20th Century Economic Thinking

Prepared by:-
Asyraf
Faris
 Neo classical faith in the
ability of free market to
bring about the best
outcomes prevailed

Introduction Believes that economy as a

whole would move
towards general
equilibrium
   Encourage
 Price will  Eliminate
 Over-supply (gluts) customers
drop surplus
buying
 Theory also applied to
labour market and found out
that unemployment is not a
long-run problem
Introduction
Government intervene is not
crucial because market
forces would do it
automatically 
Keynesian Economics
John Maynard Keynes

• British economist in 1920s and

1930s and responsible for the
next revolution in economic
thinking as "Keynesian
Economics"
• Often regarded as the father of
macroeconomics
Government orthodoxy at the time was laissez-faire, which argued that government
intervention should be limited and focused on the supply side

Govt have a role to create the maximum possible production such as education to create
skilled workers, infrastructures to make exchange possible and establishment of laws
and maintenance of order to guarantee stability

Keynes changed focus to demand rather than supply that determines national income
and govt had control in managing total demand (aggregate demand) in the economy

Grappled the problem of unemployment during the Great Depression which will not
disappear if left to market forces
• Insufficient demand during the Great Depression, demand of customers and
businesses was not enough to buy the total output of goods and services produced
resulting in "general glut"

Less
purchasing Even less
Excess Lay off of Further fall in
power to buy demand for
Supplies workers demand
goods and workers
services
 Govt should
Allowing businesses
intervene and Spend more money Increase aggregate
and customers to
increase aggregate and lower taxes demand
spend more
demand

Countered the neo classical economist in two ways,

• Went against the notion of the market automatically stabilizing itself since govt is
obliged to intervene. Full employment of all resources takes a long time and could
be damaging (unemployment) for govt to accept. Keynes proposed policies which
were fiscal (govt taxation, spending) and monetary policies (interest rate and
money supply)

• Govt should stimulate demand by going into debt and run budget deficits (Spend
more > tax revenue) and borrow money to overcome shortfall. Govt should take in
more money and spend less once debt is cleared and economy is rising
 Known as demand-side theory. Counter-
cyclical measures advocated during recession
by increasing aggregate demand using
expansionary fiscal and monetary policies.
Aggregate demand is decreased during
booming economy when at risk of inflation

Keynesian Economics
Accepted and became dominating economic
school of thought until 1970s which began
the problem of high unemployment and
inflation (stagflation) which the keynesian
theory was unable to explain and in fact
made economic problems worse
Monetarism
 Monetarism

Contrast of KEYNESIAN

Created by Milton Friedman

Economic growth depends on the total amount of money in economy

Concern with the issues of inflation

Leads to a situation "too much money chasing too few goods"

 2 best ways to achieve economic growth;
government (steer clear to demand) and central
bank (control growth of money)

Theory of "rational expectation" where they argue

that economy automatically moves to level of
national income
Monetarism
Also, Robert Lucas Jr. received Nobel Prize in
Economics in 1995

In conclusion, monetarism support economy

without intervene of government