War of Ideas
 There is an ideological war between the
French and the English.
 You will be surprised to learn that most
conservatives side with the French.
War of Ideas
 The French
economist is J.B.
Say.
 The English
economist is John
Maynard Keynes.
Say’s Law
Tout travail
cree sa propre
consommation
Ricardo traitor to the Crown
 Agreed with Say’s
law that “supply
creates its own
demand”
 And endorsed
another French
sounding idea
Laissez fair
Say’s Law at the movies
Supply creates its own Demand!
The challenger’s reply
Although the idea of laissez faire
I beg
to differ.and
Supply
does
is admirable
might be
not create
demand.
is a
applicable
in the
long run,Itplease
remember
that we interaction
are all dead in
tempestuous
the long run! the
and sometimes
opposite is true.
Business Cycle
Real
Output
(GDP)
Economic Boom
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
run
 One can consider the short
run erratic behavior of the
cycle as statistical noise
 One can argue leave it
alone and applaud the
market’s long run
performance.
 One could look at the short
run
 One can argue the macro
economy is unstable and
can lead to undesirable
outcomes
 One can argue some entity
(government) has to step
in and correct for this
erratic behavior!
Laissez Faire
 This is the long run view
 These economist argue the market through
flexible prices and wages will correct itself!
 They believe unsold goods and unemployed
labor can and will emerge,
but both would disappear as soon as people
have time to adjust prices and wages.
Keynesian View
 Keynes asserted that a market driven
economy is inherently unstable.
 He argued that expectation (psychology) of
consumers and business is determined by
the short run market performance.
 Although he believed in the long run
performance of the market system, he
argued that we are all dead in the long run!
(remember he was trying to save capitalism!)
Proving his point
 Keynes attacked the idea of Say’s by
showing:
 Prices do not correct for the
macroeconomic failure
The Historical Record
1900-1940
24
20
Unemployment
16
12
8
4
0
–4
Inflation
–8
1900
1910
1920
1930
1940
During the 1970s This Pattern
Changed
 During the 1970s this pattern of high
unemployment and falling prices did not
hold.
 Leading to the revival of laissez faire
schools of thought!
The Historical Record
1930-2000
During 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