Why do economies boom and bust, and can policy smooth the ride?

What the schools say

9 rival answers, oldest first.

• 1867Heterodox

  Marxian

  Marx asked where profit comes from. His answer: from paying workers less than the value they create. That makes capitalism dynamic but unequal and crisis-prone. His predictions of revolution failed, but his questions about power and distribution never went away.

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• 1871Heterodox

  Austrian

  Hayek's big idea: prices carry knowledge no planner could ever gather. Markets are a discovery process, and central planning fails because it can't see what prices see. Strong on that point; weaker on evidence, because its founders were wary of testing theories with data.

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• 1930Mainstream

  Ordoliberal

  Germany's answer to the 1930s: a strong state that sets firm rules, protects competition and keeps prices stable, then steps back. It shaped EU competition law, the ECB and the euro's fiscal rules. Critics say those rules made the euro crisis worse.

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• 1936Mainstream

  Keynesian

  Keynes argued that economies can get stuck with mass unemployment because there isn't enough spending. Markets don't always fix themselves, so governments should step in during slumps. The 1970s exposed its limits, but every recession since has revived it.

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• 1950Heterodox

  Post-Keynesian

  Keynes's radical heirs. The future is genuinely uncertain, banks create money when they lend, and stability itself breeds the next crisis (Minsky). They stressed financial fragility before 2008, but remain outside the mainstream.

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• 1956Mainstream

  Monetarist

  Milton Friedman's message: inflation comes from too much money, and central banks rather than governments should keep it steady. Its money-supply targets failed in practice, but its core idea won: today's independent, inflation-targeting central banks are its legacy.

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• 1972Mainstream

  New classical

  What if people are smart and look ahead? Then predictable policy may achieve little, because people see it coming. This 1970s revolution changed how all macro models are built, even though most economists rejected its conclusion that recessions are efficient.

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• 1980Mainstream

  New Keynesian

  Today's mainstream macroeconomics. It combines forward-looking people with sticky prices, which gives central banks a reason to manage interest rates. Every major central bank uses it. Its big miss: before 2008 its models had almost no banks in them.

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• 1990Heterodox

  MMT

  A government that issues its own currency can't run out of it, so the real limit on spending is inflation, not debt. Popular in politics, rejected by most academic economists. And it doesn't apply to euro countries, which don't issue their own money.

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Put it to every school

• Why is there unemployment?8 schools answer
• What causes inflation?7 schools answer
• Should governments borrow more in a recession?7 schools answer

Still argued today

• Did austerity after 2010 work?Shaped the euro crisis and a decade of European politics.
• Was the 2021–23 inflation about supply or demand?The biggest inflation in 40 years. Euro-area inflation peaked at 10.6% in October 2022.

Where it is studied

• B · History of thought: History of thought and methodology
• C · Quantitative: Mathematical and quantitative methods
• E · Macro and money: Macroeconomics and monetary economics
• G · Finance: Financial economics