TWO HUNDRED YEARS OF ECONOMICS IN ONE CLASS PERIOD C. Houston

Classical School of Economics Time Period: 1770’s – to now, except the Great Depression to the 1970’s AKA – Neo-Classical School, Supply-Side, Austrian School, Monetarists (Not the same as Monetary School)

SmithSayRicardo Marshall Hayek Friedman Classical School: Key Figures

Classical School Fundamental Premise

“Competition is best for the market.”

Classical School: Key Points Competition creates better products, cheaper products, more choices Smith’s “invisible hand” is the mechanism that creates companies that give the market better products and cheaper products because they are encouraged to perform better than less successful companies. Less successful companies fall out of the market, leaving the more efficient to win the profits.

Classical School: Key Points Supply creates wealth that remains in “long run” balance. Supply creates its own demand. (Says’ Law as it is Usually expressed.) If there is a surplus, cut production, wages, prices. Society is in “balance” because the loss of wages is balanced by lower prices. Therefore, “real wealth” remains generally the same.

Classical School: Key Points The market will balance near full and efficient production in the long run.

Classical School: Role of Government Stop anything that blocks the market’s ability to create open competition. – Monopolies – Collusion – Union attempts to stop the free flow of wages Encourage free trade, efficiencies. Oppose excessive taxation.

Classical School: Modern political examples “Trickle Down” tax policies. Encourage the entrepreneurs and they will hire more workers. (David Stockman and “Reaganomics” of the early 80’s) Flat Tax arguments and other anti-tax movements. “Right to Work” states and other anti-union movements.

Classical School: Modern political examples The EEU, NAFTA, the WTO. (Based on Ricardo’s Comparative Advantage) Many of the modern “anti-socialism” arguments.

WHY DO I CARE? Any emphasis on policy that focuses on LRAS The assumptions that prices and wages are flexible moving up or down The assumptions that more demand and more money creates inflation The assumption that more supply can lower costs and price

Keynesian School of Economics Time Period: Post WWI, Dominate from the 1930’s to the 1970’s AKA: Neo-Keynesians

Keynesian School: Key Players KeynesKrugman

Keynesian School Fundamental Premise

“Competitive markets are flawed and cannot stay in balance.”

Keynesian School: Key Points The “Invisible Hand” will also create the constant presence of less efficient companies and failing companies, therefore dragging production and price flexibility. Say’s Law of balance is largely a myth because there is no real price flexibility. When surpluses occur, prices can’t be cut because they are always “sticky” and inputs don’t automatically get cheaper. There will be constant pressures to cut production, cut jobs, cause recessions.

Keynesian School: Key points Prices can go up quickly, but not adjust downward quickly (The “Ratchet Effect”) The market might reach full employment and production but it will not last and then trend back to under production and inefficiencies.

Keynesian School: Role of Government Step in and repair the constant recessions Don’t wait for Long Run balances, there is no political “long run” anyway. Create demand during recessions with tax cuts and government spending increases. Slow inflation with tax increases and government spending reductions. Create “safety nets” like unemployment insurance and social security programs to lessen the constant underperformance of the private market. These become “Stabilizers”

Keynesian School: Modern political examples Social Security programs, Unemployment insurance, minimum wage programs Fiscal Policy Options (Taxes and Spending Adjustments by Congress)

WHY DO I CARE? Any policy that focuses on the manipulation of AD Any mention of “countercyclical fiscal policies” Any mention of “expansionary” or “contractionary” policies Any mention of Fiscal Policies or economic options from Congress (C and G, taxes or spending programs)

Monetary School of Economics (Not to be confused with “Monetarists)

Monetary School of Economics Time Period: 1970’s to modern times AKA: Central Bank Policies, Federal Reserve Policies

Monetary School of Economics: Key Players VolkerGreenspanBernanke

Monetary School of Economics Fundamental Premise

“Non-political fine tuning is best for stable growth.”

Monetary School: Key Points Keynesians can never time the policies correctly, especially recessions. Politicians will respond to recessions with tax cuts but won’t respond to inflation with tax increases. Central banks can, and will, provide for stable currencies, realistic growth patterns, long-run thinking.

Monetary School: Role of Government Use interest rates (i) to control AD. When more AD is needed, lower interest rates and spur more Ig. When fighting inflation, raise interest rates to slow Ig. Controlling Ig is more long run and healthier than shorter AD targets under Keynesian policies

WHY DO I CARE? Any mention of central bank policies or US Fed policies Any mention of “monetary” tools: Bonds, FFR, Discount Rate, Reserve Requirement Any mention of “easy money” or “tight money” policies “Open Market Operations” = Bond Markets and the Supply of Money = Open Market Committee (FOMC or OMC)