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In the Long Run
The Twentieth Century was a time of revolution and
counterrevolution in macroeconomics. Indeed, the division of
economics into the two separate branches of microeconomics
and macroeconomics was the result of what is known as the
Keynesian Revolution. John Maynard Keynes in 1936 proposed a
new way of viewing unemployment and output, though this new
way had antecedents in the work of prior economists.
The mainstream view prior to Keynes was that competitive
markets were stabilizing, which is a basic message of the
model of supply and demand. When there is a shortage, price
tends to rise, which eliminates the shortage, and when there
is a surplus, price tends to fall, which eliminates the
surplus. The self-stabilizing property of competitive
markets was assumed to work for the system as a whole, which
meant that if an economy experienced some shock (to use the
contemporary term) that caused a recession with rising
unemployment, the system would correct itself by a series of
price changes.
Although competitive markets have stabilizing features,
there are other forces in the economy that can be
destabilizing. For example, if people spend less, then
producers may cut back production. If they cut back
production, they will lay off workers. Those workers who are
now unemployed may then spend less. So a decrease in
spending can cause a further decrease in spending. Keynes
de-emphasized the stabilizing aspect of market systems and
emphasized the destabilizing forces to arrive at the
conclusion that once recession and unemployment occurred,
the destabilizing forces might overwhelm the stabilizing
forces, keeping the economy permanently stuck in
depression.
Obviously the 1930s, a decade-long period of depressed
economic activity, made people receptive to the ideas of
Keynes. Perhaps the most influential of the Keynesian
economists was Paul Samuelson, a brilliant mathematical
economist whose introductory textbook became the standard
against which all other textbooks were judged. However, by
the 1980s a counterrevolution was underway that argued that
there were serious problems in the Keynesian view, and that
those who had used that view in advising government were
responsible for the inflation that was rising in most parts
of the world in the 1970s. In future chapters we examine
both the Keynesian view and the views of its critics.
However, by the 21st century there was some agreement on
these controversies.
Economists agree that the economy has both stabilizing
and destabilizing forces, but they do not agree on their
relative strengths. If you reflect on this statement a bit,
you should not be surprised that economists who want
government to take an active role in economic affairs
usually emphasize the destabilizing forces and those who
think government should avoid intervening in economic
affairs usually stress the stabilizing forces of markets.
Most economists also think that in the long run the
stabilizing forces will prevail and that destabilizing
forces matter only in the short run. As a result, most
economists now argue that the Keynesian analysis does not
apply in the long run, and that the pre-Keynesian view of
the long run had a great deal of merit. However, when we
examine the short run, we must pay attention to the
destabilizing forces.
Today macroeconomics textbooks generally start with a
discussion of growth, which is a long-term way of looking at
change in the economy. They relegate the concerns of Keynes
to the short run, to fluctuations around the long-run trend.
There are important differences in these two time periods.
For example, from a long-term perspective saving is good
because it provides funds for investment and hence economic
growth. However, some economists worry about saving in the
short run. If people suddenly stop spending and start to
save, this change may destabilize the economy and lead to
unemployment. The remainder of this chapter will look at a
variety of ways economists have tried to make sense of the
long term and economic growth.
Copyright
Robert Schenk
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