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Mainstream economics is a loose term used to refer to the non-heterodox economics taught in prominent universities. It is most closely associated with neoclassical economics,or more precisely by the neoclassical synthesis, which combines neoclassical approach to microeconomics with Keynesian approach to macroeconomics.

Mainstream economists are not generally separated into schools, but two major contemporary orthodox economic schools of thought are the "saltwater and freshwater schools." The saltwater schools consist of the universities and other institutions located near the east and west coast of the United Statesmarker, such as Berkeleymarker, Harvardmarker, MITmarker, University of Pennsylvaniamarker, Princetonmarker, UCLAmarker, Stanfordmarker, and Yalemarker. Freshwater schools include the University of Chicagomarker, Carnegie Mellon Universitymarker, the University of Rochestermarker and the University of Minnesotamarker. They were referred to as the 'freshwater school' since Pittsburgh, Chicago, Rochester, and Minneapolis are located nearer to the Great Lakesmarker. The Saltwater school is associated with Keynesian ideas of government intervention into the free market, while the Freshwater schools are skeptical of the benefits of the government. Mainstream economists do not, in general, identify themselves as members of a particular school; they may, however, be associated with approaches within a field such as the rational-expectations approach to macroeconomics.

History

Economics has, in modern times, always featured multiple schools of economic thought, with different schools having different prominence across countries and over time; the current use of the term "mainstream economics" is specific to the post-World War II era, particularly in the Anglosphere, and to a lesser extent globally.

Prior to the development of modern academic economics, the dominant school in Europe was mercantilism, which was rather a loose set of related ideas than an institutionalized school. With the development of modern economics, conventionally given as the late 18th-century The Wealth of Nations by Adam Smith, British economics developed and became dominated by what is now called the classical school. From The Wealth of Nations until the Great Depression, the dominant school within the Anglosphere was classical economics, and its successor, neoclassical economics.In continental Europe, the earlier work of the physiocrats in France formed a distinct tradition, as did the later work of the historical school of economics in Germany, and throughout the 19th century there were debates in British economics, most notably the opposition underconsumptionist school.

During the Great Depression and the following Second World War, the school of Keynesian economics gained prominence, which built of work of the underconsumptionist school, and present-day mainstream economics stems from the neoclassical synthesis, which was the post-World War II merger of Keynesian macroeconomics and neoclassical microeconomics.

In continental Europe, by contrast, Keynesian economics was rejected, with German thought dominated by the Freiburg school, whose political philosophy of ordoliberalism formed the intellectual basis of Germany's post-war social market economy.Within developing economies, which formed the majority of the world's population, various different schools of development economics have been influential.

Post-World War II mainstream economics (in the Anglosphere sense) is generally divided chronologically into four periods, corresponding to global macroeconomic conditions: Since 2007, the financial crisis of 2007–2009 and the ensuing global economic crisis has publicly exposed divisions within mainstream economics and significantly intensified controversy about its status, with some arguing for radical overhaul or rejection of mainstream economics, and others arguing for evolutionary change.

Term

The term "mainstream economics" came into common use in the late 20th century. It appears in the seminal textbook Economics of 1948, by Samuelson and Nordhaus, on the inside back cover in the "Family Tree of Economics," which depicts arrows into it from J.M. Keynes (1936) and neoclassical economics (1860-1910). The term "neoclassical synthesis" itself also appears in Samuelson's influential textbook, in the 1955 edition.

Scope

Mainstream economics can be defined, as distinct from other schools of economics, by various criteria, notably by its assumptions, its methods, and its topics.

Assumptions

A number of assumptions underpin mainstream economics, while being rejected by some heterodox schools. These include the neoclassical assumptions of rational choice theory, a representative agent, and, often, rational expectations. The methodology employed by mainstream economics is the deductive methodology, which starts with axioms (that do not have to be proven, as they are classified as 'known to be true'), such as the rationality of individuals and their sole aim of maximising their own personal benefit (utility maximisation). To these axioms, assumptions are added, such as perfect and symmetric information, complete markets, perfect competition and zero transaction costs. Based on such axioms and assumptions, basic concepts, such as market equilibrium, are postulated, which are only relevant, when all or most assumptions hold.

Methods

Mainstream economics has also been defined methodologically as work which mainstream economists are willing to engage, which requires conforming to the mainstream language of mathematical models, featuring calculus, optimization, and comparative statics. Under this definition, areas of thought which are typically thought of as heterodox because they do not work under the typical neoclassical assumptions, such as econophysics, behavioral economics, and evolutionary economics, can be considered mainstream when they are engaged in the mainstream, using mainstream methods. Geoffrey Hodgson has considered the possibility that evolutionary economics and institutional economics may eventually become a new mainstream.

Some fields may be described as being partly within mainstream economics, partly within heterodox economics. Some of them are Austrian economics, institutional economics, neuroeconomics and non-linear complexity theory.They may use neoclassical economics as a point of departure. At least one institutionalist has argued that "neoclassical economics no longer dominates a mainstream economics."

A countervailing trend is the expansion of mainstream methods to such seemingly distant fields as crimethe family, law, politics, and religion.The latter phenomenon is sometimes referred to as economic imperialism.

Topics

Mainstream economics includes theories of market and government failure and private and public goods. These developments suggest a range of views on the desirability or otherwise of government intervention.

Critical views of mainstream

Since the financial crisis of 2007–2009, there has been heated conflict within and without economics on the status and future of mainstream economics, and its future course is uncertain.

Some economists, in the vein of ecological economics, believe that the neoclassical "holy trinity" of rationality, greed, and equilibrium, is being replaced by the holy trinity of purposeful behavior, enlightened self-interest, and sustainability, considerably broadening the scope of what is mainstream.

Alternative economic schools, such as the Austrian School, also present views that counter indicate current mainstream economic theory of how the modern economy actually works. Since mainstream economics is characterised by the deductive methodology, the assumption of pervasive equilibrium and a neglect of the institutional role of banks and bank credit, another major counter current is the approach proposed by Southampton University economist Richard A. Werner. In his book 'New Paradigm in Macroeconomics' (Palgrave Macmillan, 2005) he presents an alternative approach, which is found to be empirically supported. Unlike mainstream economics, his approach is based on the inductive research methodology (it does not require axioms and assumptions, such as perfect information), but starts with economic reality. Since perfect information is a requirement of achieving equilibrium, his economics is based on the argument that in the 'real world' markets are in disequilibrium and quantity-rationing is common. A central piece is the institutional reality of the monetary system and the role of banks as creators and allocators of the money supply, which are at the core of the economy. Credit creation is linked to the quantity equation by a disaggregation into credit for transactions that are part of GDP ('real circulation credit', which determines nominal GDP) and credit for transactions that are not ('financial circulation credit', which determines asset prices). The model neatly resolves a dozen major puzzles and 'anomalies' of mainstream economics. Published in 2005, Werner's book has chapters on 'recurring banking crises' and warns about the looming bursting of the British credit bubble and subsequent banking crisis. Werner himself labels this approach 'non-fiction economics', or 'scientific economics'.

Energy related theories of economic concepts also exist within energy economics relating to thermodynamic concepts of economic thinking, such as Energy accounting. Biophysical economics relates to this area. This area of study relates to ecological economics concepts, which relates to sustainability issues, such as natural capital.

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