Cases Where Traditional Economics Doesn't Work

Content

1. Introduction…… …………………………………………………………………….….3

2. Traditional economics theories ………………………………………...……………….4

3. Cases where traditional economics doesn’t work……………………………………….6

4. Conclusions…………………….………………………………………………...….….10

5. Bibliography………………………………….………………………...………………11

1. Introduction.

Economic theory is described as the result of the accumulation of knowledge. It is assumed that the opinions dominant today represent the highest stage of knowledge about the economy as today’s physics is superior to that of the 19th century. This superiority can be questioned. Theories are always embedded in certain paradigms, worldview and perspectives that change on account of political-economic developments. Thus the neoclassical theory prevailing today is different than the Keynesian theory that marked the decades after the 2nd World War. However it is not inevitably better.

Economic theories are constantly changing. Keynesian theory, with its emphasis on activist government policies to promote high employment, dominated economic policymaking in the early post-war period. But, starting in the late 1960s, troubling inflation and lagging productivity prodded economists to look for new solutions. Economic theories will be debated and tested. Some will be accepted, some modified, and others rejected as we search to answer these basic economic questions: How do we decide what to produce with our limited resources? How do we ensure stable prices and full employment of resources? How do we provide a rising standard of living both for now and the future? This process continues today and its motivating force remains the same as that three centuries ago: to understand the economy so that we may use it wisely to achieve society's goals.

The purpose of this assignment is to provide an understanding of what an economic theory is, describe some cases where limited possibilities of traditional economic theories appear and try to determine why it happens.

2. Traditional economics theories.

The word "economics" is derived from “oikonomikos”, which means skilled inhousehold management. Although the word is very old, the discipline of economics as we understand it today is a relatively recent development. Modern economic thought emerged in the 17th and 18th centuries as the western world began its transformation from an agrarian to an industrial society [ 1 ].

Economics is the social science that studies the production, distribution, and consumption of goods and services. The function of economic theory, according to the neoclassic theorist Friedrich von Wieser, consists in

"scientifically explicating and developing the content of common economic experience. The consciousness of every economically active human being provides him with a fund of experiences that are the common possession of all who practice economy. These are experiences that every theorist already finds within himself without first having to resort to special scientific procedures” [ 7 ].

Economic thought may be roughly divided into three phases:

• premodern (Greek, Roman, Arab),

• early modern (mercantilist, physiocrats);

• modern (since Adam Smith in the late 18th century) [ 9 ].

Major Schools of Economic Theory are the follows:

1. Systematic economic theory has been developed mainly since the birth of the modern era. The first fully developed economic theory was that of mercantilism, which dealt primarily with the economies of imperialist powers and the underdeveloped nations that they occupied.

2. The Spanish Scholastics of 14th through 17th century Spain had produced a body of thought largely similar to our modern understanding of