Core Macroeconomic Concepts in Historical Context
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This document summarizes a lecture on the history and development of macroeconomic theories. It discusses how theories like Keynesian economics were developed in response to economic crises like the Great Depression. It outlines the rise of deregulation and supply-side economics in the late 20th century in response to stagflation. It also discusses ongoing debates between different schools of macroeconomic thought and criticisms of policies like privatization and financialization.
Core Macroeconomic Concepts in Historical Context
- 1. CORE Macroeconomics Concepts & Terminologies understanding Key Economic Indicators & their significance vis-à-vis economic development Talk at NDU, on 19th September, 2014 Dr. Asad Zaman, VC PIDE.
- 2. Recorded Talk: Audio + Slides Core MacroEconomics Concepts in Historical Context KEY IDEA: Theories are responses to emergent economic problems, and can BEST be understood within the historical context in which they were formulated. Macroeconomic theories are presented as analysis and solutions of economic crises in USA. Wednesday 01st October 2014 at PIDE http://pide.org.pk/index.php?option=com_content&view=article&id=804 Recorded talk available (search) from following websites http://pide.org.pk http://asadzaman.net/online-lecture/economics/
- 3. Economics: Humanities or Science? HISTORICAL CONTEXT Who invented the theory? What problem was it designed to solve? What happened when theory was applied to solve the problem? SOCIAL SCIENCE: Theories are like scientific laws. Universal Invariants. Who invented the theory and When and Why DOES NOT MATTER
- 4. Your Vote? Science or Humanities? What does Harvard University have to say? SOCIAL SCIENCE: Application of SCIENTIFIC METHOD to study of human beings and societies. QUANTITATIVE METHODS – MEASURE everything. Mathematical Laws of Motion for Humans & Societies.
- 5. The Battle of Methodologies: Historical/Qualitative Must look at historical context to understand theory. Math/Physics Laws History is UNIQUE – impossible to learn any laws.
- 6. Science Won – Truth Lost !!! Since 1890’s STEADY DECLINE in understanding of economics – WHY? WRONG method being used to try and understand economic events. THERE are economic LAWS – Supply & Demand. LAWS of consumer behavior.
- 7. Goals of Macroeconomic Policy Full Employment == Maximum Production Stable Prices Rapid Growth {NOW a little bit Controversial} CONTROVERSIES about how to achieve these goals. ALSO Full Employment as a means of providing meaningful jobs to people VERSUS Maximizing Production of Goods and Services. Growth VERSUS Sustainable Growth, Pro Poor Growth
- 8. First Crisis: Great Depression 1929 GD took Economists by COMPLETE SURPRISE Irving Fisher: “There may be a recession in stock prices, but not anything in the nature of a crash.” Julius Barnes: “The spring of 1930 marks the end of a period of grave concern. American business is steadily coming back to a normal level of prosperity.”
- 9. BIG PUZZLE – Still Unsolved WHY did GD Happen? Economy was ROARING along – Full Employment. Massive Production of Everything. Everyone Happy. SUDDENLY – factories close, 20% unemployment, stock market crashes, banks collapse. Life Savings Destroyed. Complete Misery. WHY ???? – Stock Market Crash Banking Collapse Productive Capacity is there, Labor is there, no war, no destruction.
- 10. KEYNESIAN (MACRO)ECONOMICS: INVENTED TO SOLVE GD PUZZLE CLASSICAL ECONOMICS: UNEMPLOYMENT cannot happen. SELF-REGULATING Economy WHY? LAW of Supply & Demand. Wages will fall to restore full employment.
- 11. PUZZLE: Do Wages Fall? One thousand applicants for FOUR positions at IIUI. Similar situations all over Pakistan. WHY dont wages fall to eliminate unemployments? CONVENTIONAL ECONOMIC THEORY is incapable of dealing with the MOST IMPORTANT ECONOMIC PROBLEM: Unemployment.
- 12. Banking Crisis Regulation Glass-Steagall Act Maximum Interest Rate Federal Deposit Insurance Restriction to ONE state operation. RESULT: Very few banking failures until 1980’s.
- 13. Wrong Theories Huge Impact In Mundell’s (2000) assessment, ‘had the major central banks pursued policies of price stability instead of adhering to the gold standard, there would have been no great Depression, no Nazi revolution, and no World War II’.
- 14. Keynesian Solution: Macroeconomics Problem: SHORTFALL in EFFECTIVE DEMAND SOLUTION 1: MONETARY POLICY – Increase money supply, people have more money, will spend DEMAND Possible Problem: LIQUIDITY TRAP. No one wants to borrow money, even at ZERO interest rate. SOLUTION 2: FISCAL POLICY: Government engages directly in investment and public works. CREATES Demand.
- 15. Battle of Ideologies Free Markets Key Proponents: Hayek, Friedman Minimize Government Privatization Liberalization De-Regulation No interference with free markets Regulation Fiscal Policy, Monetary Policy Employment Policy Social Welfare Trade Unions Regulations on Monopoly Incentives for Industry & Exports
- 16. Economics of 20th-21st Century Naomi Klein: The SHOCK DOCTRINE: The Rise of Disaster Capitalism www.asadzaman.net The Rise and Fall of the Market Economy Current Crisis in Economic Theory Capitalism in Crisis
- 17. Keynes rules – post WW2 Low AD Unemployment – High AD Inflation Phillips Curve. Stable, Sound Economies, Prosperity 50-70 Klein: Chicago School – waiting for a crisis. Monetarists versus Keynesians.
- 18. The Keynesian World Low Agg. Demand Low production Excess Capacity UNEMPLOYMENT High Agg. Demand Production at maximum capacity Full Employment INFLATION
- 19. Keynesian Quarter Century 48-73 TOBIN: All advanced democratic capitalist societies adopted Keynesian strategies of demand management after World War Two. Unparalleled prosperity, growth, expansion of world trade, and stability. During this ‘Golden Age’ inflation and unemployment were low, the business cycle was tamed. Britain and other Western countries had full employment for a quarter of a century after the war because their governments were committed to full employment, and knew how to secure it; and they knew how to secure it because Keynes had told them how
- 20. Trouble in Keynesian Paradise Multinationals Military Industrial Complex
- 21. "ONLY A CRISIS-ACTUAL OR PERCEIVED-PRODUCES REAL CHANGE. WHEN THAT CRISIS OCCURS, THE ACTIONS THAT ARE TAKEN DEPEND ON THE IDEAS THAT ARE LYING AROUND. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable. Milton Friedman -- Preface to Capitalism & Freedom 1962.
- 22. Preparing IDEAS for Crisis: Great Depresson: A Monetary History of US Inflation/Employment Tradeoff: Natural Rate of Unemployment. Fiscal Policy: CROWDING OUT Hypothesis. Monetary Policy: Rational Expectations.
- 23. Utilize Post-Crisis Confusion PRIVATIZATION Slash Social Welfare Programs De-Regulation Free Trade – Collapse Domestic Industry, let multinational rule. Free Exchange Rates – LOWER EXCHANGE Rates. DEBT TRAP
- 24. Oil Crisis & rejection of Keynes Stagflation – IMPOSSIBLE according to Keynes. NEW SOLUTION: SUPPLY SIDE ECONOMICS Rise of Reagan & Thatcher New Respectability of Hayek, Friedman and Chicago School POST KEYNESIAN CONFUSION: SEVEN SCHOOLS OF MACROECONOMIC THOUGHT
- 25. Reagan DE-REGULATES S & L DISASTER FOLLOWS S&L make huge gambles with others money Losses of around $80 BILLION MORE THAN ENTIRE EARNINGS OF BANKING INDUSTRY FOR PAST FIFTY YEARS GOVERNMENT BAILOUT – LOOTERS PROFIT, PUBLIC LOSES.
- 26. Margaret Thatcher: Iron Lady Busted Labor Unions – Especially Coal Miners Subsidies and Tax Breaks for the Rich. Massive increase in Unemployment. Reduction in Social Welfare. De-Regulation of Finance Industry. RESULTS: Concentration of Wealth, Increase in Poverty.
- 28. Fall of Russia & Washington Consensus Privatize, Liberalize, De-Regulate Let free markets work their magic Complete Catastrophe in Chile, Russia NAOMI KLEIN: THE SHOCK DOCTRINE, Rise of Disaster Capitalism. Originator of Washington Consensus admits to failure World Bank Admits to Failure.
- 29. Megatrends: Financialization Massive shift of resources from real sector to financial sector. Wall St. Rookies earn million dollar salaries by playing with pieces of paper and conning prospective buyers into get rich quick schemes. No relation between earnings and Value Added/Productivity.
- 30. Megatrends: Neo-Colonialism Mossadegh of Iran Salvador Allende of Chile Long list of popular leaders deposed by coups and replaced by Leaders favoring multinationals. Debt Model: Debt pays salaries of leaders, who do tax farming for multinationals. Good governance – free currency exchange – no regulations – privatizations – all favor MNC
- 31. Invisible Hand of Multinationals Poor Countries Bottom 3 Billion Rich Countries TOP 85 INDIVIDUALS
- 32. The Battle of Ideas Perspective 1776: Britain has 50 year lead in Industrialization Theories of FREE TRADE & FREE MARKETS emerge in England Adopted Everywhere Disaster for the Colonies, Depression in Europe
- 33. Protection in USA & Europe NOT in Ottoman, India, China, Japan Alexander Hamilton: 1755 – 1804 Friedrich List == 1789 to 1846. NO Protection in India – Industries destroyed. Opium Wars: 1839-42, 1856-1860 – Free Trade in China Opening of Japan: 1852-56 Capitulations of Ottoman Empire 1830 – 1870.
- 34. Selling FREEDOM Freedom for Capitalists to make profits. Freedom for laborer to sell his body/time for wages No freedom for government to regulate sale of labor – no minimum wage, health & benefits etc. No freedom for labor to band together and negotiate against powerful capital. No freedom for weak nations to protect their infant industries, against highly advanced MNC’s.
- 35. Timeline of Ideological Warfare 1776 • Invention of Free Trade Weapon in England • England has 50 year lead over R O W 1800 • Protection in Europe/USA • None for India,China,Japan,Ottomans 1860 • Europe, USA catch up to England • India, China, Japan, Ottomans destroyed
- 36. Early Twentieth Century 1850- 1930 •Golden Age of Classical Econ •W in Europe – W in Asia 1929-50 •Theoretical Confusion •Regulation/Isolation WW2 1950-75 •Keynesian Economics •Capitalism saved from Communism
- 37. Late 20th to Early 21st Century 1970- 2007 • Reject Keynes -- FREEDOM • Reagan-Thatcher / Russia Falls 2007- Current • GFC refutes ALL Macro Theories • Prices are KEY to decentralization FUTURE • New Type of Economics Required • Islamic Economics?