Download Classical and Keynesian Economics

Classical and Keynesian
Economics: Contending
Approaches to Macroeconomics
Copyright, 1996 © Dale Carnegie & Associates, Inc.
Classical Economics
WHO?
Adam Smith, David Ricardo, John Stuart
Mill, Alfred Marshall
CENTRAL PRINCIPLE:
The economy is best organized as a
self-regulating system of markets.
Classical Economics
1.
MARKETS CLEAR
No surplus or shortage.
.
a)
SAY’S Law: “Supply Creates
Its Own
Demand”
b)
All Unemployment is voluntary.
Classical Economics
2.
WAGES AND PRICES ARE FULLY
FLEXIBLE
in order to clear markets rapidly.
3.
ECONOMY OPERATES AT FULL
EMPLOYMENT most of the time.
Classical Aggregate Supply Curve is
vertical.
Classical Economics
4.
INVESTMENT DEMAND IS A
FUNCTION OF INTEREST RATES.
5.
A BALANCED FISCAL BUDGET
is the desirable fiscal stance of
government.
Classical Economics
6.
MINIMAL GOVERNMENT
INTERVENTION
reflecting distrust of government and
belief in its inefficiency.
KEYNESIAN ECONOMICS
WHO?
John Maynard Keynes.
CENTRAL PRINCIPLE:
The economy often operates at less
than full employment; market
system does not self adjust.
KEYNESIAN ECONOMICS
Keynes: “Demand creates its own
Supply”
Focus on what drives planned
expenditures.
I.e., Spending creates Income.
KEYNESIAN ECONOMICS: KEY
IDEAS
1.
MARKETS CLEAR ONLY SLOWLY, IF
AT ALL.
A)
Demand creates its own supply,
turning Say’s law on its head.
B)
In a depression or recession,
much unemployment is
involuntary.
KEYNESIAN ECONOMICS
2.
WAGES AND PRICES ARE “STICKY”
OR INFLEXIBLE.
Why?
*
Large corporations have power
to administer or fix output
prices.
*
Labor Unions -- wage inflexibility
& labor contracts.
KEYNESIAN ECONOMICS
“Ratchet Effect” -- wages and prices are
flexible upwards but are inflexible
downwards. They ratchet upwards.
3.
ECONOMY OFTEN OPERATES AT
LESS THAN FULL EMPLOYMENT
Since markets don’t clear.
Keynesian Aggregate Supply curve is
very flat.
KEYNESIAN ECONOMICS
4.
DEMAND FOR INVESTMENT
SPENDING IS DRIVEN BY BUSINESS
EXPECTATIONS OF
PROFITABILITY.
I. is much less sensitive to interest
rates.
KEYNESIAN ECONOMICS
5.
BALANCING THE FISCAL BUDGET
MAY NOT ALWAYS BE DESIRABLE.
“Pump Priming” of total demand by
budget deficit spending.
6.
GOVERNMENT INTERVENTION MAY
BE DESIRABLE TO STABILIZE THE
BUSINESS CYCLE.
Fiscal and Monetary Policies.