Chapter 15: The Development of Modern Macroeconomic Thought

1. Chapter 15: The Development of Modern Macroeconomic Thought Questions for Review, Discussion and Research 2, 4

2. Retreat from Growth Theory • Adam Smith emphasized the relationships between • free markets • private investment • laissez faire • economic growth and development

3. Retreat from Growth Theory Cont’d • Stressed the dynamic features of a market economy and viewed free trade as an opportunity to generate technological and organizational change through • Division of labour and economies of scale • Learning by doing

4. Retreat from Growth Theory Cont’d • Ricardian microeconomics emphasized the allocation and distribution concerns • The development of neoclassical economics accelerated the movement away from growth theory • The Neoclassicals, with exception of Marshall, focused exclusively on static equilibrium

5. Marshall’s views resembled Mill’s whose discussions of technological change and population control were optimistic about the prospect for continuous growth

6. Schumpeter and Growth • His theories were difficult to incorporate into the style and method of mainstream economics • Viewed depressions and the process of creative destruction as an integral part of capital economic growth Overhead pp. 412-13

7. The success of capitalism will alter the old concept of private property with the rise of an intellectual class who live off the fruits of the system but continually undermine it with their discontent and resentment

8. Underconsumptionist Arguments • Mercantilists wanted to understand and determine the capacity and operation of economic activity • They believed that savings and the purchase of imports would create a shortage of demand for domestic products Overhead pp. 415

9. Monetary Economics and The Quantity Theory of Money • Economists of every era discussed monetary theories that determine the general price level • Classical quantity theory • The first clear statement by Hume in 1752

10. Cambridge Version of Quantity Theory • Marshall sought to integrate the microeconomic behaviour of households and firms with his discussion of the general price level • The cash balance version is

11. Monetary Economics and The Quantity Theory of Money Cont’d • M=k *p* y • Where k – inverse of velocity of money • Fixed value based on custom and habit • Where y – full employment due to Say’s Law and self correcting mechanism by non-monetary forces • The real cash balance version is M = k * y P

12. Monetary Economics and The Quantity Theory of Money Cont’d • Fishers Transaction Version of the Quantity Theory MV = PT

13. Wicksell’s Critique • Developed a monetary theory that explains fluctuations in income (Y) and the price level (P) to explain “Why the monetary or pecuniary demand for goods exceeds or falls short of the supply of goods in given conditions” Overhead pp. 417 to 432