Synopsis
of
Adam Smith
and
John Maynard Keynes
By
Emma Shanley
Emma Shanley
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Adam Smith
Scottish Economist
1723-1790
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Born in Kirkcaldy, Scotland 5 June 1723
School in Kirkcaldy
1737—University of Glasgow
Studied at Oxford University 1740-1747
Lectured in Edinburgh and Glasgow
University between 1748 to 1763.
Author of The Publication “The Wealth of the
Nations”
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The Power of the Invisible Hand
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Pursue individual interest
Result: Benefit society in general
E.g. set up business for profit and create
employment for people at the same time.
Believed people were driven by selfishness and this
was morally acceptable as this benefited society.
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3
Laissez-Faire
Believed the government should not
interfere except for to provide the
following:
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Promote free trade
Build up the infrastructure of the country
Provide a legal system
Defend the country
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Productive and Non-productive
Labour
Productive
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Produced goods for
sale
Making money to
reinvest
E.g. Baker
Non-productive
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Emma Shanley
Actors
Teachers
Engineers
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The Labour Theory of Value
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Distinguished between value in use and value in
exchange. See my example below.
Diamonds
Water
• Has many uses
• Small value in
exchange
•
•
Emma Shanley
Has limited number of
uses.
Large value in exchange.
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The Canons of Taxation
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Equality– Tax payments should be proportional
to income
Certainty– Tax liabilities should be clear and
certain
Convenience: Taxes should be collected in a
manner convenient for taxpayer
Economy – Taxes should not be expensive to
collect and should not discourage business.
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The Division of Labour
Improve the productiveness of labour.
For instance, the making of a single pin involves
eighteen separate operations, which are
entrusted to eighteen separate workmen; and
the result is, that whereas one man working
alone could make perhaps only twenty pins in a
day, several men working together, on the
principle of division of labour, can make several
thousands of pins per man in one day.
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Exam Questions Examples
2006 section B
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John Maynard Keynes
British Economist
1883 - 1946
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Born in Cambridge, England
Son of John Neville Keynes Professor of
Economics at Cambridge
Won a scholarship to Eton and later to
Kings College Cambridge
Lectured at Kings College from 1908
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Publications
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A Treatise on Money – 1930 Bestseller
The General Theory of Employment,
Interest and Money - 1936
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Fiscal
Policy
He did not believe in Laissez-Faire
Government controlled tax levels and public spending.
E.g. an economy has slowed down
•
•
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Unemployment levels are up
Consumer spending is down
Businesses are not making any money
Government decreases taxation
• Consumers have more money to spend.
• Government spends money by buying services from the market (such as
building roads or schools).
• Jobs are created.
Result:
More money in the economy and less taxes to pay
Business will now begin to make money again
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The Theory of the Multiplier
Injection of money into a business.
 Creates more income than the amount
invested.
 The formula for the Multiplier is as follows:
1
1 – MPC + MPM + MPT

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The Liquidity Preference Theory of
Interest Rates
Rate of Interest fixed by the Central Bank
•
Settles at a level which brings about equal
Supply of and Demand for Money
•
Supply meant the money in circulation.
•
Demand meant the reasons why people
want to hold onto money rather than
invest it.
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Saving and Investments
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Savings and Investments were not equal
to each other.
Savings were greater than the amount
that entrepreneurs are willing to invest.
Causes underemployment in the economy.
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Exam Question Examples
2002 section A
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The End
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