econ434notes32a

econ434notes32a - History of Economic Doctrines Lecture 29...

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History of Economic Doctrines Lecture 29 Keynesian Economics and the Economics of Keynes John Maynard Keynes and the Great Depression Biography Keynes was successful in many different arenas, including social, political and academic. He had amassed a private fortune by speculating in commodities, stock market securities and foreign currencies. Keynes also married a leading Russian ballerina. Furthermore, he was a part of England’s foremost intellectual set, the Bloomsbury group. In the political realm, Keynes served as a treasury official and as chief economics representative for the British government in important meetings following both World Wars. Yet, he will be most remembered as being a leading figure in economics. Along with the work of Smith and Marx, Keynesian theories and policies have had a major impact on economic thought and practice in the twentieth century. -Monetarists’ vs. Keynesians View from earlier econ courses: Monetarists: Keynesians AD depends on money supply Looks at government spending habits. Keynes Belief: -An Increase in aggregate demand at full employment led to an increase in the price level. -Also that a decrease in aggregate demand would lead to a quantity adjustment in which producers decreased production (Keynes thought that, in a recession, people would only produce if they thought that someone would buy the goods that they produced.) -Demand creates its own Supply\ Neoclassical Macro v. Keynesian Theory Neoclassical The market is a machine that generates “the best of all possible worlds.” [to quote Dr. Pangloss, from Voltaire’s Candide .] - Assumes flexible w, i , p and Say’s Law -- yields full employment - AD just determines price levels -- price levels determined by the money supply: M/ M P/ P Keynes - Neoclassical paradigm is not valid in the SR when AD falls because of sticky wages and prices
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Quantity Adjustments Similar Debates - Keynes: quantity adjustment and AD Neoclassical: price adjustment and AS - Austrians: demand determines pricing English tradition: supply determines pricing -Keynesian Theory Keynes thought that a capitalist economy would experience high unemployment as a long term situation unless some external forces were used to reduce it. He believed that this external force must come from government and should take the form of large expenditures on public works projects capable of utilizing and mobilizing willing workers who are unemployed. Keynes did not believe in the long tradition of “laissez- faire’ policies, which strongly discourage government intervention in the economy.
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