• Adam Smith

• Jean-Baptiste Say

• David Ricardo

• Thomas Malthus

• Jon Stuart Mill
  

Ideas

• Rooted in the concept of a laissez-faire
  economic market.

  • Also known as a free market.

• A market requires little to no government intervention.

• Allows individuals to act according to their own
  self-interest regarding economic decisions.

• Ensures economic resources are allocated
  according to desires of individuals and businesses in the marketplace.

• Value is determined by production output,
  technology, and wages paid to produce the item.
  

Historical perspective

• Economists were producing their
  "magnificent dynamics" during a period in which capitalism was
  emerging from feudalism.

• The industrial revolution was leading to vast
  changes in society.

• These changes raised the question of how a
  society could be organized around a system in which every individual sought his
  or her own monetary gain.
  

Policy

• Expansionary monetary and fiscal policy are not
  considered helpful in fighting recessions.

• Monetary and/or fiscal policy reduce
  unemployment in the long run.

• Fiscal and monetary policy should not be used in
  a discretionary way.
  

• John Maynard Keynes
  

Ideas

• Relies upon spending and aggregate demand to
  define the economic marketplace.

• It is believed that aggregate demand is often
  influenced by public and private decisions.

  • Public decisions represent government agencies
    and municipalities.

  • Private decisions include individuals and
    businesses in the economic marketplace.

• Relies heavily on the fact that monetary policy
  can affect a economy.
  

Historical perspective

• Came about during the Great Depression.

• Keynes's ideas became widely accepted after
  World War II and this lasted until the early 1970s.

• Provided the main inspiration for economic
  policy makers in Western industrialized countries.

• Governments prepared high quality economic
  statistics on an ongoing basis and tried to base their policies on the
  Keynesian theory that had become the norm.

• In the early era of new liberalism and social
  democracy, most western capitalist countries enjoyed low, stable unemployment
  and modest inflation.

  • This
    was an era called the Golden Age of Capitalism.
    

Policy Applications

• Expansionary monetary policy is not considered
  very helpful in fighting recessions while expansionary fiscal policy is.

• Monetary and/or fiscal policy is considered to
  help reduce unemployment in the long run.

• Fiscal and monetary policy should be used in a
  discretionary way.
  

Originators

• Milton Friedman

• Anna Schwartz
  

Ideas

• GDP will grow steadily if the money supply grows
  steadily.

• Supports the prescription to have the central
  bank target a constant rate of growth of the money supply.

• Also supports to maintain the above target
  regardless of any fluctuations in the economy.

• Trying to smooth the business cycle is not
  really good.
  

Historical perspective

• This policy looked backed on the Great
  Depression and tried to show some things that should have been done.

  • Believes that expansionary policy should have
    been used more during the depression.
    

Policy Applications

• Expansionary monetary policy is helpful in
  fighting recessions, while expansionary fiscal policy is not effective.

• Monetary and/or fiscal policy will not reduce
  unemployment in the long run.

• Fiscal and monetary policy should not be used in
  a discretionary way.
  
  

• There is no specific "creator" many people have helped to evolve todays consensus.

Ideas

• Monetary policy is ineffective only in the case of a
  liquidity trap.

• Monetary policy should play the main role in stabilization policy.

• The central bank should be independent, insulated from political pressures, in order to avoid a political business cycle.

• Discretionary fiscal policy should be used sparingly, both because of policy lags and because of the risks of a political business cycle.
  

Policy Applications

• Expansionary monetary policy is helpful in
  fighting recessions except in in special circumstances, while expansionary
  fiscal policy is “always” effective.

• Monetary and/or fiscal policy will not reduce
  unemployment in the long run.

• Fiscal policy should not be used in a
  discretionary way except in special circumstances, while monetary policy being
  used in this way is still in dispute.