How can you apply historical economic theories to modern business?

1 Classical economics

Classical economics is the school of thought that emerged in the 18th and 19th centuries, based on the principles of free markets, self-interest, and competition. Classical economists, such as Adam Smith, David Ricardo, and John Stuart Mill, believed that markets tend to reach equilibrium, where supply and demand are balanced, and that government intervention should be minimal. You can apply classical economics to modern business by analyzing how your product or service fits into the market structure, how you can leverage your competitive advantage, and how you can respond to changes in consumer preferences, technology, and trade.

2 Keynesian economics

Keynesian economics is the school of thought that emerged in the 20th century, based on the ideas of John Maynard Keynes, who argued that markets are often prone to instability, inefficiency, and unemployment. Keynesian economists, such as Paul Samuelson, John Hicks, and Joan Robinson, advocated for active government spending and monetary policy to stimulate aggregate demand, smooth business cycles, and reduce inequality. You can apply Keynesian economics to modern business by assessing how macroeconomic factors, such as fiscal and monetary policy, inflation, and interest rates, affect your business performance, demand, and costs. You can also use Keynesian concepts, such as the multiplier effect, the marginal propensity to consume, and the liquidity preference, to plan your budget, investment, and financing decisions.

3 Neoclassical economics

Neoclassical economics is the school of thought that emerged in the late 19th and early 20th centuries, based on the refinement and extension of classical economics, with a focus on mathematical models, rational choice, and marginal analysis. Neoclassical economists, such as Alfred Marshall, Leon Walras, and Vilfredo Pareto, developed the concepts of utility, elasticity, equilibrium, and Pareto efficiency, among others. You can apply neoclassical economics to modern business by using the tools of microeconomics, such as supply and demand curves, price elasticity, consumer and producer surplus, and cost-benefit analysis, to optimize your production, pricing, and marketing strategies. You can also use the tools of game theory, such as Nash equilibrium, dominant strategies, and prisoner's dilemma, to analyze your strategic interactions with competitors, customers, and suppliers.

4 Behavioral economics

Behavioral economics is the school of thought that emerged in the late 20th and early 21st centuries, based on the integration of psychology and economics, with a focus on human behavior, cognition, and emotions. Behavioral economists, such as Daniel Kahneman, Amos Tversky, and Richard Thaler, challenged the assumptions of neoclassical economics, such as rationality, self-interest, and consistency, and introduced the concepts of heuristics, biases, framing, and nudging, among others. You can apply behavioral economics to modern business by understanding how your customers, employees, and stakeholders make decisions, how they are influenced by social norms, emotions, and incentives, and how you can design products, services, and policies that appeal to their behavioral traits and needs.

5 Institutional economics

Institutional economics is the school of thought that emerged in the late 19th and early 20th centuries, based on the recognition of the role of institutions, such as laws, norms, culture, and organizations, in shaping economic behavior and outcomes. Institutional economists, such as Thorstein Veblen, John Commons, and Douglass North, argued that institutions provide the rules of the game, the incentives and constraints, and the sources of innovation and change in the economy. You can apply institutional economics to modern business by analyzing how the institutional environment, such as the legal system, the political system, the social system, and the cultural system, affects your business opportunities and risks. You can also use institutional concepts, such as transaction costs, property rights, collective action, and path dependence, to improve your governance, management, and coordination of your business activities.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?