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Difference between classical and keynesian economic theory
Difference between keynesian economic theory and supply side economics
Compare and contrast freshwater and saltwater
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Shortly after the financial crisis in 2008, many economists had to rethink their approach to the market. Everyone knew we had a panic because the stock market and the housing market collapsed. American economy was reaching to the bottom. Many people considered it as a second worst recession after the great the Great Depression. But what was the cause? Who were responsible for the crisis? What can we learn from this turmoil? In the recent New York Times Sunday magazine article, Nobel Prize winner Paul Krugman offered his explanation for the causes and insight toward fixing the economy.
In the article, Krugman addresses several problems underlying the recent state of the economy. He traces the cause for our recession all the way back to academia. The problem is rather subtle. He argues that faulty thinking about the market is the primary reason that has led to the 2008 and 2009 recession. The crisis has evoked the two schools of macroeconomics thought for long have stayed dormant: the “freshwater” and the “saltwater” economist. Both have their own ideology in resolving the crisis.
As Krugman put it “freshwater economists are, essentially, neoclassical purists.” They assume that people are rational and markets work. They do recognize the use of Keynesian theory but just do not trust the government interference. Therefore, they usually prefer monetary policy over fiscal policy. On the other hand, Krugman says that “saltwater economists are pragmatists.” Their approach is to do apply any methods that can keep the economy running smoothly whether it’s a fiscal or monetary policy. They usually favor Keynesian theory.
Freshwater economists base their practices on the perfect market. They trust that the market system will not ever fa...
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...hould accept the inconvenient truth that the markets sometimes do not function properly. Second, economists should re-embrace Keynesian practice because it does offer a legitimate answer for economic downturns. Finally, they should consider the realities of finance in the world of macroeconomics (Krugman 2009). As an upcoming economist from George Mason, primarily a “freshwater” school, I find the first suggestion a bit difficult for me to accept. I think the best option right now is to stay neutral and open-minded because I still have a lot to learn about economics.
Works Cited
Krugman, Paul. "How Did Economists Get It So Wrong?" How Did Economists Get It So Wrong? The New York Times, 2 Sept. 2009. Web. 09 May 2011. .
Mankiw, N. Gregory. Macroeconomics. 7th ed. New York, NY: Worth, 2009. Print.
The financial crisis of 2007–2008 is considered by many economists the worst financial crisis since the Great Depression of the 1930s. This crisis resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. The crisis led to a series of events including: the 2008–2012 global recessions and the European sovereign-debt crisis. The reasons of this financial crisis are argued by economists. The performance of the Federal Reserve becomes a focal point in this argument.
Renowned economist, Steven D. Levitt, and well-known journalist, Stephen J. Dubner, in their collaboration of the book, Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, write in a mostly inoffensive style about extremely controversial topics. Levitt’s and Dubner’s purpose is to inform readers of frequently disputed topics from a purely economic standpoint. They use second person to directly speak to their readers, an impartial tone to show an unusual perspective, and contrast to provide both sides of an argument.
I believe that it's’ important to use our constitution as a guiding tool to help appoint the correct people for the job.John Maynard Keynes was a British economist where he fundamentally changed the theory and practices of macroeconomics and economic policies of government. Although he was revolutionary most of his policies were controversial and used Keynesianism economic to get people to stay away from them . His approach to macroeconomic management was different since the previous traditional laissez-faire economists believed that an economy would automatically correct its imbalances and move toward a state of equilibrium, They expected the dynamics of supply and demand to help the economy adjust to recession and inflation without government action. Laissez-faire economics thus regarded layoffs, bankruptcies and downturns in the economy not as something to be avoided but as elements of a natural process that would eventually improve. However that was not the case for the great depression. Keynes also believed that a given level of demand in an economy would produce employment however he insisted that low employment during the depression resulted from inadequate
Just as John Stuart Mill did in the Principles of Political Economy, Paul Krugman in The Return of Depression Economics and the Crisis of 2008 felt that the government should not only help American businesses gain profits, but also play a major role in protecting the people against big businesses and moguls. Krugman believes that the average citizen cann...
Waggoner, John. "Is Today's Economic Crisis Another Great Depression?" USA Today. N.p., 4 Nov. 2008. Web. 7 Mar. 2014.
“Yes, It’s the economy, stupid, but is it demand or supply?” was published on January 24, 2014 by Paul De Grauwe for CEPS Commentary. The ‘wrong medicine’ as De Grauwe says, continually goes to the problems, but never seems to solve them correctly. Before 1970, there was a focus on demand shock, in 1970 there was a focus on demand shock for a supply shock, and in 2008-09, there is a focus on supply shock for a demand shock. Development on different models started to try to predict the shocks, and the creation of the supply-side model to replace the Keynesian model began. Repeating of old mistakes, it seemed in 2008 that the economists had not learned a thing from the 1970s. Economists do not seem to always learn from old mistakes, but in the end, sometimes it takes several repeats and misdiagnoses to get things done correctly.
Revealing the hidden side of life in clarity, Freakonomics draws in all economists with unmentioned assumptions which are upheld with reasoned correlation, bonding subjects that unveil misconceptions, concluding on economic pattern limitations. Effectively, they lead their audience on their conviction route as smoothly as possible. Nice job on not screwing the map up. Allowing them to achieve their goals, this was to change people’s views. By the time a person puts down Freakonomics, they have been led to conviction about all their claims because Dubner & Levitt know that in order to change someone else’s way of thinking you must change your own.
Philip Crawley, 9 Oct 2010. Web. The Web. The Web. 6 Jan. 2014.
Despite its size, only 190 pages, the authors address the basic concepts of economics while also applying those politically and for personal finance decision making. Those basic concepts include scarcity, gains from trade, marginal decision-making, profit management, income growth, and Adam Smith’s invisible hand theories are all discussed within the first part of the book; allowing readers to understanding the concepts, Gwartney applies the same concepts to the creation of wealth and the importance of competition, private property, open trade, monetary stability, and lower taxes. This book educates its audience by evaluating our economy and government mechanisms without the overpowering display of charts, formulas, and graphs; which you would typically see in a textbook allow...
Cochran and Glahe 69. John Maynard Keynes classical approach to economics and the business cycle has dominated society, especially the United States. His idea was that government intervention was necessary in a properly functioning economy. One economic author, John Edward King, claimed of the theory that: Keynes believed that “most economic activity results from rational economic motivations – but also that much economic activity is governed by animal spirits.... ...
The causes of the Great Recession all started as hundreds of billions of dollars was given to the United States abroad and financiers conceiving were to make a profit and what better way but the real estate market. Since the Community Reinvestment Act of 1977 and an expansion made in 1995 the than President Bush endorsed the program that created Option adjustable rate mortgages (nick-named “Pick-A-Pay”) to allow for bank to sell these options even though they were high risk (Conservapedia, 2013). The Community Reinvestment Act of 1977/95 is defined as to framework financial institutions, state and local governments, and community organizations to jointly promote banking services in the community” (Office of the Comptroller of the Currency, n.d.). That being said, there were three individuals, and firms that contributed the most to the recession including Senator Charles Schumer D-NY, Fannie Mae, American Ins...
The "subprime crises" was one of the most significant financial events since the Great Depression and definitely left a mark upon the country as we remain upon a steady path towards recovering fully. The financial crisis of 2008, became a defining moment within the infrastructure of the US financial system and its need for restructuring. One of the main moments that alerted the global economy of our declining state was the bankruptcy of Lehman Brothers on Sunday, September 14, 2008 and after this the economy began spreading as companies and individuals were struggling to find a way around this crisis. (Murphy, 2008) The US banking sector was first hit with a crisis amongst liquidity and declining world stock markets as well. The subprime mortgage crisis was characterized by a decrease within the housing market due to excessive individuals and corporate debt along with risky lending and borrowing practices. Over time, the market apparently began displaying more weaknesses as the global financial system was being affected. With this being said, this brings into question about who is actually to assume blame for this financial fiasco. It is extremely hard to just assign blame to one individual party as there were many different factors at work here. This paper will analyze how the stakeholders created a financial disaster and did nothing to prevent it as the credit rating agencies created an amount of turmoil due to their unethical decisions and costly mistakes.
My research of Classical Economics and Keynesian Economics has given me the opportunity to form an opinion on this greatly debated topic in economics. After researching this topic in great lengths, I have determined the Keynesian Economics far exceeds greatness for America compared to that of Classical Economics. I will begin my paper by first addressing my understanding of both economic theories, I will then compare and contrast both theories, and end my paper with my opinions on why I believe Keynesian Economics is what is best for America.
The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions. The ideas of economists and politicians, 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 any intellectual influences, are usually the slaves of some defunct economist." (John Maynard Keynes, the General Theory of Employment, Interest and Money p 383)
Keynesian method and world-systems theory deserve special attention. It is Keynesianism that makes possible for the radical political economists to apply the bipolar model, centered on