Chapter 15: The Development of Modern Macroeconomic Thought

Questions for Review, Discussion and Research

2, 4

Retreat from Growth Theory

Adam Smith emphasized the relationships between

1. free markets2. private investment3. laissez faire4. economic growth and

development

Retreat from Growth Theory Cont’d

Stressed the dynamic features of a market economy and viewed free trade as an opportunity to generate technological and organizational change through

1. Division of labour and economies of scale

2. Learning by doing

Retreat from Growth Theory Cont’d

Ricardian microeconomics emphasized the allocation and distribution concerns

The development of neoclassical economics accelerated the movement away from growth theory

The Neoclassicals, with exception of Marshall, focused exclusively on static equilibrium

Marshall’s views resembled Mill’s whose discussions of technological change and population control were optimistic about the prospect for continuous growth

Schumpeter and Growth

His theories were difficult to incorporate into the style and method of mainstream economics

Viewed depressions and the process of creative destruction as an integral part of capital economic growth

Overhead pp. 412-13

The success of capitalism will alter the old concept of private property with the rise of an intellectual class who live off the fruits of the system but continually undermine it with their discontent and resentment

Underconsumptionist Arguments

Mercantilists wanted to understand and determine the capacity and operation of economic activity

They believed that savings and the purchase of imports would create a shortage of demand for domestic products

Overhead pp. 415

Monetary Economics and The Quantity Theory of Money

Economists of every era discussed monetary theories that determine the general price level

I. Classical quantity theory

The first clear statement by Hume in 1752

Cambridge Version of Quantity TheoryMarshall sought to

integrate the microeconomic behaviour of households and firms with his discussion of the general price level

The cash balance version is

Monetary Economics and The Quantity Theory of Money Cont’d

M=k *p* y Where k – inverse of

velocity of money Fixed value based on

custom and habit Where y – full

employment due to Say’s Law and self correcting mechanism by non-monetary forces

The real cash balance version is

M = k * yP

Monetary Economics and The Quantity Theory of Money Cont’d

III. Fishers Transaction Version of the Quantity Theory

MV = PT

Wicksell’s Critique

Developed a monetary theory that explains fluctuations in income (Y) and the price level (P) to explain “Why the monetary or pecuniary demand for goods exceeds or falls short of the supply of goods in given conditions”

Overhead pp. 417 to 432