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