1. Dominant Thoughts and Thinkers Time Span Individual Emphasis Laissez - faire Community Emphasis Social Role 1775 – 1800Adam Smith- Say 1800 – 1825Ricardo - Malthus 1825 – 1850John Stuart Mill 1850 – 1875Karl Marx 1875 – 1900 Jevons / Walras /Marshall 1900 – 1925Wicksell – Fisher 1925 – 1950SchumpeterJohn Maynard Keynes 1950 – 1975Milton FriedmanPaul Samuelson 1975 – 2000Robert E. Lucas

2. Smith: Role of Government and Laissez – Faire protecting society from invasion administration of justice public works and public institutions Every individual... neither intends to promote the public interest nor knows how much he is promoting it...[B]y directing [his] industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this … led by an invisible hand to promote an end which was no part of his intention. Social Physics: Newton in the Economic Universe

3. Smith’s Spiral of Growth National Wealth I Opportunity for division of labor Profit Expectations Demand for Investment Increased interest rate Increased Saving Accumulation Increased Demand for Labor Higher Wage Increased Labor Supply (Reduced Mortality) Employment with increased Division of Labor National Wealth II

4. Ricardo & Malthus: Welcome to the Dismal Science David Ricardo, 1772 – 1823 Stockbroker/Dealer Abstraction  Economic Science Championed capitalists –Opposed Corn Law Advanced Say’s Law Major contributions –Differential rent –Labor theory of value –Theory of distribution –Comparative advantage Thomas Malthus,1766 – 1834 Parson Intuitive approach/preacher Championed landlords –Favored Corn Law Advanced Theory of Gluts Major contribution –Law of population Whoever wins, workers get dry crust Diminishing Returns Prevail

5. Ricardo: Value, Distribution, and Growth Capital-Labor Input (Capital and Labor are Complements) Marginal Product (corn) K1K1 w* Rent Profit Wage Bill

6. John Stuart Mill, Principles of Political Economy, 1848 Synthesis of Classical Economics Economic man  self-interest as motive force Invisible hand  harmony through competition Minimal government …but still a role Discern economic laws »Say’s Law »Law of Population »Iron Law of Wages »Law of Diminishing Returns »Law of Comparative Advantage Mill: Competition  Efficient Production …but Political Redistribution can enhance utility

7. Marx: Flavors of Crisis Invention Investment Capital Widening Capital Deepening Increased Employment Decreased Employment Rising Wages Decreased Wage Bill Profit Squeeze Overproduction Crisis Underconsumption Crisis Reserve Army Decreased Demand Increased Organic Composition Falling Rate of Profit Expropriators are expropriated

8. Marginalist Revolution Hermann Heinrich Gossen, Development of the laws of human interaction, 1854. –Obscure amateur … Acknowledged by Jevons Gossen’s 1 st Law: »Diminishing marginal utility  allocation of resources, including time Gossen’s 2 nd Law: »Equilibrium where “the last atom of money creates the same pleasure in each pleasurable use.” »MU x /P x = MU y /P y Jevons – Walras – Pareto – Clark Menger - Böhm-Bawerk – Wieser – Mises

9. Marshall’s Principles of Economics: Themes and Contents Economics … a study of mankind in the ordinary business of life. Partial equilibrium analysis … representative agents and firms »Supply (costs) interact with demand (utilities) »Ceteris paribus  conservative tilt: “Nature does not leap” (Marshall) Supply and demand curvesSupply and demand curves (the Marshallian cross) Value determined by both blades of the scissors Consumer and producer surplus Reciprocal demand curves in trade Elasticity of demand value Price decline  increase in real income Anticipates income and substitution effect analysis Short-run and long-run supply – fixed and variable costs Elasticity of supply increases with time »Value in short-run depends on demand quantity »Value in long-run depends on supply Internal economies  difficulties for competitive market paradigm External economies (of industry scale)

10. Keynes’ General Theory What did he say? Different things at different times »On tariffs »On saving What did he mean? Y = C + I C = C(Y) …Propensity to consume  passive response to income I = I(i) …Marginal efficiency of capital + animal spirits  instability Income adjusts S = I …spending multiplier … Income adjusts, not wages and prices L = L(Y,i) … Liquidity preference function interest rate determined in money market  interest rate determined in money market,

11. The Neoclassical – Keynesian Synthesis Short – run  Keynesian Unemployment Long – run  Classical Full Employment Sir John Hicks 1904 - 1989 Mr. Keynes and the Classics: A suggested simplification, Econometrica, 1937 Goods Market: I = S Money Market: L = M  ISLM macromodel i Y IS LM

12. Monetarism in Theory and Practice Theory: M  P and Y in short – run M  P in long - run Friedman’s restated quantity theory Expectations augmented Phillips Curve  Vertical long – run Phillips Curve  “Monetary mischief” Practice: oppose Keynesian activism Monetary vs. fiscal policy: what matters? Inherent stability vs. instability of enterprise economy Policy: Long – run vs. short – run focus Varying policy lags … “too much too late” »Steady money growth as automatic stabilizer

13. Spectrum of Macroeconomic Thought Marx Radical Political Economy Kalecki Post- Keynesian Keynes Keynesian (hydraulic Keynesians) Monetarist Friedman New Keynesian - New Monetarist(?) Lucas New Classical Austrian Sticky Wages/Prices Uncertainty Disequilibrium Markets Clear In Long-run Markets Clear in Short-Run Rat-X micro foundations Policy Ineffectiveness Policy Works

14. Modern GROWTH Schumpeter: A Vision without a (math) model but Economic science does (math) models Solow: Steady – state growth but Economic history suggests accelerating progress Endogenous growth theory: Increasing returns –Paul Romer –Robert Lucas, Jr.