CLASSICAL ECONOMIC THEORY AND DIFFERENT ECONOMIC SYSTEMSCLASSICAL ECONOMIC THEORY
Natural tendency to move toward full employment
No need for fiscal or monetary policy
Unemployed workers compete against each other
Wage rates will decline
Lower wages lead to increased profits
Increased profits lead to increased employment
Full employment will be restored
KEYNESIAN ECONOMIC THEORY
John Maynard Keynes
The General Theory Of Employment, Interest And Money, 1936.
Most famous economist of the 20 century.
Argued that there is no automatic tendency for the economy to move toward full employment KEYNESIAN THEORY
Unemployment is caused by a lack of sufficient aggregate demand
Producers adjust output to satisfy the desires of customers
If demand is low, output will be low
KEYNESIAN POLICY RECOMMENDATION
When aggregate demand is low, government should try to boost aggregate demand
KEYNESIAN FISCAL POLICY
Other things being equal, an increase in government spending will stimulate the economy
Other things being equal, a tax cut will stimulate the economy
QUESTIONS THAT NEED TO BE ANSWERED BY ANY ECONOMIC SYSTEM
WHAT types of goods will be produced?
Government goods HOW MUCH will be produced?
WHO will get the output?
HOW will the output be allocated?
DIFFERENT ECONOMIC SYSTEMS:
I exchange my goods or services for your goods or services
Exchange requires a double coincidence of wants
LAISSEZ FAIRE ECONOMY
Minimal government interference in the economy
COMMAND, OR PLANNED, ECONOMY
The central government owns many of the factors of production
Examples: government might own the railroads, the oil fields, the iron mines, the banks, the hospitals, the
Government planners often decide what will be produced and who gets the output
Examples: The Soviet Union had “five Year Plans” whereby the central government decided how much
agricultural output would be produced. The governments of the OPEC oil countries decided how much oil
would be produced and exported to the rest of the world. CAPITALISM:
Emphasis on the free market system
Producers and consumers are free to make their own choices
CHARACTERISTICS OF CAPITALISM
PRIVATE OWNERSHIP of property and means of production
PROFIT MOTIVE gives producers incentive to produce what people want
PRICES are free to move up and down and pro