ECN-305 Lecture Notes (Part 2)

ECN-305 Lecture Notes (Part 2) - March 4, 2008 Competing...

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Unformatted text preview: March 4, 2008 Competing traditions Smith: reliance on markets Ricardo/Malthus: class conflict and disequilibrium Utopian sots: inequality Marx: deficiencies in capitalism Veblen: irrational economic behavior and institutional change Keynes: market failures The Heresies of John Maynard Keynes US, 1920s: prosperity Living standards Stock market boom Great Bull Market (speculative bubble) Crash: October 1929 Problems: Income was concentrated High unemployment Banking failures (2 a day for 6 years!) Leverage The Heresies of John Maynard Keynes Great depression: Unemployment Business failures Lower income Problem was not temporary GDP: $87 bi in 1930 but only $39 bi in 1933 Conventional theory: voluntary unemployment was impossible The Heresies of John Maynard Keynes Keynes: viable capitalism, not doomed 1919: The Economic Consequences of the Peace Critique of the reparations imposed by the Treaty of Versailles (heavy burden) 1921: Treatise on Probability Judgment under uncertainty Critique of frequentist view of probabilities The Heresies of John Maynard Keynes 1930: Treatise on Money Theory of business cycles History of business cycles: Jevons (1870s): sunspots Malthus: savings Ricardo/Say: saving = investment (by the wealthy) Mid-19 th century: improved wealth distribution and institutionalized savings The Heresies of John Maynard Keynes Prosperity: measured by national income (current output) Flow of national income = flow expenditures Consumption: regular handing around of income Saving: money not spent The Heresies of John Maynard Keynes Banking system: puts savings to work (investment spending) Investment: fluctuates due to expectations Excess savings: possibility of recessions/depressions Capitalism: no class conflict, only rational decisions (technical problem) The Heresies of John Maynard Keynes Boom and bust: consequence of economic freedom Long-lasting nature of depressions: interest rates cannot adjust savings and investment 1936: The General Theory of Employment, Interest and Money No automatic safety mechanism Depression: state of equilibrium The Heresies of John Maynard Keynes Savings: determined by income (if income drops, savings drop, and interest rates cannot drop) Investment affects income, and therefore, savings (multiplier) Wants and demand are not the same (investment decisions are based on...
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This note was uploaded on 05/09/2008 for the course ECN 305 taught by Professor Milan during the Spring '08 term at Rhode Island.

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ECN-305 Lecture Notes (Part 2) - March 4, 2008 Competing...

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