of economics gained traction: monetarism.

  • Whew, Stan! So many -isms!

  • Monetarists focused on price stability and argue the

  • money supply should be increased slowly and

  • predictably to allow for steady growth.

  • At about the same time, another theory called

  • supply-side economics, or sometimes called trickle-down economics, entered the mainstream.

  • Supply-side economists advocated deregulation

  • and cutting taxes, especially corporate taxes.

  • Mainstream economics today takes ideas from both

  • classical economics, including monetarism, and Keynesian economics.

  • This unified theory is sometimes called the new neoclassical synthesis,

  • and, yeah, economists are bad at naming things, too.

  • But debates about how and when to implement policies continue,

  • and, remember, these are more than just intellectual classroom spats.

  • These policies affect millions of people.

  • The different reactions to the global recession in 2008 are a good example of this.

  • Some economists suggested using Keynesian policies, namely deficit spending.

  • Other economists suggested the more classical approach of reining in excess spending

  • to reduce budget deficits, something called austerity.

  • Believe it or not, economists are still fighting about which of these policies is the right approach and when to use them.

  • We can all agree that Keynes was right about at least one thing: when he said,

  • "Ideas shape the course of history."

  • So, where are all these economic ideologies and theories gonna take us in the future?

  • Most countries that once supported strict communism like China and Cuba have moved toward capitalism.

  • The only country that's really sticking with it is North Korea,

  • but they're too isolated to be a real test case for an economic system.

  • But this doesn't mean that Marxism is dead.

  • Many capitalist countries have adopted socialist looking programs.

  • It appears the world's economies are converging towards the middle.

  • But in the end, it turns out it's just really hard to predict the future,

  • especially when we're talking about something as complex as the world economy.

  • Remember Malthus' belief that we're all gonna starve?

  • Well, like Malthus, we don't know what kind of changes humanity's gonna face in the future.

  • If history has proven anything about economic thought, it's that we should expect surprises that will upset

  • our current economic models. Just like Malthus couldn't imagine that we'd all be alive today.

  • Thanks for watching. We'll see ya next week.

  • Crash Course Economics is made with the help of these nice people.

  • Feel free to comment on how great they are, too!

  • Crash Course is made possible by your support at Patreon.

  • You can help keep Crash Course free for everyone forever and get great rewards at patreon.com.

  • Thanks for watching. We're glad Malthus was wrong and that you're alive!

Welcome to Crash Course Economics. I'm Adriene Hill. And I'm Jacob Clifford.

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