An economy is simply a collection of production and consumption processes working toward solving the central economic problem: we have finite resources, but the potential for human consumption is practically limitless. Every theory, policy, or experiment is ultimately an attempt to solve a problem that, by its nature, has no solution. Economics is a social science (and while scientists from "rigorous" fields don’t always welcome it into their club), it follows the same processes to explore the world.
Economists are clumped into schools of thought, but they actually agree on most issues. Two physicists will agree an object at rest remains at rest, even if they fight over string theory. Similarly, two economists will agree on opportunity costs, even if they disagree on the long-term implications of a consumption tax.
You hear about the disagreements because economies are incredibly hard to experiment on. You can't test a radical tax theory without potentially destroying a nation. Plus, economics is something we feel daily. It impacts our retirements, crime rates, and environments, so everyone from Nobel laureates to the guy advocating a seed-based economy has an opinion. To make sense of this, we look at three major schools: Classical, Austrian, and Keynesian.
The Classical School, formed by Adam Smith, was the first incarnation of economics as a distinct discipline. Smith found a world ruled by mercantilism, a zero-sum game where nations tried to hoard gold. But hoarding gold didn't create prosperity. It was like putting nitrous on a horse-drawn carriage. Smith argued that wealth was created through the division of labor. He used the example of a pin: a small, sharp, poky metal stick. One person making a pin from scratch is slow. If you divide the tasks (mining, refining, sharpening) among specialized workers, production skyrockets. Classical economics argues that by allowing rational people to trade freely and be extremely selfish, we can work together to make the world a better place.
The Austrian School later tweaked these ideas. They realized an economy isn't an amorphous blob of production, but a collection of individuals making choices based on value. Carl Menger introduced "marginal utility." One kettle is great for making tea. Two provides redundancy. But twenty kettles? Eventually, extra items have negative value.
This led to the Subjective Theory of Value. An item isn't worth the sum of its labor; it’s worth what people want. A factory could build a titanium Toyota Camry that costs ten times more to produce, but since no one will pay $300,000 for a Camry, it’s a subjectively inferior good. The consumer is king. However, because the Austrian school relies on logic rather than rigorous math, many modern academics view it more as a branch of philosophy. Paul Krugman notably dismissed it for lacking the modeling required for hard science. Ouch.
John Maynard Keynes shifted the focus again with the Keynesian School. By the 20th century, the economy was defined by the business cycle: ups and downs driven by human sentiment rather than the harvest. Keynes argued that governments should smooth out this cycle through fiscal policy. The idea is to tax more and spend less during booms to stop things from getting too Gatsby-esque, and then tax less and spend more during recessions to keep money moving. The goal isn't to remove the cycle, but to make the ride less catastrophic so businesses can plan for the future.
These three schools are more evolution than revolution. They agree on far more than they disagree on, but they are defined by their differences. They are all just different attempts to answer the ultimate economic question of how we can supply unlimited demand with limited resources.