I. What is economics?
Economic Theories of the 20th century
Economy – consists of every activity involved with the production of goods
and services in town, region or country.
Economics (1792) – A social science concerned chiefly with description and
analysis of the production, distribution and consumption of goods and
II. Background: Before 1900
A. Classical economic theorists
1. Adam Smith & Capitalism (1723-90)
a.The Wealth of the Nations –defined
modern capitalism, which is the economic system in which most of the
means of production are privately owned and production is guided
and income distributed largely through the operation of markets.
b. Smith believed one should leave economic decision to
self-regulating market forces – government – hands off.
c. Capitalists want: 1. free trade. 2. sound money (gold standard)
3. balanced budgets 4. minimum levels of relief for the poor.
2. David Ricardo (1172-1823) Doctrine of Comparative Advantage –
fountainhead of 19th century free trade doctrine. whatever country does it
best, should do it. “Iron Law of Wages” Government should not control –
wages should remain at sustenance level. Attempts to improve are futile.
3. Karl Marx – (1818-83) Thought above was outrageous. Human labor
alone creates all value. Thus, labor should benefit, not owners.
a. Capitalism will fail. profits will fall. working class will get poorer,
business cycle will be erratic.
b. Capitalist system will collapse – working class will inherit political
and economic power – socialism.
B. 19th century developments
1. Alfred Marshall – price and output are determined by supply and demand.
2. Leon Walras – general equilibrium theory – economy can work like a
physics equation and be mathematically figured out.
III. Crisis of 1929: Save the capitalist system or abolish it? 3 theories
(After Great War Crisis of 1920’s – “Return to Normalcy” means
removal of government regulation
rapid expansion of industry and agriculture
whirlpool of speculation
stock market crash
A. Communist Model
1. Lenin – destroy all vestiges of private property “War Communism” 1921
3 year disaster
nationalize all means of production and transportation
abolition of money – barter tokens – goods and services free
imposition on the national economy as single plan
2. Lenin – plan #2 New Economic Policy 1921-28
agriculture, retail trade, small-scale light industry returned to private
Big trade etc- state controlled
3. Lenin dies (1924) Stalin takes over – 5 year plans
state takes control of all production
#1 goal – rapid development of heavy industry
socializing agriculture – see crops abroad (national hunger results)
COMMAND ECONOMY –production decided for everything for five
RESULTS REPORTED – no depression, full employment, booming
industry, rising standard of living (REPORTED BUT IS IT TRUE?)
B. John Maynard Keynes (Keynesian policy) Save the Capitalist system.
1. Let go of the past as an economic model
2. Too much emotion, not enough reason
3. When business cycle is stuck in the rut, only the government can save it by
massive public works projects – employ workers, workers will spend wages
and economy will improve.
4. Govt. must be willing to borrow $. Deficit spending. Borrow from the rich.
C. F. A. Hayek’s retort: The Road to Serfdom
1. Detests Socialism
2. The market is a form of spontaneous order
3. Bottom up recovery
4. Keep government out of economy
5. The Road to Serfdom 1944- publishes book. Against Totalitarianism
6. 1970-Nobel Prize winner