The Most Important Economic Theories of the Last Century

What are the 50 most important economic theories of the last century? That’s the question a publisher recently asked me to ponder for a book they are developing.

I’ve noodled on this over the past week and have some initial ideas. But I would be remiss if I didn’t solicit suggestions from my insightful readers.

So, what do you think have been the most important economic theories over the past century?

To spark your thinking, here are some very preliminary ideas, albeit without much respect for the publisher’s century limitation. (Apologies for the higher-than-usual amount of jargon and economic short-hand.)

I think the items in the first list are more likely to make the cut than those in the second list. There is otherwise no importance to the ranking.

25 Theories To Get You Started

  1. Supply and Demand (Invisible Hand)
  2. Classical Economics
  3. Keynesian Economics
  4. Neoclassical Synthesis (Keynesian for near-term macro; Classical for micro and long-term macro)
  5. Neo-Malthusian (Resource Scarcity)
  6. Marxism
  7. Laissez Faire Capitalism
  8. Market Socialism
  9. Monetarism
  10. Solow Model (growth comes from capital, labor, and technology)
  11. New Growth Theory (Romer & endogenous growth)
  12. Institutions and Growth (rule of law, property rights, etc.)
  13. Efficient Markets Hypothesis
  14. Permanent Income / Life Cycle Hypothesis
  15. Rational Expectations
  16. Rational Choice Theory
  17. Something Behavioral (e.g., Prospect Theory)
  18. Adverse Selection and the Lemons Problem
  19. Moral Hazard
  20. Tragedy of the Commons
  21. Property Rights as a solution to the Tragedy of the Commons
  22. Game Theory (e.g., Prisoner’s Dilemma)
  23. Comparative Advantage
  24. New Trade Theory
  25. The Trilemma (exchange rates, capital flows, and monetary policy)

37 More Theories

  1. Washington Consensus
  2. Financial Accelerator
  3. Theory of Independent Central Banks
  4. Bagehot Theory of Central Bank Lending
  5. Creative Destruction (Schumpeter)
  6. Ricardian Equivalence
  7. Dynamic Consistency
  8. Diversification and Investment Portfolio Design
  9. Capital Asset Pricing Model
  10. Option Valuation (Black-Scholes et al.)
  11. Austrian Economics
  12. Speculative Bubbles (e.g., Minsky)
  13. Liquidationist View of Downturns
  14. Time Value of Money (incredibly important but very old)
  15. Public Choice / Economic Theory of Regulation (politicians and government workers as self-interested maximizers)
  16. Arrow’s Impossibility Theorem
  17. Welfare Theorems
  18. Veblen and Conspicuous Consumption
  19. Polluter Pays Principle (e.g., Piouvian Taxes)
  20. Offsetting Behavior (e.g., people drive safe cars more aggressively)
  21. Heckscher-Ohlin Trade Theory
  22. Optimal currency areas
  23. Exchange Rates and Purchasing Power Parity
  24. Mercantilism
  25. Rubinomics
  26. Supply-side Economics
  27. Laffer Curve
  28. Phillips Curve
  29. Theories of Economic Geography
  30. Fisher Theory of Interest Rates
  31. Liquidity Traps
  32. Resource Curse (Dutch Disease)
  33. Exchange Rate Overshooting (Dornbusch)
  34. Auctions
  35. Mechanism Design
  36. Principal-Agent Theory (e.g., separation of management and ownership)
  37. Theory of Optimal Taxation (e.g., broad base, low rate, tax less-elastic activities)

I could go on, but you get the idea. As the list illustrates, there are nuances about what constitutes a theory — some try to describe how the world works, and others try to describe how it should work. And, of course, they vary widely in how well they accomplish those goals. There are certainly economic theories that are wrong, but nonetheless deserve to be on the list.

As the list may suggest, I am a mainstream economist with a U.S. focus, so my first round of brainstorming undoubtedly overlooks some worthy non-U.S. theories or less orthodox theories. (And I probably overlooked some mainstream ones too!)

About Donald Marron 294 Articles

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including: * Member of the President’s Council of Economic Advisers (CEA) * Acting Director of the Congressional Budget Office (CBO) * Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.

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