chap1.10 - The Origin of Modern Macroeconomics Economists...

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The Origin of Modern Macroeconomics Economists began to study long-run economic growth , inflation and international payments as long ago as the 1750s, and this work was the origin of macroeconomics. But modern macroeconomics did not emerge until the Great Depression , a decade (1929- 1939) of high unemployment and stagnant production throughout the world economy. In the Depression’s worst year , 1933, the production of U.S. farms, factories, shops, and offices was only 70 percent of its 1929 level and 25 percent of labor force was unemployed. These were years of human misery on a scale that is hard to image today . They were also years of extreme pessimism about the ability of the market economy to work properly . Many people believed that private ownership, free markets, and democratic political institutions would not survive. The science of economics had no solutions to the Great Depression . The major alternative system of central planning and socialism seemed increasingly attractive. It was in this climate of economic depression and political and intellectual turmoil that modern macroeconomics emerged with the publication in 1936 of John Maynard Keynes’s The General Theory of Employment, Interest and Money . Keynes’ theory was that depression and high unemployment result from insufficient private spending and that to cure these problems, the government must increase its spending . Keynes’s focused primarily on the short term. He wanted to cure an immediate problem almost regardless of the long-term consequences of the cure. In the long run ,” said Keynes, “ we’re all dead .” But Keynes believed that after his cure for depression had restored the economy to a normal condition, the long-term problems of inflation and slow economic growth would return . And he suspected that his cure for depression, increased government spending, might trigger inflation and might lower the long-term growth rate, the economy would create fewer jobs. If this outcome did occur, a policy aimed at lowering unemployment in the short run might end up increasing it in the long run. By the late 1960s and through
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This note was uploaded on 09/08/2010 for the course ECON 102 at San Jose State University .

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chap1.10 - The Origin of Modern Macroeconomics Economists...

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