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Flashcards in Week 9 - History of Economics Deck (35):

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.


What did the Neo-classical think were the only 2 elements of investor behaviour

1) marginal product of capital or the actual productivity of the investment
2) real interest rate (K argued that institutional and psychology conventions may cause r to fail to match MEC)


What are animal spirits

People tend to be emotion driven. Normally, expectations are rational and people adjust these without any economic inefficiency. When there is panic or overoptimism MEC is persistently different which can cause booms and busts.


What is the liquidity trap?

When interest rates approach zero, adjustments by central banks may not be sufficient to reflate an economy and outside intervention in AE is necessary.

Money supply cannot be increased infinitely.


What are the 5 main points of keynesism

1) focus on short-run and effective demand rather than supply
2) money is not neutral in the short run
3) economic agents operate under uncertainty and thus have a subjective view that doesn't always match reality
4) equilibrium is not assumes
5) Say's law doesn't hold


What is countercyclical policy

fluctuations in economic output are addresses with government fiscal policy. When output is above economic potential, inflation is a risk as there isn't enoug labour and capital to meet demand. The gov offsets this excess activity by raising taxes or lowering spending


What is the rational expectation argument against Keynes

Claims economic agents have expectations consistent with formal statistical properties of the underlying economy.

Contradicts the fine-tuning and gov intervention. If agent and policy makers have the same information, agents will anticipate their actions and adjust accordingly.


What does the policy irrelevance say?

says Keynesian policy will only do harm in the long run and people can only be caught by surprise by policy so many times.

If firms know banks will keep inflation low, they are less likely to raise prices after an inflation shock.


Policy irrelevance explanation of stagflation

an expected increase in gov spending growth will not occur with slow price adjustment. Rather, their expectations will cause inflation to spiral upwards and unemployment to raise gov spending is met with price markups but no increase in hiring, cutbacks met with layoffs but no price cuts.


What are the main points of monetarism

1) money supply drives inflation and growth in economic output in a predictable way
2) built on the quantity theory of money MV = PT
3) reliance on fiscal policy is misplaced
4) more money supply leads to higher prices and unstable M = unstable P.


What was the Volker Experiment

- inflation and unemployment was very high in the US
- volker was appointed and he hoped setting M would reduce P and reset expectations
- interest rates rose, US inflation was eventually broken but a recession occured


What is New-Classical economics?

Claims the whole isn't difference from the sum of its part. Micro theory alone can explain macro movements.


What are the main point of new classical

1) general market clearing assumption
2) business cycles caused only by an exogenous shocks, then there is an adjustment period (real business cycle)
3) whole = sum of it part


What is the current model?

starts with some version of the solow model as the starting point and adds various 'frictions' such as sticky inflation of labour market issues

includes monetary policy rules and allows a range of shocks. Can't foresee black swan events such as the GFC as general equilibrium is assumed.


What are the main points of the Austrian school?

1) reject the economy isn't the sum of its parts
2) argues gov intervention and general glut is wrong
3) economy is fundamentally production driven
4) production is decentralised but is an effective co-ordination driven by proper price signals. Policy would disrupt this.


What are the main points of post-keynesian?

1) reject neutrality of money in both the short and long run
2) reject gross substitution
3) reject the ergodic


What is non-neutral money in post-keynesian?

money in an economy is leveraged and created by various institutions and macroecnomic conditions affect the supply of money which, in turn, impacts the macroeconomic conditions


What is gross substitution

refers to an assumption that goods are interchangeable - core assumption in neoclassical thought in which goods are essentially disembodied and trade-offs are smooth. Differences in substitutions can limit the ability to proportionately response to price changes with changes in C leading to rigidities and lags.


What are non-ergodic economies

ergodic axiam asserts the future of the economy can be predicted based on past and present conditions. Post Keynesians reject this as decisions are hampered by uncertainty


What does Minsky say?

1) financial systems have a complex interdependency with the real sector
2) nature of this is shapes by psychology, particularly crowd behaviour and judgement.


What is the financial instability hypothesis

Financial booms and busts are inevitable as:
- during normal times agents forget anything bad can occur in business
- risk expectation and perception becomes distorted
- investors take more risk and asset bubbles are created
- reality sets in
- asset prices fall
- causes further tightening and falls and panic