Term Paper on "History of Economic Thought"

Term Paper 8 pages (2494 words) Sources: 12 Style: MLA

[EXCERPT] . . . .

John Maynard Keynes's contributions to economic thought.

John Maynard Keynes is considered to be one of the most prominent figures in economic thought of the 20th century. Keynes's ideas had a deep influence on economics and political theory as well as on theory of government fiscal policies. Keynes supported idea of economic intervention of government, as to his idea fiscal measures prevented national economies from deep consequences of economic recessions, stagnations and depressions or sudden economic boom. In wider scope, John Keynes is considered to be one of the founders of modern macroeconomics theory.

John Keynes opposed fundamental concept of classical economists that market was settled at a state of full employment, as he considered full employment to be only one equilibrium component of economy's continuum of equilibria. His approach to macroeconomics was viewed as a set of microeconomic behaviors, which yet were different from microeconomic models, unlike it was proposed by new classical economists.

A b) to what extent is Keynes the source of the macroeconomic theories in today's introductory textbooks?

Ideas of Keynes are presented in macroeconomic theory introductory textbooks as ideas opposite to those of Classical economists in order to give a full concept of tendencies in economic theory of the first half of the twentieth century. Keynes's ideas are presented as feedback of economic science to economic boom of the WWI recovery period and as roots of the great depression and recession of 1930 ies both in the U.S.A. And Europe.

Yet, his ideas were different from those of socialists, as he also sharply criticized Marxist theory. His theories gave instructions on how to save capitalism, but not on how to destroy it, despite critics on world economy system. Keynes considered that reduction of crisis effects could be achieved by direct government penetration into economy, as an effective example of government intervention he used examples of the U.S.S.R. planned economy of 1930th during industrialization period, fascist Italy and later Nazi Germany under Hitler, with strict government control over national economies.

That's why concepts of Keynes which he described in the General Theory are considered to be among the fundamental in macroeconomic studies.

To what extent is economic policymaking today (say, the monetary ideas used by the Federal Reserve, which is the central bank of the United States) influenced by Keynes?

Federal Reserve uses open market operations as a major tool for money supply manipulation. Open market operations in which major American banks participate allow Federal Reserve to manage reverses of the U.S.A. banking system by means of buying or selling Treasury bonds. These banks are also called money center banks. When treasury bonds are sold to major banks by Federal Reserve, Federal Reserve is paid by cash. In this case reserves in the banking system are reduced and money circulation supply also is gone down. Money supply goes up when Federal Reserve buys Treasury bonds back from commercial banks. By means of such monetary polices on open market, nation's money supply is manipulated by Federal Reserve.

According to John Keynes monetary policies influence consumption demand and private sector investments which affects aggregate demand. Such monetary policies allow manipulating interest rates as interest rates go down when money supply grows. It leads to growth of consumption, private investing as private sector holds most of cash, which as a result leads to growth of aggregate demand.

2. (a) Discuss the following two quotations. With which, if either, do you agree?

Up to a certain point it is possible to compare the influence of economic theories on society to that of grammarians on language. Languages are formed without the common consent of grammarians, and are corrupted in spite of them; but their works throw light on the laws of the formation and decadence of languages." [Augustin Cournot, 1838]

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back." [John Maynard Keynes, 1936] agree with point view of John Keynes, who truly described the role of economics scientists in nation's life. Like philosophers, whose theories reflect ethical and moral ideology of society, theories of economists reflect society's wealth and its ability to manage wealth and prosperity of a nation. The view point of Augustin Cournot:

Up to a certain point it is possible to compare the influence of economic theories on society to that of grammarians on language." is inaccurate mainly because it's outdated and has little reference to modern realities. In the 19th century the power of economics ideas was weak as concept of economics science was not studied well and fragmented world economy of the 19th century functioned independently from economic theories.

If to view the saying of Keynes in the modern scope it would also look not absolutely accurate as it's difficult to say that world is mainly ruled by ideas of political and economical philosophers. Today in the epoch of globalization, there are much more objective factors which influence world and local economies than pure scientific ideas of goods circulation, supply and demand. World economy today represents an organism which functions by natural laws, and any considerable intervention from outside will have far going issues because equilibrium shifts. Today both economy and politics are mainly manipulated by changing prices and shortage of energy and food resources so economical and political doctrines are mostly adjusted to these conditions.

Yet, doctrines of economists influenced balanced manipulation of monetary fiscal policies which guaranteed decades of gradual development in after war years without such serious shakes as Depression of 1920's-1930's.

A b) Consider James M. Buchanan's public-choice theory of politics (see chapter XI of New Ideas from Dead Economists by Todd Buchholz). Are Buchanan's views, on the factors that influence the decisions of politicians, closer to Cournot's or to Keynes's? Explain.

According to the Calculus of Consent by James M. Buchanan government decisions form components of national economy, but not factors which influence economy. Such approach leads to new concept of economic analysis which allows using economic tools for study of political science problems. Buchanan's theory implies that study of public sector also includes collective decision methods.

Theory of public choice studies behavior of politicians, government officials and voters in order to find the most optimal strategies for economic and political balance and harmony.

Despite acceptance of public choice theory by neoclassical economists, some of its concepts are doubtful as it's not clear that government's decisions would be beneficial for society, as they mainly reflect interested of a limited group of people such as government bureaucracy. James M. Buchanan, saying that government decisions form economies components, implied that government was not able to correct economy's failures in market or private sector, as it wasn't perceived as an economic influence factor. That's why Buchanan rejected economic theories of Keynesians.

In views about factors which influence decisions of politicians Buchanan was close to ideas of Augustin Cournot and in particular proposed to use economical analysis methods for decision making and decision support early proposed by Augustin Cournot.

3. (a) Did Thorstein Veblen have a favorable view of neoclassical economic theories, which were based on the assumption that people are rational? Explain.

Thorstein Veblen derived new concepts of economics from studies in anthropology, sociology and psychology. Unlike neoclassical economists, who considered economical development had individual determination, Veblen considered that it had social character and so roots of economical development laid in process of evolution.

He described that roots of evolution laid in typical human instincts, mainly in instincts of workmanship and predation, but also in instincts of emulation, curiosity and parental bent. Thorstein Veblen wanted economists to pay more attention to cultural and social changes in order to understand origins of economic transformations better. Writing of Thorstein Veblen the Theory of the Leisure Class is one of his most successful works which gives satiric description of American society, as a society of consumerism. Veblen described American society as society where the key role was executed by instincts of predation and emulation. The main role of consumption in the Theory of the Leisure Class is to achieve a certain social status, which is same for both rich and classes. This is one of the most important evidences which Veblen presented in order to oppose neoclassical economists' theory that individual act rationally. Consumerist behavior as well as other aspects of human psychology witness that rationalist theory of neoclassical economists is inaccurate as "economic man's" behavior is different from a behavior of a typical individual.

In more general scope Veblen's ideas state that economy doesn't develop by principles of pure mechanics and order, as it was stated by fathers of economics thought of the 19th century. Today we can easily… READ MORE

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