Chapter 11 Competing Macro Theories
 

  

I. Capitalism Theories Overview 1 video

II. Classical Economics 1 video

III. Keynesian Economics 1 video

IV. Classical v Keynesian 1 video

V. Quantity Theory of Money 2 videos

VI. Monetarism 3 videos

VII. New Classical Economics 2 videos

VIII. Supply-side Econ 3 videos

IX. Market Fundamentalism 1 video

X. Austrian School

XIII. Additional Learning Materials

Part 2 Review Notes Chapters 8-14

  


I. Capitalism Theories Overview
     A. Classical economics
          1. Dominated philosophically during the late 18th, 19th and early 20th centuries.
         2. First defined by Adam Smith in The Wealth of Nations - Wikipedia published in 1776.
         3. Two primary beliefs
             a. Full employment was a norm of capitalism.
             b. Laissez-faire (hands-off) government policy was best.
     B. Keynesian economics
          1. Macro equilibrium could settle at an unacceptable level of unemployed resources.
         2. Government intervention could be required to fully employ resources.
     C. Monetarism states changes in the money supply are both a necessary and sufficient
          condition to cause inflation.
     D. New Classical economics states market forces and not government manipulation of
          aggregate demand and the money supply to control economic activity.
          1. Supply-side economics - Wiki discussed in chapter 16, stated emphasizes increasing
              aggregate supply rather than increasing aggregate demand.
          2. Freiburg School of the Austrian School developed in 1930's Germany after their great
              inflation, is followed by A. Merkel and stresses free markets with rigorous regulation. 
     E. Overview Video

Unit I Review Full employment was a norm of capitalism,
Laissez-faire hands-off government policy was best.

II. Classical Economics
    A. Basic philosophy
          1. The economy is self-adjusting, government doesn't have to interfere. 
          2. Except for unusual circumstances (war, speculative crises), full employment would
              be the norm.
      B. Two basic theories
           1. Say's law
               a. Supply created enough factor income to clear the market 
                   1) Inventories will not accumulate.
                   2) An excess inventory slowdown which causes unemployment was not a necessity.
               b. Savings is not a leakage because interest rates adjust to so saving is borrowed and
                    invested (spent).
                   1) Leakage describes the loss of a variable required to maintain a state of equilibrium
                       or stable level of economic activity.  
                   2) Interest rates drop when savings increase to insure savings is invested and there
                        isn't leakage.
               c. Say's law - wiki has more information
               d. Will Say’s law stay dead? (Rumplestatskin, Macro Business 03/12/13

           2. Price-Wage flexibility
               a. During periods of slow economic activity wage rates would fall and everyone
                    wanting to work could find work.
               b. All factor prices, not just wages, would adjust downward and all factors would
                   be fully employed.  "Real" factor prices would therefore remain constant. 

       C. In France, John Baptist Say produced a very superior work on the subject of Political 
            Economy. His arrangement is luminous, ideas clear, style perspicuous, and the whole 
            subject brought within half the volume of [Adam] Smith's work. Add to this considerable
            advances in correctness and extension of principles. Thomas Jefferson, letter to Joseph
            Milligan, April 6, 1816 Friesian School
       D. Other Important Classical Theories
            1. Iron law of Wages
            2. Malthus Essay on the Principle of Population
            3. Ricardo on Rent
       E. Free Course Video Great Economists: Classical Economics and its Forerunners

Unit II Review Say's LAW, Supply created factor income to clear the market 
and Price-Wage Flexibility, factor prices adjust downward
 

 

 

 

 

 

 

 

 

cartoonstock.com/

 

 

 

 

 
 

III. Keynesian Economics   
       A. The Great Depression discredited classical economics as equilibrium settled and
            stayed at high unemployment.
       B. John Maynard Keynes
           1. Wrote The General Theory of Employment, Interest, and Money (1936). 
           2. Disagreed with Say's Law: savings may not be invested.
               a. Interest rates are not the sole determinate of savings and investing.
               b. Saving and investment are done by different people with different motives.
                   Saving may not equal investment causing goods to go unsold and inventories
                   to increase.
               c. Saving is based upon "liquidity preference," the need to hold money
                   1) Transactionary Motives: for every day use.
                   2) Speculative Motives: save because prices may drop (Japan in late 1990's).
                   3) Precautionary Motives: save for uncertainty (recession, oil prices).
               d. Investment decisions are based upon profit expectations and interest rates
               e. Money balances (savings) are also important in determining aggregate demand.      

           3. Disagreed with Price-Wage Flexibility: that prices would 
               adjust downward insuring all resources are fully employed. 
               Great Recession data proved Keynes still correct.
               see wage growth and unemployment, wages did not
               adjust. 7/16/13, Global Economic Intersection and
            Why are wages sticky 
           4. Use deficit spending to stop recessions with a surplus
                to slow inflation with budget balanced over cycle.
           5. Keynesian Thinking  Kahan Academy video

Unit III Review Equilibrium could settle and stay at high unemployment
 requiring government deficits eventually followed by surplus

John Maynard Keynes

Keynes argued against a return to the
 gold standard after the war.

IV. Classical vs. Keynesian Equilibrium  
         A. Classical explanation
             1. Prices are flexible, output is stable.
             2. Changes in AD cause prices to change, AS determines Real GDP.
         B. Keynesian explanation
             1. Output adjusts, prices are stable.
             2. Changes in AD cause changes in employment and Real GDP.
         C. Aggregate supply over the business cycle
              1. QU represents a recessionary level of Real GDP.
              2. QF represents a full-employment level of Real GDP.
              3. Aggregate supply - Wikipedia
         D. Manipulating equilibrium
             1. Classical economists didn't see a need as Real GDP was fixed..
             2. Keynesian economists want to manipulate AD by changing  
                 C + I + G + XN to maintain noninflationary full employment.
             3. Aggregate demand - from Wikipedia has a more complete
                 explanation of the Keynesian view.
         E. Comparing Classical and Keynesian macro models
           1. Classical and Keynesian Economics  is a concise narrative of this material. 
             2. Aggregate Spending Model from Dr.  Barbara Mikalson, Rio Hondo College
             3. Elmer G. Wiens: Classical & Keynesian AD-AS Model -
                 An on-line, interactive model of the Canadian Economy.
            4. Khan Academy Keynesian vs. Classical Economics video

Unit IV Review
Classical: aggregate supply very inelastic, Keynes AS very elastic

V. The Quantity Theory of Money
     A. Represents the basic theory behind macroeconomics prior
          to the Keynesian Revolution
     B. Believed that changes in the money supply would only affect
          price and not economic activity.
     C. The equation of exchange
                                                   MV = PT
           Money Supply X Money Velocity  = Average Price Level X Transactions 
           1. Velocity of money is how often the money supply is spent.
           2. Transactions is the number in real economic activity
           3. The equation is an identity
                a. Dollars spent = dollars received
                b. MV = Aggregate Demand and 
                    PT = Nominal GDP = C + I + G + XN = GDP

           4. Classical theory stated that V was basically stable and
               that there existed some natural level of growth for T. 
               a. This natural level was a function of individual and 
                    business interaction. 
               b. V and T were essentially unalterable which meant
                    changes in M would change P and not the natural
                    level of T. 
               c. Government should thus refrain from interfering with
                   market activity by adjusting the money supply.
     D. Came into disfavor in the 1930's with the popularity of
          Keynesian economics which stated that real output 
          could be changed by affecting aggregate demand.

   E. Additional
          1. If V Picks-Up, Will Inflation Soar 9/27/20
          2. Equation Video and Velocity of Money Rather Than Quantity- Diving Prices<
          3. Quantity Theory of Money? is a concise narrative.
          4.Quantity theory of money - Wiki requires algebra.
          5. The money-inflation connection: It's baaaack!
       6. Debt-Deflation from Irving Fisher  was popular in
              the early 1930's though Keynes won. Revisited 
              because of the Great Recession
         7. Monetary theory is non ergodic as data can't be averaged.

Unit V Review Changes in the money supply would
only affect price and not economic activity

 

Image result for money supply cartoons

 

The US velocity of money keeps drifting lower. A unit of credit expansion is generating an increasingly smaller amount of economic growth.

Editors Note:
 Things have happened since the equation of exchange was developed and they increase current aggregate demand and run the risk on decreasing AD in the future.
1) Nixon took us completely off gold in early 70's. Money supply can change up or down without printing so we will never need inflation caused wheel barrows to carry money.
3) Federal debt, once only used to finance war now finances social programs.
3) States and companies promise retirement they may not easily finance in the future. Note the Federal government is not included as they can print money. For 250 years this has not been a problem. See
Can We Afford a 20 Trillion Dollar Federal Deficit?
We Afford Federal Entitlements?
Question! How many econometric models incorporate these concepts?

 

Why Debt Won’t Spark Inflation

Government Debt Has Not Affected Yields
   VI. Monetarism
         A. Monetarists believe that changes in the money supply are
             both a necessary and sufficient condition to cause inflation.
         B. If AD was low, increasing the money supply would only
              increase short-run economic activity. 
              1. Eventually short-term expansion stops and increasing M
                  only adds to inflation. 
              2. Public anticipation stops the process from being repeated. 
              3. Monetarists believe that government involvement in the 
                  economy, especially monetary intervention, increases the
                  magnitude of the business cycle.
         C. Keynes believed changing the money supply would affect 
              interest rates which would affect investment which in turn
              would affect Real GDP
         D. To some degree monetarism is an extension of classical
              economics. Its advocates believe that a competitive market,
              free from government interference, results in economic 
              stability and a reasonable growth rate.

        F. Videos
            1. Modern Money Theory
            2. Modern Money & Public Purpose  video series
            3. Game of Theories: The Monetarists 6 min. 11/15/17
           Unit VI. Review:  Changes in the money supply are both a necessary and
                                        sufficient condition to cause inflation.

     E. Extra Stuff
      1. The Concise Encyclopedia of Economics
             2. History of Economic Thought Website       
             3. Privatize the Gains, Socialize the Losses
                 is a concise history of our 20th century monetary system.
            4. Austrian School of Economics are monetarists whose
                theories are followers by conservative Europeans. Video 1   Video 2
            5. Modern Monetary Policy vs. The Austrian Society video
            6. Inflation, Fear of Inflation an Public Debt Video Princeton
              professor and Nobel Laureate Christopher A. Sims 9/2/14
     7. Bill Mitchell Demystifies Modern Monetary Theory

VII. New Classical Economics
      A. Lead by Milton Friedman - wiki , these economists revived the 
             quantity theory of money. See Milton Friedman from Cato Institute
             1. Milton Friedman Video on  Greed from You Tube
             2. Milton Friedman Video 30 minute interview on Open Mind
        B. Market forces and not government manipulation of aggregate
            demand and the money supply control economic activity.
       C. This economic school of thought has much in common with
             those who believe in Rational expectations.
            1. This recently formed school does not assume market 
                participants have perfect knowledge. 
            2. It assumes market participants will learn from experience
                and use current information to predict and adjust to an 
                expected future. 
            3. The result is not the disequilibrium of Keynesian economics
                with its inflationary and deflationary gaps but a constant 
                equilibrium with economic behavior adjusting to be compatible
                with different levels of economic activity. 
            4.  As with the classical school, the new classical school, monetarist,
                 and those believing in rationalist expectation feel government
                 involvement in econo ic activity is not beneficial.
       D. Reasons for self-correction nature of capitalism
            1. Wages are Inflexible downward as employers face a minimum
                wage and lower wages cause low morale and less efficiency.
                Robert King: The Concise
           3. Critique of neoclassical economics, did anything change 2/26/14
           4. New Classical Macroeconomics from Wiki
           5. What-is-neoclassical-economics
           6. Austrian School Debate

Unit VII Review Market forces not government manipulation of AD
and the money supply control economic activity.

VIII. Supply-side Economists
   A. Slow economic growth and high inflation of the 1970's caused
            some economists to emphasize increasing Aggregate Supply.
      B. Stagflation and the Rise of Supply-Side Economics.
      C. Video for and Video against 2 min. each
      D. Reagan Revolution 14 min.

IX. Markets Fundamentalism
     A. Believed in by Laissez fair and Chicago School
     B. Based on always rational actors, i.e.. Economic Man Doctrine
     C. Maximize self Interest i.e. profit maximization in a system of
          full information and limited resources


       Increase Aggregate Supply not Government Spending
                     to enhance economic growth.

 XI. Great Recession Analyzed
      A. U.S. has successfully used Keynesian economics to quickly
              negate the recession, will inflation follow?
        B. Germany's enforcing Austrian School austerity and slow growth
            In the money supply for Europe has resulted in recessions and
            slow growth
       C. Great Brittan is still in or close to recession because of austerity
            and an easy money policy has yet to work. Economist Magazine
       D. Cheat Sheet for Understanding the Different Schools of Economics
       E. Videos
           1. Quick History  11 min
           2. Financial Mediation video follows the money 13 min.

Cartoon of the Day: Bailouts! - bankers bailing cartoon 10.11.2016

 

Image result for Milton Friedman cartoons

 

Federal Reserve in Action

Macro Chapters

8) Measuring Total Economic Activity

9) The Business Cycle

10) Macro Equilibrium

11) Competing Macro Theories and Issues

10) Macro Equilibrium

11) Competing Macro Theories and Issues

12 Keynesian Economics: An Expanded View

13 Money, Banking, Creation of Money

See
Financial Crisis

The Great Recession

14) Fiscal Policy

15) Monetary Policy

16) Stagflation:Rise of Supply-Side Economics
 17) Budget Deficits

See
Democratic Capitalism vs. Capitalistic Democracy 

 

 

XII. Avoiding a Great "COVID" Depression

 

  


 

  
XIII. Additional Learning Materials
    A. Readings, Videos, Podcasts   
        1. Reconciling Hayek and Keynes short article 6/7/14
        2. GDP A Brief But Affectionate History   7/20/14
         3. Democratic Capitalism vs. Capitalistic Democracy
        4. History of New Keynesianism/
        5. How Laissez Faire Economics Lead to Inequality Recession
        6. Stagflation and the Rise of Supply-Side Economics:
            the brake-down of the Phillips curve.
       7. Progression of Economic Theory, Classical to Keynesian back to Classical
       8. Great Recession from a Classical-Keynesian View
           from Roger Farmer Pepperdine School of Public Policy
           a.  Who are the Academic Scribblers 9.11
           b.  Refining Classical Economics 9.29
           c. Effect of the Great Depression 9.14
           d. 1970's oil shock shocks the world of economics 8.52
           e. How bad is the economy and where is it going 7.41
       9. Crash Course in Non-Equilibrium Economics  6 videos
     10. Macro Musings Podcast Claudio Borio one hour
  B. Current Political Economic Controversies has an interesting economics section. 
 		  

XIV. Schools of Economics Flow Charts

 

Western Political Economy Since 1843

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