Download Economic Development Theories

Rhetoric of Economic Thought
Keynes, and Liberal
macroeconomics
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Economic Development Theories
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Mercantilism (16th – late 18th century)
Classical Economics (1776-1870s)
Neo-classical Economics (1870s-1930s)
Keynesian Economics (1930s-1970s)
Development Economics (1940s-1990s)
Neoliberalism (1990s-2008)
Timeline does not necessarily imply loss of
significance of a particular theory
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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 – 2008)
Paul Samuelson (1915 – )
Samuelson
Kenneth Arrow (1921 – )
Friedman
Gary Becker (1930 – )
Robert Lucas (1937 – )
Lucas
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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
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Democracy & Capitalism =
Compromise
• Marx believed that compromise between
workers and capitalist was impossible
• Keyenesianism (1930s) provided
ideological and political foundations for
compromise
• State reconcile private ownership with
democratic management
• Sweden first country to promote
employment policies in 1932 but not
income distribution
Democracy & Capitalism
• For Keynes the engine of the economy is
consumption
• Thus his solution to economic recession =
increase demand (consumption)
• How?
• Raising wages
• Transfers to the poor by ad hoc programs
• Government spending
• Or reducing taxes
Keynes’ Policy
• Full employment and equality (creation of
welfare programs)
• Over time capitalists and socialists struck
different compromises. Capitalists
understood that Socialists had the votes to
rule and accepted a certain degree of
regulation and employment and welfare
policies as the lesser of two evils (a
communist revolution)
Liberal View
• Liberals opposed Keynes’ ideas because:
• Higher wages and more social services
raised the cost of production
• The welfare of the poor was not the
responsibility of the government (by
manipulating economic policy) but of
private charities
Classical economics
• Based on critique of Mercantilism (Adam Smith)
• General belief on economic development through free
market (i.e. trade without barriers)
• Adam Smith’s Wealth of Nations (1776) marks the
beginning
• Self-interest as economic drive
• Limited government intervention—free trade; selfregulating
markets [contrast: mercantile protectionism]
• Market prices limited by competition
• Invisible hand of self-regulating markets transform selfinterest
into public virtue
• Division of labor (i.e. specialization) enhances production
[distinctively industrial orientation]
• Division of labor limited by the extent of market
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Fiscal policy and government finance
Theories of Public Debt
Keynesian
Classical
(Less-than-full employment)
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(Full employment)
If an economy is in a state of “under
production”, expansion of debt could
conceivably make both current and
future generations better off.
Views countercyclical public debt
policy as an optimal response to the
business cycle – “appropriately
timed” deficits can benefit all.
Ricardian
Neoclassical
(Non-Ricardian)
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Debt-financed deficits make
households feel wealthier in the
short run, thereby raising current
levels of output.
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Public debt competes with private
debt for available funds, thus driving
up interest rates and changing the
composition of output (lowering
investment) with deleterious effects
for long-term growth.
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Debt-financed deficits imply higher
future taxes, and thereby constitute a
burden on future generations.
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Debt-financed deficits imply higher
future taxes with a present value
equal to the value of the debt.
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Rational agents (behaving according
to the “Permanent Income / Life
Cycle model of consumption) will
adjust current saving plans in
anticipation of the future taxes.
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Debt-financed deficits will not
change households perception of
wealth, and therefore will not
precipitate any change in current
levels of output.
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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
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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
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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.
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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 – 199214