Mainstream economics is a term used to refer to widely accepted economics as taught across prominent universities, and in contrast to heterodox economics. It has been associated with neoclassical economics and with the neoclassical synthesis, which combines neoclassical methods and Keynesian approach macroeconomics.
In the U.S.
Mainstream economists are not generally separated into schools, but two major contemporary economic schools of thought have been the "saltwater and freshwater schools." In the early 1970s, so-called "fresh-water economists" challenged the prevailing consensus in macroeconomics research. Key elements of their approach was that macroeconomics had to be dynamic, quantitative, and based on how individuals and institutions make decisions under uncertainty. Many of the proponents of this radically new approach to macroeconomics were associated with Carnegie Mellon University, the University of Chicago, the University of Rochester and the University of Minnesota. They were referred to as the "freshwater school" since Pittsburgh, Chicago, Rochester, and Minneapolis are located nearer to the Great Lakes. The established consensus was primarily defended by economists at the universities and other institutions located near the east and west coast of the United States, such as Berkeley, Harvard, MIT, University of Pennsylvania, Princeton, Columbia, Stanford, and Yale. They were therefore often referred to as "the saltwater schools". Today, mainstream economists do not, in general, identify themselves as members of a particular school.
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 on the 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 schools of development economics have been influential.
Since 2007, the financial crisis of 2007–2010 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, others arguing for evolutionary change, and others still arguing that mainstream economics explains the crisis.
The term "mainstream economics" came into common use in the late 20th century. It appears in 2001 edition of the seminal textbook Economics by Samuelson and Nordhaus on the inside back cover in the "Family Tree of Economics," which depicts arrows into "Modern Mainstream Economics" from J.M. Keynes (1936) and neoclassical economics (1860–1910). The term "neoclassical synthesis" itself also first appears in the 1955 edition of Samuelson's textbook.
Mainstream economics can be defined, as distinct from other schools of economics, by various criteria, notably by its assumptions, its methods, and its topics.
A number of assumptions may underpin many mainstream economic models, while being rejected by some heterodox schools. These include the neoclassical assumptions of rational choice theory, a representative agent, and, often, rational expectations. Much of modern economic modelling consists of exploring the effects that complicating factors have on models, such as imperfect and asymmetric information, incomplete markets, imperfect competition and transaction costs.
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.
Additionally, some economic fields include elements of both mainstream economics and heterodox economics: for example, the 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 crime the family, law, politics, and religion. The latter phenomenon is sometimes referred to as economic imperialism.
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.
Since the financial crisis of 2007–2010, considerable conflict has arisen, among both economic theorists and a wider cross-section of the public, regarding the status and future of mainstream economics. Some critics have argued that potentially promising approaches have been excluded in major mainstream publications by a focus on problems amenable to formal modeling.
Chartalists, who are generally considered part of the Post-Keynesian school of thought, criticise mainstream theory as failing to describe the actual mechanics of modern fiat monetary economies. Chartalism focuses on a detailed understanding of the way money actually flows through the different sectors of an economy. Specifically, Chartalism focuses on the interaction between central banks, treasury and the private banking system. Chartalism rejects critical mainstream theories such as the loanable funds market, the money multiplier, and the utility of fiscal austerity.
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. Ecological economics addresses sustainability issues, such as public goods, natural capital and negative externalities (such as pollution).
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.
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- Olivier J. Blanchard (2008), "neoclassical synthesis," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
- The precise distinction and relationship between classical economics and neoclassical economics is a debated point. Suffice to say that these are the ex post facto terms used to refer to successive chronological periods of an interrelated group of theories.
- The state of economics: The other-worldly philosophers, The Economist, 2009-07-16
- Paul A. Samuelson and William D. Nordhaus (2001), 17th ed., Economics
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- Colander, D. C.; Holt, R. P. F.; Rosser, J. B. (2004), The Changing Face of Economics, University of Michigan Press, ISBN 978-0-472-06877-7 Description and preview links.
- Hodgson, G.M (2007), "Evolutionary and Institutional Economics as the New Mainstream", Evolutionary and Institutional Economics Review 4 (1): 7–25, retrieved 2009-11-21.
- A Companion to the History of Economic Thought (2003). Blackwell Publishing. ISBN 0-631-22573-0 p. 452
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- John B. Davis (2006), "The Turn in Economics: Neoclassical Dominance to Mainstream Pluralism?", Journal of Institutional Economics, 2(1), pp. 1-20. (PDF article link)
- David D. Friedman (2002), "Crime," The Concise Encyclopedia of Economics,
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- Edward Lazear (2000), "Economic Imperialism", The Quarterly Journal of Economics., 115(1), pp. 99-146.
- How Did Economists Get It So Wrong?, by Paul Krugman
- • Daniel A. Schiffman (2004). "Mainstream Economics, Heterodoxy and Academic Exclusion: A Review Essay," European Journal of Political Economy, 20(4), pp. 1079–1095. Abstract. Prepublication PDF.
• Tony Lawson (2006). "The Nature of Heterodox Economics," Cambridge Journal of Economics, 30(4), p. 482 [pp. 483-505]. Advance-access text, p. 20 of 23.
-  Nadeau, Robert (Lead Author); Cutler J. Cleveland (Topic Editor). 2008. "Environmental and ecological economics." In: Encyclopedia of Earth. Eds. Cutler J. Cleveland (Washington, D.C.: Environmental Information Coalition, National Council for Science and the Environment). First published in the Encyclopedia of Earth December 12, 2007; Last revised August 26, 2008; Retrieved October-6-2009
-  Science Notes: Energy Accounting and Balance Carnegie Mellon University Retrieved October-6-09
-  Cleveland, Cutler (Lead Author); Robert Costanza (Topic Editor). 2008. "Biophysical economics." In: Encyclopedia of Earth. Eds. Cutler J. Cleveland (Washington, D.C.: Environmental Information Coalition, National Council for Science and the Environment). [First published in the Encyclopedia of Earth September 14, 2006; Last revised November 18, 2008; Retrieved Oct-6-09.