History[ edit ] Early proposals of monetary systems targeting the price level or the inflation rate, rather than the exchange rate, followed the general crisis of the gold standard after World War I. Irving Fisher proposed a "compensated dollar" system in which the gold content in paper money would vary with the price of goods in terms of gold, so that the price level in terms of paper money would stay fixed. Fisher's proposal was a first attempt to target prices while retaining the automatic functioning of the gold standard. In his Tract on Monetary ReformJohn Maynard Keynes advocated what we would now call an inflation targeting scheme.
The classical tradition of partial equilibrium theory had been to split the economy into separate markets, each of whose equilibrium conditions could be stated as a single equation determining a single variable.
The theoretical apparatus of supply and demand curves developed by Fleeming Jenkin and Alfred Marshall provided a unified mathematical basis for this approach, which the Lausanne School generalized to general equilibrium Expansionary monetary policy essay.
For macroeconomics the relevant partial theories were: Keynes sought to supplant all three aspects of the classical theory. Precursors of Keynesianism[ edit ] See also: A number of the policies Keynes advocated to address the Great Depression notably government deficit spending at times of low private investment or consumptionand many of the theoretical ideas he proposed effective demand, the multiplier, the paradox of thrifthad been advanced by various authors in the 19th and early 20th centuries.
An intellectual precursor of Keynesian economics was underconsumption theories associated with John LawThomas Malthusthe Birmingham School of Thomas Attwood and the American economists William Trufant Foster and Waddill Catchingswho were influential in the s and s.
Underconsumptionists were, like Keynes after them, concerned with failure of aggregate demand to attain potential outputcalling this "underconsumption" focusing on the demand siderather than " overproduction " which would focus on the supply sideand advocating economic interventionism.
Numerous concepts were developed earlier and independently of Keynes by the Stockholm school during the s; these accomplishments were described in a article, published in response to the General Theory, sharing the Swedish discoveries.
Robertson in his The Fallacy of Saving, in earlier forms by mercantilist economists since the 16th century, and similar sentiments date to antiquity. In it he attributes unemployment to wage stickiness  and treats saving and investment as governed by independent decisions: This argument rests upon the assumption that if a surplus of goods or services exists, they would naturally drop in price to the point where they would be consumed.
Given the backdrop of high and persistent unemployment during the Great Depression, Keynes argued that there was no guarantee that the goods that individuals produce would be met with adequate effective demand, and periods of high unemployment could be expected, especially when the economy was contracting in size.
He saw the economy as unable to maintain itself at full employment automatically, and believed that it was necessary for the government to step in and put purchasing power into the hands of the working population through government spending.
Thus, according to Keynesian theory, some individually rational microeconomic-level actions such as not investing savings in the goods and services produced by the economy, if taken collectively by a large proportion of individuals and firms, can lead to outcomes wherein the economy operates below its potential output and growth rate.
Prior to Keynes, a situation in which aggregate demand for goods and services did not meet supply was referred to by classical economists as a general glutalthough there was disagreement among them as to whether a general glut was possible.
Keynes argued that when a glut occurred, it was the over-reaction of producers and the laying off of workers that led to a fall in demand and perpetuated the problem.
Keynesians therefore advocate an active stabilization policy to reduce the amplitude of the business cycle, which they rank among the most serious of economic problems. According to the theory, government spending can be used to increase aggregate demand, thus increasing economic activity, reducing unemployment and deflation.
Samuelson puts it as follows: The producers of these goods will now have extra incomes Henry Hazlittwho considered Keynes to be as much a culprit as Kahn and Samuelson, wrote that The textbook multiplier gives the impression that making society richer is the easiest thing in the world: For him the initial expenditure must not be a diversion of funds from other uses but an increase in the total amount of expenditure taking place: On p Kahn rejects the claim that the effect of public works will be at the expense of expenditure elsewhere, admitting that this might arise if the revenue was raised by taxation, but says that other means are available which have no such consequences.
As an example he suggests that the money may be raised by borrowing from banks, since This assumes that banks are free to create resources to answer any demand. But Kahn adds that For it will be demonstrated later on that, pari passu with the building of roads, funds are released from various sources at precisely the rate that is required to pay the cost of the roads.
It is the orthodox Treasury dogma, steadfastly held The first proposition would ascribe to us an absolute and rigid dogma, would it not? Pigou was at the time the sole economics professor at Cambridge. Nor were his practical recommendations very different: Keynes was seeking to build theoretical foundations to support his recommendations for public works while Pigou showed no disposition to move away from classical doctrine.
Referring to him and Dennis RobertsonKeynes asked rhetorically: It is almost wholly theoretical in nature, enlivened by occasional passages of satire and social commentary. The book had a profound impact on economic thought, and ever since it was published there has been debate over its meaning.Published: Mon, 18 Jun Chinese inflation is rising too fast.
But it’s had another major side effect.
The Chinese economy is fast overheating. All that extra liquidity is driving up prices and wages, while property values have soared.
Show paragraph. But this is usually the result of constant government intervention and ratcheting up expansionary monetary policy. The only capitalism that exists is the fettered kind, where the politicians impose their arbitrary whims, and rationalize it with cherry picked economics.
James Poterba, president James Poterba is President of the National Bureau of Economic Research. He is also the Mitsui Professor of Economics at M.I.T.
Economic Surveys of the European Union and Euro Area The European economy is growing robustly, helped by accommodative monetary policy, mildly expansionary fiscal policy . Show paragraph. But this is usually the result of constant government intervention and ratcheting up expansionary monetary policy.
The only capitalism that exists is the fettered kind, where the politicians impose their arbitrary whims, and rationalize it with cherry picked economics. This essay discusses the role of Milton Friedman’s presidential address to the American Economic Association, which was given a half century ago and helped set the stage for modern macroeconomics.
We discuss where macroeconomics was before the address, what insights Friedman offered, where.