Chapter 4 - reading group

Chapter 4 - reading group - Chapter 4 from Rapley: The...

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Chapter 4 from Rapley: The Neoclassical Answer to Failure A number of right-wing politicians across the Western world win elections in the late 1970s. For example Margaret Thatcher in the UK in 1979 and Ronald Reagan wins the US presidency the next year. This was a clear sign that the state-led development and its ideas were starting to lose their support among the public in the developed world. This change greatly influenced policies of donor- agancies across the First World, in particularily the IMF and the World Bank. The Neoclassical Tradition Neoclassical tradition dates back to 1870. At the time mathematics was introduced into the study of economics giving birth to an array of new branches of economics and separating economics from political economy. Guiding neoclassical economics was the fundamental assumption that people are rational and utilty maximizers: they know what they want and how to get it best. From this assumption it follows that the most productive economy will be the one in which individuals are allowed the greates freedom to pursue their self-interest. The concluscion points to an idea that Adam Smith had in mind: that if people are allowed to pursue their narrow self interest, society as a whole will benefit. Not until 1950 was Keynes' theory challenged, and it was done so first time by Milton Friedman (University of Chicago) who revived the quantity theory of money and argued that monetary policy was more effective than the fiscal one (by merely lowering the interest rate and thus encouriging people to spend during recessions; or encouraging saving during a boom by raising the interest rate) As Friedman saw it, the principal role of the government was to create right conditions for individuals to
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This note was uploaded on 10/09/2010 for the course INTD 200 taught by Professor .. during the Fall '09 term at McGill.

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Chapter 4 - reading group - Chapter 4 from Rapley: The...

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