20th century Economic Theories - The Northwest School by panniuniu


									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
     asset-price bubbles
     stock market crash
     banks collapse

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
            compulsory labor
       2. Lenin – plan #2 New Economic Policy 1921-28
            agriculture, retail trade, small-scale light industry returned to private
            Big trade etc- state controlled
            money reintroduced.
       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

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