Economic Theories

Economic Theories

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  • No, that is my cousin, twice removed. I am the Ghost of Economic Theories' Past. You do not understand, but I will help you. Rise, come with me.
  • Who goes there? Is it you again, Ghost of Christmas' Past?
  • First of all, we will visit Mr. Adam Smith, who founded the Classical economic theory. It was relevant from 1776 to the 1930s.
  • Okayyyy...
  • So, now you have learned the differences between the two economic theories. Which one do you agree with?
  • You see, Smith believed that the economy didn't need government intervention to recover from a recession. He agreed with Say's Law, which asserted that cheaper excess supply created its own demand. Now let's see his counterpart.
  • Don't worry, be happy, the economy will fix itself. We don't need the government to help.
  • If there was a way for the economy to self-correct to full employment, why hasn't it done it in this Great Depression? I''ll tell you: because it doesn't exist!
  • Wait, so why are their theories so different?
  • John Keynes believed that demand creates supply. He thought the government should act to stabilize the economy, such as spending to stimulate aggregate demand and increase GDP.
  • In my time, French Enlightenment philosophers brought us the laissez-faire theory, and we had just gained freedom from an overbearing government! Karl Marx and David Ricardo agree with me!!
  • The Great Depression is the worst our economy has ever been. Without help from our government, we would never have landed back on our feet! Arthur Okun and John Taylor support me!! 
  • See for yourself...
  • I think that the Keynesian theory is correct because we have proof that the economy doesn't always fix itself. We can see how monetary and fiscal policies work to restabilize the economy.
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