Economic Ideologies

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Economic Ideologies
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AREAS OF DISPUTE

• WHAT CAUSES INSTABILITY IN THE ECONOMY?
• IS THE ECONOMY SELF-CORRECTING?
• SHOULD GOVT HAVE RULE SOR USE DISCRETION IN
  SETTING ECON POLICY?

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Classical Economics

• Otherwise known as Conservative Economics.
• Emphasizes role of profit incentives in creating
  new products and industries.
• Prefers free market solutions to economic
  problems.

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Classical Economics contd

• Believes the economy is self-regulating.
• Assumes prices, wages and interest are (or should
  be) flexible.
• Believes capitalism promotes economic growth,
  innovation, efficiency and raises standards of
  living.
• Believes govt policies can crowd-out business
  investment and fail because of timing lags.

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• LAISSEZ FAIRE
• ADAM SMITH RICARDO, MILL, SAYS LAW
• NATURAL LAWS OF ECONOMICS
• PRIVATE PROPERTY/PRIVATE INTEREST
• FREEDOM OF TRADE
• FULL EMPLOYMENT IS THE NORM
• SHORT TERM PROBLEMS FIX THEMSELVES IN THE LONG
  RUN
• Says Law- supply creates its own demand

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Liberal Economics

• Otherwise known as Keynesian Economics.
• Believes free markets do not solve high
  unemployment.
• Believes that instability is inherent in
  capitalism.

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Liberal Economics contd

• Believes demand for goods is central for
  understanding the rise or fall of production.
• Emphasizes inflexibility of prices and wages
  because of institutional constraints. Maintains
  that inflexibility is necessary or not easily
  changed.
• Believes the economy can remain stuck in
  recession or depression.
• Believes capitalism can be repaired by
  governmental action.

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KEYNESIAN ECON CONTINUED

• ECONOMY NOT SELF CORRECTING
• AGGR. DEMAND DETERMINES OUTPUT
• WAGES INFLEXIBLE DOWNWARDS
• ACTIVE GOVT INTERVENTION FIXES AN UNSTABLE ECON.
• INSTABILITY IN THE ECONOMY CAUSED BY INVESTMENT
  CHANGES

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Radical Economics

• Otherwise known as Marxian Economics or
  Communism.
• Emphasizes built-in structural problems that will
  cause capitalism to change.
• Emphasizes the importance of social classes
  workers and owners.

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Radical Economics contd

• Believes low wages can cause too little demand
  for products.
• Believes technology can worsen working conditions
  for workers.
• Believes unemployment and imperialism will occur
  under capitalism.
• Believes reforms to capitalism cannot completely
  fix the system.

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MONETARISM

• MILTON FRIEDMAN
• MVPQ VELOCITY IS STABLE
• ECONOMY IS STABLE IN LR AT NATURAL RATE OF
  EMPLOYMENT
• FISCAL POLICY HAS NO AFFECT
• INSTABILITY OF ECONOMY IS CAUSED BY INCORRECT MP

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Real Business Cycle Theory

• Focus on aggregate supply
• Business cycle caused by supply factors like
  productivity
• Decline in GDP means less demand for
  money-----supply of money decreases
• AD falls
• Price is the same because AS also fell

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COORDINATION FAILURES

• Instability occurs because people do not reach a
  mutually beneficial equilibrium
• Dont coordinate their actions
• Firms and households have a disconnect
• Expectations different?

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RATIONAL EXPECTIONS

• ROBERT LUCAS
• PRICES ADJUST INSTANTLY
• PEOPLE ACT IN RESPONSE TO EXPECTATIONS
• RECESSIONS SELF CORRECTING
• INFLATION IS ALWAYS ANTICIPATED
• Self correction
• Lower prices dont change real output even in the
  SR

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RULES OR DISCRETION

• POLICY RULESREDUCE INSTABILITY
• MONETARY RULEEXPAND MONEY SUPPLY EACH YEAR AT
  THE SAME ANNUAL GROWTH RATE OF GDP
• PROMOTE STEADY GROWTH
• CONSTITUTIONAL AMENDMENT FOR A BALANCED BUDGET?

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PROS OF DISCRETION

• VELOCITY OF MONEY TOO UNSTABLE---MP CAN HELP
  CHANGE AD IN SR
• BALANCED BUDGET AMENDMENT WOULD MAKE RECESSION
  WORSE BY FORCING TAXES TO INCREASE AND GOVT
  SPENDING TO DECREASE

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EFFICIENCY WAGE THEORY

• IF HAVE A HIGH TURNOVER OF LABOR OR HIGH COST OF
  SUPERVISION, THEN MARKET WAGE NOT EFFICIENCY WAGE
• 1-GREATER WORK EFFORT
• 2-DECREASED SUPERVISION COST
• 3-DECREASED TURNOVER
• add to inflexibility of the wages

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INSIDER-OUTSIDER PROBLEM

• DURING A RECESSION
• INSIDERHAS JOB
• OUTSIDERLAID OFF
• UNDERBIDING OF EXISTING WAGES TO GET JOB BACK
• WAGES INFLEXIBLE DOWNWARD WHEN AGGR. DEMAND
  DECLINES