Competing schools of thought Macroeconomic Theory.
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Transcript of Competing schools of thought Macroeconomic Theory.
Macroeconomic Theory
Competing schools of thought
Macroeconomic Theory
Macroeconomic theory is a set a views about the way the economy operates.Models are developed to illustrate how the economy worksEconomists differ in what they believe is the correct model of the economy
leads to disagreement about the role and conduct of policy
Two main schools of thoughtClassical
Keynesian
Old Classical (1776 1930s)An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith (1776)
Invisible hand theoremlaissez faire economics Says law
Invisible hand theorem
states that if each consumer is allowed to choose freely what to buy and each producer is allowed to choose freely what to sell and how to produce it, the market will settle on a product distribution and prices that are beneficial to all the individual members of a community, and hence to the community as a whole.
The reason for this is that self-interest drives economic actors to beneficial behaviour.
Video laissez faire economics
The Invisible hand theorem leads to the concept of laissez-faire economics.
An approach to economics that emphasizes an environment in which transactions between economic agents are free from government intervention, including regulations, taxes, tariffs and enforced monopolies.
Says LawSupply creates its own demand John Baptiste Say
No possibility of overproduction and underproduction.
The classical view was the predominant view of the period from the late 18th century until the Great Depression in the 1930s.
The Great Depression1929 early 1940s
Worldwide economic depression began on October 29th, 1929 with a stock market crashpanic struck!
Unemployment rates spiked and persisted (33% in Canada; 25% in U.S.)
The Classical view did not explain the persistent levels of high unemployment.
John Maynard Keynes
There is no invisible hand channeling self interest towards a social optimum.
Keynes proposed a new approach in his General Theory of Employment, Interest and MoneyThe Keynesian Revolution!Took hold in 1930s
The great depression was a result of a lack of demand, not a lack of supply.
The dawn of Keynesian economics is marked by the acceptance of the idea than changes in AD drive the business cycles.Keynesian economicsAdvocates wide use of stabilization policy.
Post WWII, all advanced democratic societies adopted Keynesian policiesPolicies that manage the demand side of the economy
Unemployment remained low until 1973.
Key concepts of Keynesian economics
Market failure
Involuntary unemployment
Stabilization policy
1970sHigh inflation!
Rising unemployment!
Low economic growth!
Led to questioning of Keynesian economics15The reign of Keynesianism came to a halt No one school of thought has dominated since that time.Other important schools of thoughtMonetarist school (Milton Friedman)Quantity theory of moneyExpectations augmented Phillips curve
New Classical SchoolReal business cycle theory New Keynesian EconomicsAdapted micro to macro theoryMicro foundations
Austrian SchoolFree markets, invisible hand, emphasis on individuals
Post KeynesianImportance of uncertainty