1. War of Ideas  There is an ideological war between the French and the English.  You will be surprised to learn that most conservatives side with the French.

2. War of Ideas  The French economist is J.B. Say.  The English economist is John Maynard Keynes.

3. Say’s Law Tout travail cree sa propre consommation

4. Ricardo traitor to the Crown  Agreed with Say’s law that “supply creates its own demand”  And endorsed another French sounding idea Laissez fair

5. Say’s Law at the movies Supply creates its own Demand!

6. The challenger’s reply Although the idea of laissez faire is admirable and might be applicable in the long run, please remember that we are all dead in the long run! I beg to differ. Supply does not create demand. It is a tempestuous interaction and sometimes the opposite is true.

7. Business Cycle Real Output (GDP) Time Economy is growing over a long period However in the short run it is erratic! Recession Economic Boom Growth Trend

8. Two ways of looking at the Business Cycle  One could look at the long run  One can consider the short run erratic behavior of the cycle as statistical noise  One can argue leave it alone and applaud the market’s long run performance.  One could look at the short run  One can argue the macro economy is unstable and can lead to undesirable outcomes  One can argue some entity (government) has to step in and correct for this erratic behavior!

9. Laissez Faire  This is the long run view  These economist argue the market through will correct itself!  They believe unsold goods and unemployed labor can and will emerge, flexible prices and wages but both would disappear as soon as people have time to adjust prices and wages.

10. Keynesian View  Keynes asserted that a market driven economy is inherently unstable.  He argued that expectation (psychology) of consumers and business is determined by the short run market performance.  Although he believed in the long run performance of the market system, he argued that we are all dead in the long run! (remember he was trying to save capitalism!)

11. Proving his point  Keynes attacked the idea of Say’s by showing:  Prices do not correct for the macroeconomic failure

12. The Historical Record 1900-1940 24 20 16 12 8 4 0 – 4 – 8 19001910192019301940 Unemployment Inflation

13. During the 1970s This Pattern Changed  During the 1970s this pattern of high unemployment and falling prices did not hold.  Leading to the revival of laissez faire schools of thought!

14. The Historical Record 1930-2000 20 15 10 5 5 3 0 3 0 –5 –10 193019351940194519501955196019651970197519801985199019952000 15 20 15 10 –5 –10 –15 Great Depression WWII Korean War Vietnam War During war time Government Spending Increases Reagan’s increased Cold War spending End of Cold War End of Vietnam War WWII Ends