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

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