Classical%20Economic%20Crises

1
ClassicalEconomic Crises

• Before the Great Depression

2
Trade-off Conflict

• Analysis of growth suggests a short-term
  trade-off between consumption and investment
• The larger the surplus to be invested, the
  smaller the immediate consumption
• Consumption mostly consumption of workers
• Surplus profits of capitalists
• Thus conflict between workers capitalists,
  labor and business

3
Wage as Cost

• Business used to view wages as pure cost.
• the more they paid workers
• the less surplus available as profits
• Profit maximization???hold wages down
• minimum wage laws
• use of force violence, both private public
• With wages at or near subsistance all wealth
  accumulated by capitalists
• Thus "class struggle"

4
Crisis as Solution

• Along with laws and force,business could go on
  strike, i.e., refuse to invest
• For example in period of rapid growth, high
  profits and high investment, labor markets get
  tight, workers get higher wages, rate of profit
  fills and busines cuts back on investment
• Thus a downturn as economic activity diminishes

5
Classical Business Cycle
Output

Q ?
I ?
? ?
U ?
W ?
W ?
I ?
Q ?
p ?
I ?
time
6
Classical Economics

• No "crisis" only adjustment
• Adjustment through markets
• Debate Malthus vs Ricardo
• Two key markets
• labor market
• financial markets
• Use Supply Demand for each

7
Labor Market
supply of labor
wage

demand for labor
quantity
8
Says' Law

• Supply creates its own demand
• True for barter
• Non true for money economy
• money can be hoarded
• savings of individuals
• retained earnings of corporations
• Financial institutions channel savings/profits
  into investment

9
Financial Market
supply of loanable funds
interest

demand for loanable funds
quantity
10
Quantity Theory

• Quantity Theory of Money argued for stable
  relationship between money supply prices
• Money Supply M ? piqi/V, where
• ? piqi sum of all goods q at prices p, and
• V velocity of money, where p f(M) in short run

11
Gold Standard

• International dimension of classical economics
• All currencies values in fixed ratio to gold,
  e.g. 35/ounce.
• All domestic money supply tied to gold, I.e, any
  change in amount of gold would change amount of
  money internally.
• International Acounts settled through gold
  transfers

12
Adjustment

• Trade Deficit more imports than exports
• Trade Surplus more exports than imports
• Net imports ? gold export
• Net exports ? gold import
• Export of gold would reduce money supply
• Import of gold would increase money supply
• So. A trade deficit would be cured by
• ? demand for imports caused by econ slowdown
• ? demand for imports caused by drop in relative
  prices
• ? exports caused by drop in relative prices

13
Int'l Circulation of Crisis -I

• Acrisis in one country would circulate to others
  in the gold standard
• Contraction in economy ? drop in demand for
  imports ? drop in other countries exports ? drop
  in other countries levels of production
• Reduction in local markets ? increased
  protectionism, e.g., limits on imports to protect
  local industry ? further reductions in trade and
  foreign output

14
Int'l circulation of Crisis - II

• Economic crises, e.g. financial collapse ? gold
  flight ? further deflation due to link of
  domestic money level to gold and further
  reduction in economic activity
• Such deflation SHOULD result in lower prices and
  increasingly competitive exports whose growth
  would spur recovery.
• So crisis should be corrected via shift from
  trade deficit to trade surplus, influx of gold,
  expanded money supply, reduced interest rates,
  etc.

15
--End--