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Illustration Available macro-economics.
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Chapter 3, “Economics that have Moved the Times,” is a good overview of the currents as it is explained in chronological order.
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Contrary to the title, it explains how it came into being before the birth of macroeconomics.
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leviathan v.s. civic government theory The idea that value is added by labor.
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Adam Smith Absolute advantage v.s. Rickard’s comparative advantage.
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Adam Smith work-value theory v.s. marginal utility theory → Marshallian uplift
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Neoclassical Microeconomics v.s. Keynes School Macroeconomics → Cessation by Hicks.
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1961-1963 Kennedy Administration + Keynesians → full employment
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1963-1969 Johnson Administration: Medicare
- Vietnam war
- Government spending at full employment leads to inflation.
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1969-1974 Nixon Administration
- 1971 Dollar shock + price wage freeze treatment + 10% surcharge on imports
- 1973 Oil crisis
- Inflation has not stopped despite the recession stagflation.
- Keynesian cannot cope with stagflation because it is an aggregate demand management policy
- Inflation expanded until 1982, tripling prices in 17 years (6.5% per annum).
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A New Wave of Keynesian Discreditation - monetarism - Milton Friedman (1912-2006) - freedom of choice 1977 - Keynesians went too far and went beyond the natural unemployment rate to full employment. - That policy causes inflation. - money illusion, not realizing that inflation is causing real reductions. - Monetary illusion: a 5% increase in payroll with 10% inflation is a reduction in real terms, but is mistakenly thought to be an increase - Monetary illusion - Wikipedia - The result is a reduction in real terms and an increase in nominal terms, with an increase in supply thinking it is an increase. - When it is widely understood that inflation is occurring? - Phillips curve - Rigidity in nominal wages prevents salaries from increasing at the same rate as inflation - The resulting inflationary increase would effectively reduce salaries. - The volume of employment increases (if not at full employment) in response to lower labor prices - But inflation at full employment will not add any more jobs. - And? - rational expectations hypothesis - Lucas. - People try to act rationally by factoring in future inflation expectations (forecasts)
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Relatively new idea - theory of games : Because of conflicting interests of people, even if each individual makes a rational decision based on his or her own interests, the whole may fall into a suboptimal solution. - behavioral economics : People’s decisions are not rational to begin with. - information asymmetry : → contract theory
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