Dominant Thoughts and Thinkers
Time Span
Individual Emphasis
Laissez - faire
1775 – 1800
Adam Smith-Say
1800 – 1825
Ricardo - Malthus
1825 – 1850
John Stuart Mill
1850 – 1875
1875 – 1900
Community Emphasis
Social Role
Karl Marx
Jevons/Walras/Marshall
1900 – 1925
Wicksell – Fisher
1925 – 1950
Schumpeter
1950 – 1975 Milton Friedman
1975 – 2000 Robert E. Lucas
John Maynard Keynes
Paul Samuelson
Smith: Role of Government and Laissez – Faire
• protecting society from invasion
• administration of justice
• public works and public 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
Smith’s Spiral of Growth
National Wealth II
National Wealth I
Employment with increased
Division of Labor
Opportunity for division
of labor
Increased Labor Supply
(Reduced Mortality)
Profit Expectations
Demand for Investment
Higher Wage
Increased interest rate
Increased Demand for
Labor
Increased Saving
Accumulation
Ricardo & Malthus: Welcome to the Dismal Science
David Ricardo, 1772 – 1823
Thomas Malthus,1766 – 1834
Stockbroker/Dealer
Parson
Abstraction  Economic Science
• Championed capitalists
Intuitive approach/preacher
• Championed landlords
– Opposed Corn Law
– Favored Corn Law
Whoever wins, workers get dry crust
• Advanced Say’s Law
Major contributions
–
–
–
–
• Advanced Theory of Gluts
Major contribution
– Law of population
Differential rent
Labor theory of value
Theory of distribution Diminishing Returns Prevail
Comparative advantage
Marginal Product
(corn)
Ricardo: Value, Distribution, and Growth
Rent
Profit
w*
Wage
Bill
K1
Capital-Labor Input
(Capital and Labor are Complements)
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
…but Political Redistribution can enhance utility
Marx: Flavors of Crisis
Invention
Investment
Capital
Widening
Capital
Deepening
Reserve
Increased
Employment
Decreased
Employment
Army
Rising Wages
Profit
Squeeze
Overproduction
Crisis
Decreased
Wage Bill
Increased
Organic
Composition
Falling
Rate
of Profit
Expropriators
are
expropriated
Underconsumption
Crisis
Decreased
Demand
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
Marshall’s Principles of Economics: Themes and Contents
• Economics … a study of mankind in the 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
» Value in long-run depends on supply
quantity
• Internal economies  difficulties for competitive market paradigm
• External economies (of industry scale)
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,
The Neoclassical – Keynesian Synthesis
Short – run  Keynesian Unemployment
Long – 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
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
Spectrum of Macroeconomic Thought
Marx
Keynes
PostKeynesian
Friedman
Keynesian
(hydraulic
Keynesians)
Lucas
Monetarist
New
Classical
Rat-X
New Keynesian
- New Monetarist(?)
Markets
Clear in
Short-Run
micro
foundations
Uncertainty
Sticky
Wages/Prices
Disequilibrium
Policy
Works
Markets
Clear
In
Long-run
Policy
Ineffectiveness
Austrian
Radical
Political
Economy
Kalecki
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.