* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download rh351_transparencies6_std - Rose
Fear of floating wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Economics of fascism wikipedia , lookup
Steady-state economy wikipedia , lookup
Modern Monetary Theory wikipedia , lookup
Non-monetary economy wikipedia , lookup
Post–World War II economic expansion wikipedia , lookup
Full employment wikipedia , lookup
International monetary systems wikipedia , lookup
Fiscal multiplier wikipedia , lookup
Phillips curve wikipedia , lookup
Austrian business cycle theory wikipedia , lookup
Interest rate wikipedia , lookup
Edmund Phelps wikipedia , lookup
Monetary policy wikipedia , lookup
Business cycle wikipedia , lookup
Keynesian Revolution wikipedia , lookup
RH351 Rhetoric of Economic Thought Transparencies Set 6 Keynes, Keynesianism, and modern macroeconomics Economic analysis – key contributors, 20th century 1900 2000 1950 Alfred Marshall (1842 – 1924) John Maynard Keynes (1883 – 1946) Keynes Thorstein Veblen (1857 – 1929) Joseph Schumpeter (1883 – 1950) Friedrich A. von Hayek (1899 – 1992) Hayek Ronald Coase (1910 – ) Milton Friedman (1912 – ) Paul Samuelson (1915 – ) Samuelson Kenneth Arrow (1921 – ) Friedman Gary Becker (1930 – ) Robert Lucas (1937 – ) Lucas John Maynard Keynes, 1883 – 1946 Biographical Details 1883 Early life 1906 / 1909 1914 – 1918 1918 1919 1921 1923 1924 – 1925 1926 1930 1930 – 1935 1936 1939 – 1943 1944 1946 Marx dies, Keynes born Eaton / Cambridge – Studies under Marshall British civil service / back to Cambridge The Great War – At the Treasury, financing the war Versailles Peace Conference The Economic Consequences of the Peace Treatise on Probability Tract on Monetary Reform Gold Standard debate in U.K. "Currency Policy and Unemployment" (1923) "Monetary Reform" (1924) "The Gold Standard Act" (1925) The Economic Consequences of Mr. Churchill (1925) The End of Laissez-Faire A Treatise on Money Responses to “The Great Slump” General Theory of Employment, Interest, and Money WWII, back at the Treasury Bretton Woods Keynes dies / Keynesianism is born G. E. Moore’s Principia Ethica (1903) “… o ur causal knowledge is utterly insufficient to tell us what different effects will probably result from two different actions, except within a comparatively short space of time … Our utter ignorance of the far future gives us no justification for saying that it is even probably right to choose the greater good within the region over which a probable forecast may extend … It does in fact appear to be the case that, in most cases, whatever action we now adopt, ‘it will be all the same a hundred years hence,’ … we can only hope to discover which, among a few alternatives, will generally produce the greatest balance of good in the immediate future.” Chapter V, “Ethics in Relation to Conduct”, sections 93 and 94 Keynes’ road to The General Theory But this long run is a misleading guide to current affairs. In the long run we are all dead. Economist set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again. Tract on Monetary Reform (1923) I abandon laissez-faire – not enthusiastically . . . . but because, whether we like it or not, the conditions of its success have disappeared … Our problem is to work out a social organization which shall be as efficient as possible without offending our notions of a satisfactory way of life. The End of Laissez Faire (1926) I believe myself to be writing a book on economic theory which will largely revolutionize -- not, I suppose, at once, but in the course of the next ten years -- the way the world thinks about economic problems. Letter to G.B. Shaw (1935) Keynes, The General Theory -- Aggregate Demand The idea that we can safely neglect the aggregate demand function is fundamental to the Ricardian economics ... The celebrated optimum of traditional economic theory, which has led to economists being looked upon as Candide's ... is also to be traced, I think, to their having neglected to take account of the drag on prosperity which can be exercised by an insufficiency of effective demand ... It may well be that the classical theory represents the way in which we should like our Economy to behave. But to assume that it actually does so is to assume our difficulties away. The General Theory (pp. 32 – 34) Keynes, The General Theory -- The Propensity to Consume The fundamental psychological law, upon which we are entitled to depend with great confidence both a priori from our knowledge of human nature and from the detailed facts of experience, is that men are disposed, as a rule and on the average, to increase their consumption as their income increases, but not by as much as the increase in their income. That is to say, if Cw is the amount of consumption and Yw is income (both measured in wage-units) Cw has the same sign as Yw but is smaller in amount, i.e. dC w dYw is positive and less than unity. The General Theory (p. 96) Keynes, The General Theory -- Investment There will be an inducement to push the rate of new investment to the point which forces the supplyprice of each type of capital asset to a figure which, taken in conjunction with its prospective yield, brings the marginal efficiency of capital in general to approximate equality with the rate of interest. That is to say, the physical conditions of supply in the capital goods industries, the state of confidence concerning the prospective yield, the psychological attitude to liquidity and the quantity of money ... determine, between them, the rate of new investment. The General Theory (p. 248) Keynes, The General Theory -- Animal Spirits Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. ... if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die; The General Theory (p. 161) Hayek and Keynes on free markets and social justice Our problem is to work out a social organization which shall be as efficient as possible without offending our notions of a satisfactory way of life. The End of Laissez-Faire (1926) John Maynard Keynes 1883 – 1946 We must face the fact that the preservation of individual freedom is incompatible with a full satisfaction of our views of distributive justice Individualism, True and False (1945) Friedrich Hayek 1889 – 1992 The evolution of “textbook” economics Early 1800s: Political Economy Mill, The Wealth of Nations (1776) Ricardo, Principles of Political Economy (1817) 1850: Political Economy Mill, Principals of Political Economy (1848) 1900: Economics Marshall, Principals of Economics (1890) Keynes’s General Theory 1950: Economics Samuelson, Economics, An Introductory Analysis (1948) Part 1: Basic Economic Concepts and National Income Part 2: Determination of National Income and its Fluctuations Part 3: The Composition and Pricing of National Output Macroconomics Microconomics Keynes or Keynesianism? The Employment Act of 1946: The Congress hereby declares that it is the continuing policy and responsibility of the Federal Government to use all practicable means consistent with its needs and obligations and other essential considerations of national policy … to promote maximum employment, production, and purchasing power. What is at stake in our economic decisions today is not some grand warfare of rival ideologies which will sweep the country with passion, but the practical management of a modern economy. What we need is not labels and cliches but more basic discussion of the sophisticated and technical questions involved in keeping a great economic machinery moving ahead. John F. Kennedy, 1962 We’re all Keynesians now. Richard Nixon, 1971 The Income-Expenditure Model – the “Keynesian Cross” $ TOTAL SPENDING C+I C EQUILIBRIUM POINT l 45° 0 NNP NET NATIONAL PRODUCT Samuelson, 1961 (5TH ed.) Hicks and the birth of IS – LM analysis “Against a given quantity of money, the first equation, M = L(I,i) gives us a relation between Income (I) and the rate of interest (i). This can be drawn out as a curve (LL) which will slope upwards, since an increase in income tends to raise the demand for money, and an increase in the rate of interest tends to lower it … The curve IS can … be drawn showing the relation between Income and interest which must be maintained in order to make saving equal to investment. “Income and the rate of interest are now determined together at P, the point of intersection of the curves LL and IS. They are determined together; just as price and output are determined together in the modern theory of demand and supply.” J. R. Hicks, “Mr. Keynes and the ‘Classics’; A Suggested Interpretation.” Econometrica 5 (April 1937): 147 – 159. “Hick’s graphical approach, called the IS-LM approach, is still used widely today because of its great intuitive appeal.” Robert E. Hall and John B. Taylor, Macroeconomics: Theory, Performance, and Policy, 2nd ed. (1986). i INTEREST RATE (R) IS LM L P L I IS GNP(Y) 0 Hicks, 1937 Hall & Taylor, 1986 The algebra of the basic IS-LM model IS Curve LM Curve (Equilibrium in the goods market) (Equilibrium in the assets market) Output = Expenditure Y C I G Y a b(Y T ) c dr G Y a bY bT c dr G dr a c G bT (1 b)Y a c G bT (1 b) r Y d d r 1-b < 0, because 0 ≤ ≤1 Y d Demand for “Real Balances” = M P f(Output, Interest Rate) + = L(Y , r ), e.g., M P = kY - hr M kYP hrP 1M k r=+ Y h P h r k = > 0, becauseh, k > 0 Y h Fiscal and Monetary policy with IS – LM analysis Typical “Keynesian” View Typical “Monetarist” View If d is “large”, IS is flat If h is “small”, LM is steep F Monetary policy is relatively strong INTEREST RATE If d is “small”, IS is steep If h is “large”, LM is flat F Fiscal policy is relatively strong INTEREST RATE (i) (i) LM LM’ Illustrating equal magnitude Shifts of IS and LM LM IS LM’ IS’ IS GNP(Y) For equal magnitude changes in fiscal or monetary policy, monetary policy is relatively more effective in influencing output. IS’ GNP(Y) For equal magnitude changes in fiscal or monetary policy, fiscal policy is relatively more effective in influencing output. The Phillips Curve w Phillips, A. W., “The Relationship Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom,” Economica 25 (November 1958). Samuelson, Paul A., and Robert M. Solow, "Analytical Aspects of Anti-Inflation Policy." American Economic Review 50:2 (1960): 17794. 5.5% Unemployment Rate Friedman on the Phillips Curve Phillips’ analysis of the relation between unemployment and wage change is deservedly celebrated as an important and original contribution. But, unfortunately, it contains a basic defect – the failure to distinguish between nominal wages and real wages …Phillips wrote his article for a world in which everyone anticipated that nominal prices would be stable and in which that anticipation remained unshaken and immutable whatever happened to actual prices and wages. Milton Friedman (1912 – ) … the Phillips Curve can be expected to be reasonably stable and well defined for any period for which the average rate of change of prices, and hence the anticipated rate, has been relatively stable. For such periods, nominal and real wages move together … The higher the average rate of price change, the higher will tend to be the level of the curve… To state this conclusion differently, there is always a temporary trade-off between inflation and unemployment; there is no permanent trade-off. The temporary trade-off comes not from inflation per se, but from unanticipated inflation. “The Role of Monetary Policy,” American Economic Review 58:1 (March 1968), 1 – 17. The “expectations augmented” Phillips Curve Friedman, Milton, “The Role of Monetary Policy,” American Economic Review 58:1 (March 1968), 1 – 17. Inflation Phelps, Edmund, "Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time,“ Economica 34 (August 1967). U* Unemployment Rate The 1970s crisis in macroeconomic policy The present situation cannot last… it will either degenerate into hyper-inflation and radical change; or institutions will adjust to a situation of chronic inflation; or government will adopt policies that will produce a low rate of inflation and less government intervention into the fixing of prices.” Milton Friedman As an advice-giving profession, we’ve made a real mess of things. Robert Lucas Schools of thought in mid-20th century macroeconomics Keynesianism is the view that Monetarism is the view that economies are inherently unstable, that they may in fact settle at less-than full employment equilibrium, that Aggregate Demand is the primary determinant of output and employment, and that authorities can intervene in an economy to stabilize it. Keynesians generally express a preference for fiscal policy as a stabilizing tool. economies are inherently stable, that the quantity of money has a major influence on economic activity and the price level, and that the objectives of monetary policy are best achieved by targeting the rate of growth of the money supply. Monetarists generally express a preference for monetary policy as a stabilizing tool relative to prices only, being generally skeptical of attempts to manage output. Keynes Samuelson Friedman Greenspan Schools of thought in late-20th century macroeconomics New Keynesianism is the view New Classicalism is the view that that market failures and microeconomic coordination failures give rise to macroeconomic instabilities that frequently cause economies to settle at less-than full employment equilibrium, that both aggregate demand and aggregate supply are important determinants of output and employment, and that authorities can intervene with fiscal and monetary policy tools to stabilize an economy economies are inherently stable, that fiscal and monetary interventions tend to be destabilizing, and that cyclical fluctuations are caused by either real shocks to the economy or unanticipated policy shocks. New classicals generally express a preference for microeconomic policies aimed at fostering aggregate supply, and a predictable monetary policy to maintain price stability. Bernanke Mankiw Prescott Lucas Saltwater macroeconomics Freshwater macroeconomics • Minnesota • Cal Berkeley • Stanford Based on David M. Kreps, “Economics – The Current Position” (1997) Rochester • Chicago • Carnegie - Mellon • Harvard / MIT • • Yale Princeton • •Penn The Keynesian “revolution” Beyond all this stretched the ‘Keynesian Revolution’ – the logic and practice of managing economies so as to maintain full employment and avoid depressions like that of 1929 – 33. In the form Keynes left it, his Revolution was never wholly accepted; and the debate about its value and relevance, and its author’s place in the pantheon of thought and statesmanship, continues. Robert Skidelsky, John Maynard Keynes, Volume III, Fighting for Freedom, 1937 – 1946 (2000) Now, after more than three decades in the wilderness, Keynesian-style fiscal policy seems to be staging a comeback. “A stimulating notion,” The Economist, February 16, 2008.