War of Ideas - War of Ideas There is an ideological war...

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Unformatted text preview: War of Ideas There is an ideological war between the There French and the English. You will be surprised to learn that most You conservatives side with the French. War of Ideas The French The economist is J.B. Say. The English The economist is John Maynard Keynes. Say’s Law Tout travail cree sa propre consommation 1 Ricardo traitor to the Crown Agreed with Say’s Agreed Say’ law that “supply creates its own demand” demand” And endorsed And another French sounding idea Laissez fair Laissez Say’s Law at the movies Supply creates its own Demand! The challenger’s reply Although the idea of laissez I beg to differ. Supply faire is admirable and might be does not create demand. It applicable in the long run, please remember that we are all is a tempestuous dead in the long run! interaction and sometimes the opposite is true. 2 Business Cycle Economic Boom Real Output (GDP) n om Eco y is w gro ing lo ra ove ng i od per Growth Trend Recession However in the short run it is erratic! Time Two ways of looking at the Business Cycle One could look at the long One run One can consider the short One run erratic behavior of the cycle as statistical noise One can argue leave it One alone and applaud the market’s long run market’ performance. One could look at the short One run One can argue the macro One economy is unstable and can lead to undesirable outcomes One can argue some entity One (government) has to step in and correct for this erratic behavior! Laissez Faire This is the long run view This These economist argue the market through These flexible prices and wages will correct itself! flexible They believe unsold goods and unemployed They labor can and will emerge, but both would disappear as soon as people have time to adjust prices and wages. 3 Keynesian View Keynes asserted that a market driven Keynes economy is inherently unstable. He argued that expectation (psychology) of He consumers and business is determined by the short run market performance. Although he believed in the long run Although performance of the market system, he argued that we are all dead in the long run! (remember he was trying to save capitalism!) (remember Proving his point Keynes attacked the idea of Say’s by Keynes Say’ showing: Prices do not correct for the Prices not macroeconomic failure The Historical Record 1900-1940 190024 20 Unemployment 16 12 8 4 0 –4 Inflation –8 1900 1910 1920 1930 1940 4 During the 1970s This Pattern Changed During the 1970s this pattern of high During unemployment and falling prices did not hold. Leading to the revival of laissez faire Leading schools of thought! The Historical Record 1930-2000 1930During war time Government Spending Increases 20 20 WWII 15 Reagan’s increased Cold War spending Korean War 10 5 3 0 Vietnam War 10 5 3 0 –5 –5 –10 15 15 End of Vietnam War Great Depression WWII Ends End of Cold War –10 –15 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 5 ...
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