ECONOMIC THEORIESMATTHEW DANG

CLASSICAL

• First modern economic theory, started in 1776 by Adam Smith

• Classical: economic freedom and ideas such as laissez-faire and free competition

• “Invisible Hand”: free markets regulate themselves

• The economy would grow the most with free competition and trade

• When individuals follow their self interest the whole community benefits

• Individuals will make profit by producing goods that are in demand, and people will buy what they want or need

CAPITALISM

• Capitalism: An economic system in which trade, industry and the means of production are controlled by private owners

• Goal: prosperity and profits in market economy

• Risks: financial crises, job insecurity and income inequality

• Allows for the right to hire and fire freely which emboldens the company to take risks and hire people raising wages and employment

• Individual entrepreneurs will make innovations and be the ones to take the risks

• Competition between individuals and businesses innovation and growth

NEO-CLASSICAL• Term first used by Thorstein Veblen

• Succeeded classical economics around the 1870s

• Three Assumptions:

• People have rational preference among outcomes that can be identified and associated with a value.

• Individuals maximize utility and firms maximize profits

• People act independently on the basis of full and relevant information

MARXISM/

• Theoretical successor to capitalism in historical materialism

• Created by Karl Marx as an alternative to capitalism without the problems of capitalism

• Value theory: False, Use-Value: True

• Modes of production will follow the criteria of use-value, and production is done through economic planning

• Distribution of economic output follows the principle of “To each according to his contribution” where the amount they receive is equal to the contribution they put into the economy

SOCIALISM

• First mentioned by Marx, though he dismissed it is impossible

• Socialism: a mode of production where the criterion for production is use-value

• Elements:

• Government controls all means of production

• Production output is equal to demand and need

• Does not include: rent, interest, profit, and money

KEYNESIAN• 1936: Created by John Keynes during the Great Depression

• Keynesian Economic Theory: in the short run, the GDP is strongly influenced by aggregate demand, or the amount of spending in the economy

• Natural balance of the economy wouldn’t ensure full employment

• Due to uncertainty investment wouldn’t be as high and there would be over-saving

• Fiscal policy controls economy

• Increasing government investment by deliberately borrowing money creates jobs

MONETARISM• Mainly attributed to Milton Friedman, adopted from

Keynesian Theory

• Monetariasm: Inflation is a natural part of the economy

• Monetary policy controls the economy focused on price stability

• Keynes’ theory of gluts and government spending’s effect on the economy: FALSE

• Governments control of the money supply can strongly influence national GDP and the price level.

• Inflation is an inherent part of the money supply

DEPENDENCY THEORY• Theory that more developed countries extract resources from less developed

countries while preventing those countries from becoming more developed.

• Differs from modernization theory in which all countries will become developed with the developed countries helping the developing improve.

• Believes that underdeveloped countries are structurally and fundamentally different from developed countries and in the world economy.

ACTIVITY

• Split the class into two groups, using either capitalism or communism

• Everyone rolls two dice and records their sum

• Communist group tallies the average, if above 6 everyone wins

• Capitalists win if above 6• If 11 win twice as much, if 12 triple, if enough prizes