Dominant Thoughts and Thinkers

1. Dominant Thoughts and Thinkers

2. Smith: Role of Government and Laissez – Faire • protecting societyfrom invasion • administration of justice • public worksandpublic institutions • Every individual... neither intends to promote the public interest nor knows how much he is promoting it...[B]y directing [his] industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this … led by an invisible hand to promote an end which was no part of his intention. Social Physics: Newton in the Economic Universe

3. Smith’s Spiral of Growth National Wealth II National Wealth I Employment with increased Division of Labor Opportunity for division of labor Profit Expectations Increased Labor Supply (Reduced Mortality) Demand for Investment Higher Wage Increased interest rate Increased Demand for Labor Increased Saving Accumulation

4. David Ricardo, 1772 – 1823 Stockbroker/Dealer Abstraction  Economic Science Championed capitalists Opposed Corn Law Advanced Say’s Law Major contributions Differential rent Labor theory of value Theory of distribution Comparative advantage Thomas Malthus,1766 – 1834 Parson Intuitive approach/preacher Championed landlords Favored Corn Law Advanced Theory of Gluts Major contribution Law of population Ricardo & Malthus: Welcome to the Dismal Science Whoever wins, workers get dry crust Diminishing Returns Prevail

5. Ricardo: Value, Distribution, and Growth Rent Marginal Product (corn) Profit w* Wage Bill K1 Capital-Labor Input (Capital and Labor are Complements)

6. John Stuart Mill, Principles of Political Economy, 1848 • Synthesis of Classical Economics • Economic man  self-interest as motive force • Invisible hand  harmony through competition • Minimal government …but still a role • Discern economic laws • Say’s Law • Law of Population • Iron Law of Wages • Law of Diminishing Returns • Law of Comparative Advantage • Mill: Competition  Efficient Production …butPolitical Redistribution can enhance utility

7. Marx: Flavors of Crisis Invention Investment Capital Widening Capital Deepening Increased Organic Composition Reserve Increased Employment Decreased Employment Army Falling Rate of Profit Rising Wages Decreased Wage Bill Expropriators are expropriated Profit Squeeze Decreased Demand Overproduction Crisis Underconsumption Crisis

8. Marginalist Revolution • Hermann Heinrich Gossen, Development of the laws of human interaction, 1854. • Obscure amateur … Acknowledged by Jevons • Gossen’s 1st Law: • Diminishing marginal utility  allocation of resources, including time • Gossen’s 2nd Law: • Equilibrium where “the last atom of money creates the same pleasure in each pleasurable use.” • MUx/Px = MUy/Py • Jevons – Walras – Pareto – Clark • Menger - Böhm-Bawerk – Wieser – Mises

9. Marshall’s Principles of Economics: Themes and Contents Economics … a study of mankind inthe ordinary business of life. Partial equilibrium analysis … representative agents and firms Supply (costs) interact with demand (utilities) Ceteris paribus conservative tilt: “Nature does not leap” (Marshall) Supply and demand curves (the Marshallian cross) Value determined by both blades of the scissors Consumer and producer surplus Reciprocal demand curves in trade Elasticity of demand value Price decline  increase in real income Anticipates income and substitution effect analysis Short-run and long-run supply – fixed and variable costs Elasticity of supply increases with time Value in short-run depends on demand quantity Value in long-run depends on supply Internal economies  difficulties for competitive market paradigm External economies (of industry scale)

10. Keynes’ General Theory • What did he say? • Different things at different times • On tariffs • On saving • What did he mean? • Y = C + I • C = C(Y) …Propensity to consume  passive response to income • I = I(i) …Marginal efficiency of capital + animal spirits  instability • S = I …spending multiplier … Income adjusts, not wages and prices • L = L(Y,i) … Liquidity preference function • interest rate determined in money market,

11. The Neoclassical – Keynesian SynthesisShort – run  Keynesian UnemploymentLong – run  Classical Full Employment Mr. Keynes and the Classics: A suggested simplification, Econometrica, 1937 Goods Market: I = S Money Market: L = M  ISLM macromodel Sir John Hicks 1904 - 1989 i LM IS Y

12. Monetarism in Theory and Practice • Theory: M  P and Y in short – run M  P in long - run • Friedman’s restated quantity theory • Expectations augmented Phillips Curve  Vertical long – run Phillips Curve  “Monetary mischief” • Practice: oppose Keynesian activism • Monetary vs. fiscal policy: what matters? • Inherent stability vs. instability of enterprise economy • Policy: Long – run vs. short – run focus Varying policy lags … “too much too late” • Steady money growth as automatic stabilizer

13. Marx Kalecki Keynes Friedman Lucas New Classical Post- Keynesian Keynesian (hydraulic Keynesians) Monetarist Radical Political Economy Austrian Rat-X New Keynesian - New Monetarist(?) Markets Clear in Short-Run micro foundations Spectrum of Macroeconomic Thought Sticky Wages/Prices Uncertainty Markets Clear In Long-run Disequilibrium Policy Ineffectiveness Policy Works

14. Modern GROWTH • Schumpeter: A Vision without a (math) model but Economic science does (math) models • Solow: Steady – state growth but Economic history suggests accelerating progress • Endogenous growth theory: Increasing returns • Paul Romer • Robert Lucas, Jr.