Before the introduction of Keynesian economics and Milton Friedman’s Monetarism theory, there was classical economics. These economists believed in self-adjusting market mechanisms, however with that the market needs perfect competition. Wages and prices in the market must be flexible. These economists believe that supply and demand pulls would always help the economy reach full employment.
Full employment could be achieved by the market forces and with that changes the level of employment resulting in a fixed income and aggregate output. They believed that fixed income was a result of full employment and the price level was established by the supply of money in the economy. Since classical economist believed that it was the market that leads to full employment in the economy, they thought the market could do without any government intervention.
Government spending and taxes cause overall harm to economy because it would decrease individual spending and private consumption. Raising taxes on private consumption would only help fund public consumption and pay for government spending.
Classical economist’s theory of monetary policy was thought to only affect prices and wouldn’t affect truly important factors such as employment. It was a major concern that if the government was to finance its’ spending only by increasing how much money was produced then it would have the same out come as expansionary monetary policy.
Classical economists found that their original theories were problematic when the Great Depression hit the United States. They originally argued that the market was self-adjusting so with no government intervention they thought it would automatically correct itself. They thought tha...
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3. Kevin D. Hoover. "Phillips Curve." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. Retrieved May 25, 2010 from the World Wide Web: http://www.econlib.org/library/Enc/PhillipsCurve.html
4. Krugman, P. (2007, February 15). Who was Milton Friedman. Retrieved May 22, 2010, from http://www.nybooks.com/articles/archives/2007/feb/15/who-was-milton-friedman/?pagination=false
5. Friedman, M., & Schwartz, A. (1963). A Monetary History of the United States 1865-1960. National Bureau of Economic Research. Retrieved April 21, 2010, from GoogleBooks
6. Alan S. Blinder. "Keynesian Economics." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. Retrieved May 28, 2010 from the World Wide Web: http://www.econlib.org/library/Enc/KeynesianEconomics.html
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