Transcript Chapter 15: The Development of Modern Macroeconomic Thought

Chapter 15: The
Development of Modern
Macroeconomic Thought
Questions for Review, Discussion
and Research
2, 4
Retreat from Growth
Theory

Adam Smith emphasized
the relationships between
1.
2.
3.
4.
free markets
private investment
laissez faire
economic growth and
development
Retreat from Growth
Theory Cont’d

Stressed the dynamic
features of a market
economy and viewed free
trade as an opportunity to
generate technological and
organizational change
through
1. Division of labour and
economies of scale
2. Learning by doing
Retreat from Growth
Theory Cont’d



Ricardian microeconomics
emphasized the allocation
and distribution concerns
The development of
neoclassical economics
accelerated the movement
away from growth theory
The Neoclassicals, with
exception of Marshall,
focused exclusively on static
equilibrium

Marshall’s views resembled
Mill’s whose discussions of
technological change and
population control were
optimistic about the prospect
for continuous growth
Schumpeter and
Growth


His theories were difficult to
incorporate into the style and
method of mainstream
economics
Viewed depressions and the
process of creative
destruction as an integral
part of capital economic
growth
Overhead pp. 412-13

The success of capitalism will
alter the old concept of
private property with the rise
of an intellectual class who
live off the fruits of the
system but continually
undermine it with their
discontent and resentment
Underconsumptionist
Arguments


Mercantilists wanted to
understand and determine
the capacity and operation of
economic activity
They believed that savings
and the purchase of imports
would create a shortage of
demand for domestic
products
Overhead pp. 415
Monetary Economics
and The Quantity
Theory of Money

I.

Economists of every era
discussed monetary
theories that determine
the general price level
Classical quantity theory
The first clear statement
by Hume in 1752
Cambridge Version of
Quantity Theory
Marshall sought to
integrate the
microeconomic
behaviour of
households and firms
with his discussion of
the general price level
The cash balance version
is
Monetary Economics and
The Quantity Theory of
Money Cont’d





M=k *p* y
Where k – inverse of velocity
of money
Fixed value based on custom
and habit
Where y – full employment
due to Say’s Law and self
correcting mechanism by nonmonetary forces
The real cash balance version is
M=k*y
P
Monetary Economics and
The Quantity Theory of
Money Cont’d
III. Fishers Transaction
Version of the Quantity
Theory
MV = PT
Wicksell’s Critique

Developed a monetary
theory that explains
fluctuations in income (Y)
and the price level (P) to
explain “Why the monetary
or pecuniary demand for
goods exceeds or falls short
of the supply of goods in
given conditions”
Overhead pp. 417 to 432