Week 9 - History of Economics Flashcards
What is mercentilism
Maintained the gov should intervene to maintains a trade surplus as trade was viewed as a 0 sum game. The aim was to amass as much metal as possible.
3 things Adam Smith (post-mercantile) said
1) argued free trade and specialisation was the most efficient.
2) Talked about a division of labour where production is broken down into tasks (e.g ford factories).
3) Argued against gov intervention.
5 key points of classical economis
1) Very production focused
2) there was an assumption that markets would always balance
3) Money is exogenous and the classical dichotomy holds
4) Everything that is produced is sold
5) Eventually, capitalist economies would settle into a stationary state
What is Neo-classical economics?
Formalisation and sysemisation of classical economics by Walras, Jevons and Marshall in 19th century. Emphasises the deductive method of using assumptions from which hypothesises are drawn
What are the 9 main points from Neo-classical economics?
1) implicitly long run and focused on market dynamics
2) economic agents are introduced
3) While still production driven, an explicit supply-demand framework introduced
4) concerned with price theory or how prices are set and impact on behaviour and equilibrium
5) assumes people are rational, self-interested and maxamising
6) General glut and say’s law are assumes
7) the economy is the sum of its parts
8) there is instant adjustment as time in not addressed
9) classical dichotomy holds
what did Marx say?
argues specialisation and division of labour would make production too efficient and there wouldn’t be enough demand so ultimately the economy would be unstable. Argued the eventual stationary state would cause a crisis as capitalism relies on continuous growth.
What happened in the Great Depression
- mass unemployment
- falling output continued after the panic ended
- seemed to be no end to deflation and no market clearing
- real gdp fell
- lead to keyneian
What was the General Theory?
Asserted neoclassical was a special case of employment, interest and money. Incorporated the general glut after the Great Depression
What are Keynes’ departure points from Neo-classical?
1) the importance of total demand (consumption) - Say’s Law doesn’t always hold
2) the role of time (short-run versus long-run adjustments and the classical dichotomy)
3) psychology of consumers and investors, particularly regarding expectations
What is effective demand?
Say’s law claimed supply created its own demand. Keynes argued there can be divergences = effective demand. Argued GD was a time of persistent mismatch between AD and AS
Why may the gov get involved in demand?
There must be production in the 1st instance but this can outrun demand and may not right itself. Therefore, there is a case for gov intervention to ensure AD was sufficient to but AS
How did Keynes incorporate psychology
consumers and investors make decisions based on expectations which aren’t always based on the best available evidence/ Subjective perceptions of economic forces impact consumption and investment decisions and people are prone to panic
What are the economic consequences of large differences between perceptions of market forces and what is actually happening?
- inability to reach efficient market equilibrium
- getting stuck as a sub optimal macro equilibrium
What did Keynes consider to be the most critical element of macro
Investment as it is the providers of capital that drive the modern capitalist economy and the employment and income derived from it.
What is the marginal efficiency of capital
how people look at the real supply price of that investment and compare it to the discount financial cash flows an investment is expected to return over its life when making investment.
