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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
1256 notes
À partir de la leçon
The Aggregate Supply-Aggregate Demand Model and the Classical-Keynesian Debate
Rencontrer les enseignants
Dr. Peter NavarroProfessor
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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