Keynesian Economics is Born

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En provenance du cours de University of California, Irvine

The Power of Macroeconomics: Economic Principles in the Real World

1256 notes

University of California, Irvine

The Power of Macroeconomics: Economic Principles in the Real World

1256 notes

In this course, you will learn all of the major principles of macroeconomics normally taught in a quarter or semester course to college undergraduates or MBA students. Perhaps more importantly, you will also learn how to apply these principles to a wide variety of situations in both your personal and professional lives. In this way, the Power of Macroeconomics will help you prosper in an increasingly competitive and globalized environment. This course is also available in Portuguese. To join the fully translated Portuguese version, visit this page: https://www.coursera.org/learn/macroeconomia-pt/

À partir de la leçon

The Aggregate Supply-Aggregate Demand Model and the Classical-Keynesian Debate

Keynesian Economics is Born7:00

The Two Pillars of Classical Economics 6:44

Why Classical Economics Failed 2:23

The AS-AD Framework 4:03

Why the AS and AD Curves Shift 7:37

Three Ranges of the Economy 7:05

Rencontrer les enseignants

Dr. Peter Navarro
Professor
Paul Merage School of Business

[MUSIC]

Welcome to the power of macro economics. The purpose of this lesson is to first

illustrate why classical economics gave way to Keynesianism in the 1930s.

This discussion sets the stage for the development of

one of the most important tools used in macro economics.

The aggregate supply-aggregate demand framework.

The debate between classical

economists and Keynesians ranks as one of the most important in macroeconomics.

It is a debate that goes back to the 1930s in the Great Depression.

However, it remains a very important one, even today.

This is because many of the macroeconomic policies now

favored by conservatives, have their roots in classical economics.

While those on the other side of the ideological spectrum,

are generally much more supportive of the Keynesian approach.

In analyzing this debate, the most important point we'll

make is that the classical versus Keynesian controversy is

primarily a dispute over how an economy adjusts during

a recession and finds its way back to full employment.

On the one hand, the classical economists believe that

a price adjustment mechanism would cure the economy.

Specifically, they believe that in the event of

unemployment, prices, wages and interest rates would all fall.

This would in turn increase consumption, production and investment, and

quickly return the economy back to its full employment equilibrium.

In contrast, the Keynesian school argued that

before the price adjustment mechanism had time to work, it would

be overpowered by a more deadly income adjustment mechanism.

To the Keynsenians when an economy sinks into a recession people's incomes fall.

This fall in income causes them to both spend less

and save less, while businesses respond by investing and producing less.

This reduction in consumption, savings, investment, and output in turn

drives the economy deeper into recession rather than back to full employment.

You can see now why this debate is so important.

One school of economics, the classical approach, believes that the best

cure for a recession is to leave the free market alone.

This approach

is also known as Laissez faire. And laissez faire economists are

those who believe that most government policies will probably make things

worse, not better, so the best policy is relatively little government.

On the other hand, the other schools, the Keynesians,

prescribes large-scale government expenditures to prime the economic pump.

Keynesians typically are activist economists who believe that the government

can create and implement policies that will positively affect the economy.

To frame this debate, let's start with classical economics.

Classical economics has its roots in the free market writings

of eighteenth century economists like Adam Smith, David Ricardo, and most

importantly, Jean Baptiste Say. These classical economists

believe that the problem of unemployment was a natural part of the business cycle.

That it was self-correcting, and most importantly, that there was no need

for the government to intervene in the free market to correct it.

They blamed unemployment on wages that were too high

and believed that in the event of a recesion,

unemployed workers would be willing to work for less.

Wages would then fall back down to levels where it once again made

it profitable for firms to hire the workers and the recession would end.

Thus in terms of our discussion of unemployment in the first

lecture, classical economists agreed that

frictional and structural unemployment could exist.

But they did

not agree that cyclical unemploymnet could be

caused by a shortage of aggregate demand.

Between the Civil War and the roaring 20s, America sustained

periodic booms and busts recording no less than five official depressions.

However, after ever bust the economy always

bounced back exactly as the classical economists predicted.

That was true until the classic economists met

their match in the Great Depression of the 1930s.

While President Herbert Hoover kept promising that prosperity was

just around the corner, and the classical economists kept

waiting for what they viewed as the inevitable recovery,

a towering figure walked on to the macroeconomic stage.

Economist John Maynard Keynes.

John Maynard Keynes was born in 1883, the son of

a British economist famous in his own right, John Neville Keynes.

Maynard Keynes was by all accounts a genius

who made millions as a stock market speculator.

He was also a distinguished patron of the arts.

A faculty member at Cambridge University, and

a key appointee to the British Treasury.

In 1946,

with the global economy flat on its back, Keynes

published the general theory of employment, interest, and money.

In that book Keynes flatly rejected the classical notion of a self-correcting

economy that would solve unemployment through adjustments in wages and prices.

Keynes argued that patiently waiting for the eventual recovery was fruitless.

Because in the long run we're all dead. And Keynes believed that under

certain circumstances a recessionary economy would only not naturally rebound.

But even worse, fall into a deep spiral. To Keynes, the only way to get the economy

moving again was to prime the economic pump with massive government expenditures.

From an historical perspective, it is important to emphasize

that, at the time Keynes' approach was economic heresy.

Indeed, the Keynesian prescription was initially

rejected by the entire economics profession.

Far worse, Keynes and his followers were branded as socialists

or even communists for advocating such an activist role for the

central government.

To his credit, Keynes stuck to his guns and, as

the Depression wore on, his teachings gained both adherents and disciples.

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