Transcript The origins of macro

The “A” Factor: The Rise of
Growth as the Principal Goal of
Policy
The Development of Macroeconomics in an Era of Wars/Cheap
Energy and Disrespect for Earth
Alternate title
Getting to a Bad Place for Good
Reasons
The Economist March 2002
John Maynard Keynes
(1883-1946)
http://www.wam.umd.edu/~mglondon/London/Keyne
s/keynes.htm
The war and the threat of depression
and another war. .
Vimy Ridge: Never Again?
The Versailles Treaty
http://history.acusd.edu/gen/text/versaillestreaty/vercontents.html
Versailles’ conditions on
Germany
• Excessive reparations (almost 4 times
the actual damage inflicted).
• Marine merchant fleet.
• Territory with coal mines was taken
away.
• Tariff concessions to luxury goods
from other countries.
The Depression
A Nervous Wreck
from Literary Digest , 7/5/1919
The General theory
• Critiques of Prevailing Economics.
• Aggregate demand.
• Liquidity trap.
• Breaking out of the liquidity trap:
government intervention.
The General Theory
Critiques of Existing Economic
Theory
Jean-Baptiste Say
(1776-1832)
1. “Supply creates its own demand.”
http://www.bized.ac.uk/virtual/economy/library/economists/say.htm
No idle money
2. Income is either spent on commodities
and services or is put into savings. This
portion is loaned to someone else who
invests it.
Between workers and employers
3. All unemployment is voluntary.
Problems
• Equilibrium can be reached at any level of
employment. Supply may not create
enough demand to soak up all the labor.
• Not all income is invested.
• Not all unemployment is voluntary.
The General Theory: Elements
Aggregate demand
• We have to pay attention to the total
amount of demand.
• The aggregate demand function measures
the volume of sales which corresponds to
each level of income and output.
Income
Liquidity Trap
People hold money for reasons that are
related to uncertainty about the future.
Liquidity Trap
Liquid
Less liquid
http://www.bankofcanada.ca/en/auct.htm
http://www.clipartconnection.com/search
/download?oid=1227821&fmt=GIF
Breaking out of the liquidity trap
Policy tools: Fiscal-taxing/spending
and Monetary Policy-Money supply
Government
intervention
• Public works (e.g., housing, schools,
hospitals, roads, parks) .
The multiplier effect on
investment
Investment
1,000
National Income
2,000
Government Intervention
Income
“Even if the community puts the
unemployed to work at useless jobs,
the income from this labour will be
expended on food, clothing, shelter,
medical care, and recreation.”
Peter G. Brown
$821.45
Eight Hundred and Twenty One 45/100
$$$
Taxes
Peter G. Brown
$947.20
Nine Hundred and Forty Seven 20/100
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Monetary Policy
• The increase in the money supply to
correspond to and stimulate growth.
• The extreme liberalization of the authority
to create financial instruments/1980s and
1990s. An era of very cheap credit—200812.
Business Cycle
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The Goals of Macro Policy
• Growth
• Low inflation, but NOT deflation
• “Full” employment
Reasons for Growth
•
•
•
•
•
•
Population Increase
Productivity
Poverty
More consumption means more happiness
Social and political stability
But……………
The Triple Crisis
• The employment/population crisis: Policy
tool/macro policy.
• The money crisis: there is more money than
there is Earth. Policy tool/deception: if you
have more money you must be richer.
• The collapse of the Earth’s life support
systems. Policy tool/deny what we already
know-disable the ability to learn more.