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Dominant Thoughts and Thinkers. Smith: Role of Government and Laissez – Faire protecting society from invasion administration of justice public works and public institutions

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slide2
Smith: Role of Government and Laissez – Faire
  • protecting societyfrom invasion
  • administration of justice
  • public worksandpublic institutions
  • Every individual... neither intends to promote the public interest nor knows how much he is promoting it...[B]y directing [his] industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this … led by an invisible hand to promote an end which was no part of his intention.

Social Physics: Newton in the Economic Universe

smith s spiral of growth
Smith’s Spiral of Growth

National Wealth II

National Wealth I

Employment with increased

Division of Labor

Opportunity for division

of labor

Profit Expectations

Increased Labor Supply

(Reduced Mortality)

Demand for Investment

Higher Wage

Increased interest rate

Increased Demand for

Labor

Increased Saving

Accumulation

ricardo malthus welcome to the dismal science
David Ricardo, 1772 – 1823

Stockbroker/Dealer

Abstraction  Economic Science

Championed capitalists

Opposed Corn Law

Advanced Say’s Law

Major contributions

Differential rent

Labor theory of value

Theory of distribution

Comparative advantage

Thomas Malthus,1766 – 1834

Parson

Intuitive approach/preacher

Championed landlords

Favored Corn Law

Advanced Theory of Gluts

Major contribution

Law of population

Ricardo & Malthus: Welcome to the Dismal Science

Whoever wins, workers get dry crust

Diminishing Returns Prevail

ricardo value distribution and growth
Ricardo: Value, Distribution, and Growth

Rent

Marginal Product

(corn)

Profit

w*

Wage

Bill

K1

Capital-Labor Input

(Capital and Labor are Complements)

slide6
John Stuart Mill, Principles of Political Economy, 1848
  • Synthesis of Classical Economics
      • Economic man  self-interest as motive force
      • Invisible hand  harmony through competition
      • Minimal government …but still a role
      • Discern economic laws
          • Say’s Law
          • Law of Population
          • Iron Law of Wages
          • Law of Diminishing Returns
          • Law of Comparative Advantage
  • Mill: Competition  Efficient Production

…butPolitical Redistribution can enhance utility

marx flavors of crisis
Marx: Flavors of Crisis

Invention

Investment

Capital

Widening

Capital

Deepening

Increased

Organic

Composition

Reserve

Increased

Employment

Decreased

Employment

Army

Falling

Rate

of Profit

Rising Wages

Decreased

Wage Bill

Expropriators

are

expropriated

Profit

Squeeze

Decreased

Demand

Overproduction

Crisis

Underconsumption

Crisis

slide8

Marginalist Revolution

  • Hermann Heinrich Gossen, Development of the laws of human interaction, 1854.
    • Obscure amateur … Acknowledged by Jevons
      • Gossen’s 1st Law:
          • Diminishing marginal utility  allocation of resources, including time
      • Gossen’s 2nd Law:
          • Equilibrium where “the last atom of money creates the same pleasure in each pleasurable use.”
          • MUx/Px = MUy/Py
  • Jevons – Walras – Pareto – Clark
  • Menger - Böhm-Bawerk – Wieser – Mises
marshall s principles of economics themes and contents
Marshall’s Principles of Economics: Themes and Contents

Economics … a study of mankind inthe ordinary business of life.

Partial equilibrium analysis … representative agents and firms

Supply (costs) interact with demand (utilities)

Ceteris paribus conservative tilt: “Nature does not leap” (Marshall)

Supply and demand curves (the Marshallian cross)

Value determined by both blades of the scissors

Consumer and producer surplus

Reciprocal demand curves in trade

Elasticity of demand value

Price decline  increase in real income

Anticipates income and substitution effect analysis

Short-run and long-run supply – fixed and variable costs

Elasticity of supply increases with time

Value in short-run depends on demand quantity

Value in long-run depends on supply

Internal economies  difficulties for competitive market paradigm

External economies (of industry scale)

keynes general theory
Keynes’ General Theory
  • What did he say?
      • Different things at different times
          • On tariffs
          • On saving
  • What did he mean?
  • Y = C + I
  • C = C(Y) …Propensity to consume  passive response to income
  • I = I(i) …Marginal efficiency of capital + animal spirits  instability
      • S = I …spending multiplier … Income adjusts, not wages and prices
  • L = L(Y,i) … Liquidity preference function
  • interest rate determined in money market,
slide11
The Neoclassical – Keynesian SynthesisShort – run  Keynesian UnemploymentLong – run  Classical Full Employment

Mr. Keynes and the Classics: A suggested simplification,

Econometrica, 1937

Goods Market: I = S

Money Market: L = M

 ISLM macromodel

Sir John Hicks

1904 - 1989

i

LM

IS

Y

monetarism in theory and practice
Monetarism in Theory and Practice
  • Theory: M  P and Y in short – run

M  P in long - run

      • Friedman’s restated quantity theory
      • Expectations augmented Phillips Curve

 Vertical long – run Phillips Curve

 “Monetary mischief”

  • Practice: oppose Keynesian activism
      • Monetary vs. fiscal policy: what matters?
      • Inherent stability vs. instability of enterprise economy
      • Policy: Long – run vs. short – run focus

Varying policy lags … “too much too late”

          • Steady money growth as automatic stabilizer
spectrum of macroeconomic thought

Marx

Kalecki

Keynes

Friedman

Lucas

New

Classical

Post-

Keynesian

Keynesian

(hydraulic

Keynesians)

Monetarist

Radical

Political

Economy

Austrian

Rat-X

New Keynesian

- New Monetarist(?)

Markets

Clear in

Short-Run

micro

foundations

Spectrum of Macroeconomic Thought

Sticky

Wages/Prices

Uncertainty

Markets

Clear

In

Long-run

Disequilibrium

Policy

Ineffectiveness

Policy

Works

slide14

Modern GROWTH

  • Schumpeter: A Vision without a (math) model

but

Economic science does (math) models

  • Solow: Steady – state growth

but

Economic history suggests accelerating progress

  • Endogenous growth theory: Increasing returns
    • Paul Romer
    • Robert Lucas, Jr.