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!)