Economic Ideologies
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Transcript of Economic Ideologies
Economic Ideologies
AREAS OF DISPUTE• WHAT CAUSES INSTABILITY IN
THE ECONOMY?
• IS THE ECONOMY SELF-CORRECTING?
• SHOULD GOV’T HAVE RULES OR USE DISCRETION IN SETTING ECON POLICY?
Classical EconomicsOrigin: Adam Smith Wealth of
NationsProponents: Mills & Says Law
(supply creates its own demand)Key Equation:
Savings=Investment• First modern school of economic
thought• Also known as Conservative
Economics• Prefers free market solutions to
fix economic problems• Economy is self regulating in the
long run
Classical Economics cont’d• Prices, wages and interest
are (or should be) flexible• Capitalism promotes
economic growth, innovation, efficiency and raises standards of living
• Government is bad=Laissez faire
• Natural laws of economics– Freedom of trade– Short term problems fix
themselves in the long run– Say’s law- supply creates its
own demand– Outside shocks cause
economic efficiencies
Keynesian EconomicsOrigin: John Maynard KeynesKey Graph: AE• Otherwise known as Liberal
Economics• Free markets do not solve
high unemployment• Instability is inherent in
capitalism• Demand for goods is central
for understanding the rise or fall of production
• Economy can remain stuck in recession or depression
• Government is Good= can ‘fix’ capitalism
MONETARISMOrigin: Milton FriedmanMain equation mv=pq; velocity is
stable• Economy is stable in LR at natural
rate of employment– Promote steady growth
• Fiscal policy has no affect• MP should focus on price stability• Instability of economy is caused
by incorrect mp• Full employment reached if
government is not involved• Expand money supply each year
at the same annual growth rate of GDP
**CONSTITUTIONAL AMENDMENT FOR A BALANCED BUDGET???
RATIONAL EXPECTIONSOrigin: Robert Lucas• Prices adjust instantly• People act in response to
expectations... They are ‘rational’
• Recessions self correcting• Inflation is always
anticipated– Self correction
• Lower prices don’t change real output even in the SR
Supply SideOrigin (proponents): Ronald Regan
George GilderMain equation: Laffer Curve (relation
between tax rate and revenue)• Free-trade crucial to success of
supply-side• Production most important
determinant of economic growth • MP goal to reach a specific value of
money• MV determined by supply and demand
for money• LR growth is achieved by cutting
marginal taxes – Cut taxes for investors/ \entrepreneurs
and it will “trickle down” throughout economy
• Coined “Voodoo Economics” by George H.W. Bush