For this paper, it is writing to Compare and contrast two of the following major economists: Adam Smith, Karl Marx, Robert Malthus, John Stuart Mill, David Ricardo, Alfred Marshall, John Keynes with respect to one of the following: 1. growth/accumulation/stationary state 2. general gluts and recessions 3. theory of value 4. trade 5. determination of wages 6. monetary policy I have attached PowerPoints about the above economists for reference as well as tips for the writing. The topic of this paper is to compare and contrast two of the economists above. There must have a thesis statement in the first paragraph and that statement should not be: “Smith and Marx have many similarities and many differences.” The statement should be analytical and argumentative. Address both similarities and differences. In order to make decisions about what to include, writers need to keep one thing in mind: relevance. Relevance helps determine which characteristics are worth comparing and contrasting. CITATIONS: Reference any material that is not yours – Quotes or paraphrase from a book – Charts, tables, graphs – Facts & figures Create an alphabetized works-cited list at the end -Use a standard format (APA or Chicago Style) Example: Heilbroner, R. L., & Rogers D. Spotswood Collection. (1996). Teachings from the worldly philosophy. New York: W.W. Norton. – Formal, objective language – Means no 1st or 2nd person (I/we/you) – No acronyms – Professional tone and objectivity
326_10_keynesian_economics.ppt
326_8_marshall_1_.ppt
326_3_smith_1_.ppt
326_6_marx.ppt
326_4_malthusricardo_1_.ppt
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10. Keynes and
Macroeconomics
Recall
Underconsumptionist
Arguments
• Say’s law a central pillar of
classical economics: supply creates
its own demand
• Malthus had hinted at
underconsumption problems
• Sismondi and Lauderdale had
argued the bookseller problem
• Mill had acknowledged the problem
of crises—but saw them as
secondary to equilibrating forces
• Marx had made more noise about
these issues in his business cycle
theories
Monopoly and Restraint of
Production—a Second
Theme
• The growth of productive power
matched by the new trusts
• Monopolies have incentives to
restrain trade and hold up prices—
as commented on by Marshall,
Clark and most dramatically Veblen
• Concern among railroad
economists that high fixed cost and
low marginal cost encourage
cutthroat competitive pricing—a
need for controlled regulation to
keep prices up—
• These ideas clashed in newly
established Interstate Commerce
Commission
Business Cycles and
Money
• These themes flowed into the
business cycle literature of the late
19th and early 20th centuries
• Clement Jugular (1819-1905) and
Wesley Clair Mitchell emphasized
empirical work
• Mikhail Tugan-Baranowsky (18651919)
– The business cycle is endogenous
– Investment is the key variable
component
– Kalecki, working with TuganBaranowsky’s ideas independently
generates much of Keynesian analysis
John Maynard Keynes
(1883-1946)
• Bred for economics in the
Cambridge tradition—father
John Neville Keynes, mentor
Alfred Marshall
• Broad interests—economic
academic, active civil servant,
intellectual
• Bloomsbury group—Virginia
Woolf, E.M. Forester—a bit
decadent
• Did an interesting book on
probabilities
Keynes and a Third
Way
• The Soviet revolution had occurred
in 1917—not really part of Marx
script
• As depression breaks out in Europe
and then America, Marxist
influences growing among
intellectuals
• Keynes explicitly looking for a third
way between communism and
laissez faire
• This is clearest perspective on the
policy implications of his
macroeconomics
The General Theory of
Employment, Interest and
Money
• Picks up on ideas from
Wicksell and Kahn
• Advances simple multiplier
analysis of short run income
determination
• Emphasizes role of liquidity
trap in short circuiting fall of
interest rates
• More importantly, the
depression of investor
confidence disrupts the return
of income to demand
Expectations and
Investment
• Marginal efficiency of capital
defined as “that rate of
discount which would make the
present value of the series of
annuities given by the return
expected from the capital-asset
during its life just equal to its
supply price.”
• Rate of investment pushed to
point where MEC=market
interest rate
Investment and Interest
Rates
Interest
rate
MEC
r*
I*
Investment
The Uncertainties of
Investment
• (Chapter 12) Present facts exaggerated
in our estimates of the future
• Our knowledge is extremely limited
• Animal spirits “Business men play a
mixed game of skill and chance, the
average results of which to the players
are not known by those who take a hand.
If human nature felt no temptation to take
a chance, no satisfaction (profit apart) in
constructing a factory, a railway, a mine,
or a farm, there might not be much
investment merely as the result of cold
calculation.” p. 150
• Stock markets only make things worse
since here emphasis is on guessing what
others think about the future, not what the
future will actually be.
Speculation
• Speculation = forecasting
psychology of the market
• Enterprise=forecasting the
prospective yield of assets over
their whole life
• “Speculators may do no harm as
bubbles on a steady stream of
enterprise. But the position is
serious when enterprise becomes
the bubble on a whirlpool of
speculation. When the capital
development of a country becomes
a by-product of the activities of a
csino, the job is likely to be ill-done”
The Interest Rate and
Liquidity Preference
• Interest rate doesn’t balance
investment and savings
• Rather it is the price which
equilibrates the desire to hold
wealth in the form of cash with
the available quantity of cash
– Transaction motive
– Precautionary motive
– Speculative motive
• Interest is reward of not
hoarding, not the reward of not
spending
The Money Market
Interest
rate
Md
r*
Liquidity Trap
Ms*
Money
General Theory
• Independent variables
– MEC
– Rate of interest
– But note these are endogenous
• Ultimate independent variables
– Mpc,liquidity preference,
expectation of MEC
– Wage
– Quantity of Money
• Dependent variables
– Employment
– GDP in wage units
Savings, Rentiers and
Long-Run Interest Rate
• “our argument leads towards the
conclusion that in contemporary
conditions the growth of wealth, so far
from being dependent on the abstinence
of the rich, as is commonly supposed, is
more likely to be impeded by it. One of
the chief social justifications of great
inequality of wealth is, therefore,
removed.” p. 373 (Ch. 24 “Social
Philosophy.”
• At less than full employment savings are
actually detrimental.
• Policy offset—public spending and
relatively cheap money
• In long-run interest rate heads toward
zero as financial capital accumulates
Savings, Rentiers and
Interest, cont.
• “the return from them [capital
instruments] would have to
cover little more than their
exhaustion by wastage and
obsolescency together with
some margin to cover risk and
the exercise of skill and
judgment. In short, the
aggregate return from durable
goods in the course of their life
would, as in the case of shortlived goods, just cover their
labour-costs of production plus
an allowance for risk and the
costs of skill and supervision.”
p375
Savings, Rentiers and
Interest, cont.
• “Though this state of affairs would
be quite compatible with some
measure of individualism, yet it
would mean the euthanasia of the
rentier, and consequently, the
euthanasia of the cumulative
oppressive power of the capitalist
to exploit the scarcity-value of
capital.” p. 376
• “I see, therefore, the rentier aspect
of capitalism as a transitional phase
which will disappear when it has
done its work.” This change
requires no revolution.
Keynes and Anti-Usury
Legislation
• The Keynesian problem par
excellence is to achieve lower
interest rates
• Keynes is very sympathetic to
mercantilist attempts to
legislate interest rate caps and
encourage real investment in
this manner
• Quotes Smith on this and
criticizes Bentham
Is Keynesian Model about
Sticky Wages and Prices?
• A popular treatment of the
Keynesian model in
introductory and intermediate
texts holds it is a theory of
sticky wages and prices
• Keynes did observe on the
stickyness of wages and prices
• But overall he considered this
a blessing, rather than an
obstacle to full employment
Sticky Wages and
Prices, cont.
• Can’t aggregate labor demand
curves across industries because
each assumes a constant
aggregate demand for product
(Chapter 19)
• Consider effect of a fall of wages
on consumption, MP of investment,
interest
• Prices will fall somewhat, but
unlikely that domestic
consumption will rise since
income transferred to richer
segments with more savings
Sticky Wages and
Prices, cont.
• Lower prices may well improve the
balance of trade, but will hurt the
terms of trade which will reduce
real incomes—net effect unlikely to
be strong
• May stimulate investment some,
unless creates an expectation of
continuing wage declines in the
future thus leading to
postponement of investment
• Price fall reduces demand for
money and will generally reduce
short term interest rate. Equivalent
to an increase in money holding
prices constant (Keynes effect) But
if prices expected to rise in future,
long term rates unlikely to be
strongly affected.
Keynes Effect
P
=>
MD
=>
r
=> AD
Pigou Effect
P
=>
W
=>
C
Trade Effect
P
=>
X
Sticky Wages and
Prices, cont.
• Deflation may reduce political
confidence, increase popular
discontent and thus raise
demands for cash offsetting the
effects described in the last
point
• Deflation will increase existing
debt burdens on employers—
could lead to bankruptcy and
reduced investment. Also
raises burden of national debt
Sticky Wages and
Prices, cont.
• If trade unions adjusted wages downward
in recessions we “would have monetary
management by the Trade Unions, aimed
at full employment, instead of by the
banking system.” p. 267
• But this is at best an awkward alternative
to monetary policy
• “In the light of these considerations I am
now of the opinion that the maintenance
of a stable general level of money-wages
is, on a balance of considerations, the
most advisable policy for a closed
system…” For an open system use the
exchange rate if adjustments are
necessary
Precursor of Aggregate
Demand-Aggregate Supply
Model
Supply
Price
Level
{Classical Range}
{Keynesian Range}
Expenditures
Real GDP
Keynes on Trade and
Mercantilism
• Focus on expanding domestic
holdings of precious metals can
help to lower interest rates and
stimulate investment (Ch. 23)
• But need to be careful not to
increase demand so much that
price level rises (Hume’s price
specie flow mechanism) Spain for
example went too far
• “a favourable balance, provided it is
not too large, will prove extremely
stimulating; whilst an unfavourable
balance may soon produce a state
of persistent depression.” p.338
Keynes and
Mercantilism, continued
• Doesn’t mean maximizing trade
restraints is optimal, generally
something less severe
• An immoderate policy “may lead to
a senseless international
competition for a favourable
balance which injures all alike”
• Also beware of what we now call
rent seeking behavior by special
interests
Thoughts on Keynes
• Keynes definitively deconstructed
Say’s Law
• Various conservative efforts to
reconstruct Say’s Law and it’s
laissez-faire policy prescriptions
have been delusional
• But Keynes’s own policy solutions
underestimated the difficulty of
reaching full employment
Six Issues with
Keynesian Policy
• Multiplier smaller than Keynes anticipated
• Finance harder to rein in than Keynes
anticipated
• Capital mobility more extensive and
problematic than Keynes anticipated—in
particular, dampens wage growth
• Monopoly elements more persistent
• Technological change increasingly favors
high-end consumerism (new goods)
rather than low end consumerism (more
efficient production techniques)
• Political power and social influence of the
wealthy highly resilient
Conclusion
• These point to a rather
pessimistic conclusion:
– Keynes’s analysis remains
cogent
– But his policy prescriptions
are not easily implemented
and perhaps insufficient to
the task
Michal Kalecki (1899-1970)
• Polish economist
• Reasonable case to
Call Keynesian
economics the KeynesKalecki model
• Influenced by Marx
• Emphasized the role of the income
distribution: “workers spend what
they earn and capitalists earn what
they spend”
• Predicted opposition to Keynesian
policies based on class
Major Keynesians
John Hicks
With Hansen developed
the IS-LM curve
Joan Robinson
The Accumulation
of Capital
Cambridge Capital
Controversies
Paul Samuelson
Raised math rigor
First major Keynesian
textbook
Economics 326:
History of Economic
Thought
Marshall and the NeoClassical Agenda
• A definition: “Political Economy
or Economics is a study of
mankind in the ordinary
business of life; it examines
that part of individual and
social action which is most
closely connected with the
attainment and with the use of
the material requisites of well
being.”
Marshall Biography
• Alfred Marshall (1842-1924)
• Strong religious background; also first rate
mathematics student
• Becomes major figure in the Cambridge
tradition of British political economy—He is
John Maynard Keynes’s professor
• 1890 Wrote Principles of Economics which
became the major text for the field for fifty
years
• Concerned to communicate with real world—
especially interested in industrial organization
(his second major work entitled: Industry &
trade; a study of industrial technique and
business organization, and of their influences
on the conditions of various classes and
nations.)
Political Economy or
Economics
• Marshall, in the Christian
moralist tradition, attached to
broad social questions raised
by the historical school—hence
political economy
• But also eager to build on a
more explicitly analytical
foundation—what John Neville
Keynes (John Maynard’s
father) called economics
Classical or Marginalist
• Marshall develops and embraces a
range of marginalist tools
• But avoids obsession with demand
• Indeed, for long run analysis again
emphasizes role of supply, like the
classicists
• Nor does he completely give up
labor values for long run historical
comparisons
Fundamental Task
• Marshall strongly influenced by
religion and morality
• Deserting the wage fund theory
and modifying Malthus will give
him more room for optimism (In
this he is very much the
inheritor of J.S. Mill)
• Advanced the elimination of
poverty as the central practical
purpose of economics
Method
• Breaking down the complex
• Ceteris paribus and partial
equilibrium
• Let more vary over time:
– Market period: supply inelastic
– Short run: variable inputs
– Long run: fixed inputs
– Secular period: technology and
population vary
Supply and Demand
• Marshall formulated a
compromise between the value
theory of the classics which
emphasized supply and the
value theory of the marginalists
which emphasized demand
• Interaction of supply and
demand
Contributions to
Demand Theory
• Clear formulation of elasticity,
which had been implicit in Mill’s
work on international trade—
Marshall formalized that argument
as well
• An additive utility function
• Kept marginal utility of money
constant for small changes
• Consumer surplus
• Taxes and subsidies for increasing
and decreasing cost industries
Contributions to Supply
Analysis
• Theory of the firm
• The representative firm—trees
in a forest
• Normal rate of profit—what is
it?
• Quasi-rent as key explanation
of profits
Measuring Welfare
• Consumer surplus
– A measure of the gain from trade
• Producer surplus
– Rent
– Quasi-rent
Taxes and Surpluses
• Constant Cost Industry
– Tax revenue less than consumer
surplus
S’
Revenue
DWL
S
D
Taxes and Surpluses
• Increasing Cost Industry
– Tax revenue can be larger than loss of
consumer surplus
– Discuss implications for producer
surplus—question of whether upward
slope is a pure rent
Taxes and Surpluses
• Decreasing Cost Industry
– Bounties may be justified since raise
consumer surplus (ABCD) more than
bounty (CDEF)
D
S’
A
S
B
F
E
D
C
Welfare Economics
• Marshall’s consumer surplus
analysis is beginning of formal
welfare economics
• Leads to Pigou’s more
extensive analysis
• Also to cost-benefit analysis
Factor Payments:
Wages
• Accepted the logic of marginal
product theory and product
exhaustion
• But saw marginal products as
only one of the determinants of
wages
Quasi Rents Again
• Price determining factor
payments in the long run
• Price determined factor
payments in the short run—
these are quasi-rents
Economies
• Internal economies
• External economies
– Individual firms may face internal
diseconomies (entrepreneurship
fixed?)
– But groups of firms may realize
external economies
– Emphasized geographic
clustering—now called
agglomeration economies. Think
Silicon Valley
Agglomeration
Economies
• “When an industry has chosen a locality
for itself, it is likely to stay there for long;
so great are the advantages which
people following the same skilled trade
get from near neighborhood to one
another. The mysteries of the trade
become no mysteries; but are as it were
in the air, and children learn many of
them unconsciously. Good work is
appreciated; inventions and improvement
in machinery, in processes and the
general organization of the business
have their merits promptly discussed; if
one man starts a new idea, it is taken up
by others and combined with suggestions
of their own; and thus it becomes the
source of new ideas.”
Alfred Marshall, 1920
Increasing Returns and
Economic Progress
• Marshall saw increasing
returns as the driving engine of
economic progress
• To an extent workers shared in
this progress through rising
marginal productivity of labor
• But poverty remained
• Progress laid the basis for an
expansion of state activities to
address poverty and its
consequences
Monopoly
• Works out basic principle of
monopoly profit maximization
• Flat taxes and taxes on profit
will not change level of
production
• Anticipates theory of
contestable markets and limit
pricing
• Presents basics of duopoly
theory (Gave Cournot credit.)
Monopolistic
Competition
• Marshall often talks about the fear
firms have of “spoiling the market”
• A perfectly competitive firm would
have no such fear
• Marshall associates the problem
with excess capacity and
recessions
• While he doesn’t fully develop the
argument, he is anticipating here
the theory of monopolistic
competition as developed by Joan
Robinson and E.H. Chamberlin
Monopolistic
Competition
• It is difficult to understand how
Marshall and his colleagues could
be so enamored of perfect
competition, when virtually every
firm worries about achieving sales,
i.e. faces a downward sloping
demand curve.
• Still curious that monopolistic
competition receives so little
attention in micro-texts
• Robinson and Chamberlin are the
obvious bridge to modern game
theory
Money and Macro
• Accepted Mill version of Say’s
Law.
• Fluctuations related to
business confidence and credit
• Argued for controls to prevent
over exuberance in expansion
• Vague policies for
guaranteeing firms against risk
during contraction
• Put forward a quantity theory of
money based on the demand
for money—precursor of
Keynes
Marshall on Policy
• An academic all his life,
Marshall participated as an
expert witness in a number of
Royal Commissions of Inquiry
– On the Depression of Trade and
Industry 1886
– The Aged Poor 1893
– Local Taxation 1897
– International Trade 1903
A Welfare State
• “Let the state be up and doing”—
hardly laissez faire
• Supported social security for the
elderly
• Free schooling for children
• An expansion of outdoor poor relief
through “economic chivalry”, a
public redistribution plan to tax the
rich and subsidize the poor so as to
“ remove the worst evils of poverty
from the land”
• City planning—green belts
• But still tentative and cautious
about government’s role
• Fear of upsetting the engine of
progress
What Accounted for this
Shift
• Marshall reflects developments in
liberal utilitarian thought
• Sedgewick (utilitarian philosopher)
argued that classical liberal
freedom “from” not enough
• Needed to expand freedom “to” so
that participation in society could be
expanded
• The conditions of modern industry
both necessitated this concern and
made possible a response
• Basis for welfare state
• J.B. Clark in the U.S. took a similar
position as did members of the
German Historical School
Academics, Theory and
Policy
• Academics clearly had more time
and energy to devote to theory
• Presumably less self-interested in
the policies they proposed
• But perhaps also less aware of the
“realities” of business and life—
somewhat on the defensive
• Also perhaps lack the passion of
class advocates like Mun or
Ricardo
• Their careers depend more on not
being too outspoken and the
opinions of th …
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