Modern economic theory looks beyond production and invisible hand theory, examining demand, money supply, and free trade. Classical economics focused on resource allocation. Keynesianism emphasizes government intervention to stimulate demand. Money supply economics uses central banks to control inflation and manage growth. Free trade is necessary for a thriving economy.
Modern economic theory tends to separate itself from classical economic theory by looking beyond simple source of production and invisible hand theory. Modern economics also looks at things like the role of demand, the supply of money and its effects on growth or monetarism and free trade. In one sense, modern economic theory is a much more macroeconomic study examining large areas of a single economy. This does not mean that an individual labeled a classical economist does not favor these elements; it simply means that the economy changes throughout history, with the term modern economics coming after the period of classical economics. There is still a clear relationship between these two schools of thought for economic theory.
Classical economics began by examining the resources used in the production of goods and services. How various entities collected these assets and used them was of great interest in the 16th century. The purpose of these studies was in fact to determine how an economy could best use resources in a given market. For example, economists will study whether a central entity would be best at allocating these resources or whether numerous individuals working in their own self-interest would suffice. Hence, many studies on this topic have left open the need for revision as in modern economic theory.
Keynesianism is perhaps the greatest single modern economic theory, with all its advantages and shortcomings. Keynes looked at the role of demand in a market and what happened when there was too much supply and not enough demand. In essence, he thought the government should step in and grease the market sledges to stimulate economic movement. This, in turn, would allow companies with the supply to remain profitable and continue in their natural course of business. Employment, however, was not necessarily something Keynes had considered, as he could not answer whether full employment would occur under this scenario.
Money supply economics also comes from modern economic theory. Here, it is important to use a central bank to govern interest rates and the amount of money in a market. This theory is needed to control inflation and manage growth in order not to exceed the upper limits of the economy.
Open markets and free trade between countries are another tenet of modern economic theory. In short, free trade is necessary for a country to have a thriving economic centre. Most countries would like a fair balance between imports and exports or a situation where imports are far below exports because that means more currency is left in the country. The ability to move goods between domestic and other international markets also allows for growth and expansion. Modern economic theory may have different concepts of how best to achieve this.
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