ECON 3008: History of

Economic Thought
SEMESTER 2- 2016

Keynesians and Monetarists

Lecture Outline
John Maynard Keynes
Keynes’s Innovations
Major tenets of Keynesianism
Milton Friedman
Major tenets of Monetarism
The Great Depression Debate
Questions

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 Criticisms: • Studied at Eton and
1. His broad John Maynard Keynes King’s College,
philosophical views led (1883-1946) Cambridge
to attacks from both • Taught economics
sides. at Cambridge
2. Monetarists argued • Accomplished
that money matters mathematician

Major Works:
1. The Economic
• Paradox of Thrift
Consequences of the
Peace (1919)
• Keynesian policy: fine
2. The General Theory
tuning through monetary
of Employment,
and fiscal policy
Interest and Money
(1936)

• Proposed the Bretton • Attacked Say’s Law:

Realytic theory:
Woods system. argued that
…Keynes used reality to
• Instrumental in the aggregate demand
guide his choice of
formation of the IMF determined supply…
assumptions…
and World Bank. 11/27/2021 3
 KEYNES’S INNOVATIONS
Aggregate Expenditure- 45 degree line

◦ Consumption function

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KEYNES’S INNOVATIONS CONT’D
Liquidity Preference Theory

Multiplier Model

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Major Tenets of Keynesianism
Macroeconomic emphasis
Demand oriented
Instability in the economy (uncertainty in
markets)
Wage and price rigidity
Active fiscal and monetary policy

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 • Majored in economics
Realism of Milton Friedman
and mathematics
assumptions does (1912-2006)
• One of the founders
not matter in of the Chicago School
scientific analysis of Economics.
• Nobel Prize winner
(1967)
• Natural rate of
unemployment…everyone
will not always have a job
Best known for his
• Preferred flexible crusade against the
exchange rates Keynesian revolution

• Capitalism is the best

economic system Major works:
1. Income from
independent
• Quantity Theory of Money: Professional Practice
MV=PQ Consumption (1945)
function 2. A Theory of the
• Long run: money is neutral Consumption Function
versus
Permanent Income (1957)
• Inflation is a monetary 3. Capitalism and
Hypothesis
phenomenon. 11/27/2021
Freedom (1962) 7
 Major Tenets of Monetarism
Long run monetary neutrality

Short run monetary non-neutrality

Constant money growth rule

Interest rate flexibility

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 The Great Depression Debate
 Keynes
 The crash and the
subsequent depression
were due to factors that
are innate to the capitalist
system, unchecked under
the supposedly laissez-
faire policies
 Rejected the view that the
boom-bust cycle was due
to over-expansive
government monetary
policy
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 Friedman
 Friedman blamed the
Great Depression on the
Federal Reserve, showing
how they first tightened
the money supply
because of their fears
about stock market
speculation
 Led to a sharp drop in the
US money supply,
reduced spending, and
created a Depression.
9
QUESTIONS

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 1
What is the title of John Maynard
Keynes’ 1936 treatise?

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 ANSWER
The General Theory of Employment,
Interest and Money

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 2
Accordingto Friedman, in the long run
money is…

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 ANSWER
Neutral

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 3
What type of theory Keynes used?

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 ANSWER
Realytic theory: a compromise between a
realistic and analytical approach.

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 4
Interestrate flexibility is a major tenet of
what economic school of thought?

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 ANSWER
Monetarism

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 5
Friedmanreceived the Nobel Prize for
Economics in what year?

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 ANSWER
1967

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WEEK DATE TOPICS
I. Introduction
1 22nd Jan II. Early Pre-classicals
I. Mercantilists and Physiocrats
2 29th Jan
I. Classical Political Economy: Adam Smith
3 5 Feb
th II. Classical Political Economy: Thomas Malthus
III. Classical Political Economy: David Ricardo
I. Classical Political Economy: J.S. Mill
4 11th Feb II. Critique of Capitalism and Classical P. Economy: Karl Marx
I. Critique of Capitalism and Classical P. Economy: Lenin, Bukharin,
5 18th Feb Luxemburg
II. Critique of Capitalism and Classical P. Economy: Austrian School
I. Marginalist Revolution: Walras, Jevons, Menger
6 25th Feb
7 3rd Mar I. Neo-classical: Marshall, Samuelson
I. Keynesian: Keynes and the Keynesians
8 10th Mar II. Monetarists: Friedman
I. Dependency Theory: W.A Lewis, Baran, Frank, Amin, Cox, Wallerstein and
9 17th Mar others
II. Dependency: Plantation School
I. New Classicals: Sargent, Lucas
10 24th Mar II. Supply-siders: Laffer, Becker
I. Radical approaches: Post-Keynesians
11 31st Mar II. Radical approaches: Institutionalists
12 7th Apr I. Final Lecture
I. Review/Exam Discussion
13 14th Apr

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 SOURCES
Pressman, S. (1999) Fifty Major Economists,
Routledge.
Landreth, H. and Colander, D. (2002) History
of Economic Thought, Fourth Edition, Boston:
Houghton-Mifflin.
http://www.economictheories.org/
http://www.imf.org/external/pubs/ft/fandd/2014
/03/basics.htm
http://fee.org/freeman/detail/the-great-depressio
n-according-to-milton-friedman#axzz2tjPWjdq
P
http://www.econlib.org/library/Enc/bios/Friedm
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