Three Schools of Economics

Classical

• Jean B. Say
• Adam Smith
• David Ricardo
• Alfred Marshall
• competition is good for the economy
• "invisible hand"
• the market will take care of itself
• no extra intrusion in the market
• Say's Law
• supply creates its own demand
• AS is determined by the output
• economy is always close to or at Full Employment
• in the long run, economy will balance at Full Employment
• Trickle Down Effect
• it will help the rich first and then everyone else later
• Ronald Reagan believed in this
• Savings (or leakage) is an investment (or injection) due to the interest rate
• Savings (leakage) = Investment (injection)
• prices and wages are flexible downward (no involuntary unemployment)
• whatever output is produced will be demanded
• Laissez-faire (no government intervention)

Keynesian

• John Maynard Keynes
• "Competition is Flawed
• AD is the key, not AS
• savings (leaks) cause constant recessions
• Ratchet Effect and Sticky Wages block Say's Law"
• in the long run, we are all dead
• demand creates its own supply, therefore AD curve is unstable
• savers and investors save and invest for different reasons
• Saving ≠ Investment
• the economy is not always close to or at Full Employment
• prices and wages are inflexible downward
• inflexible downward = monopolistic competition
• there is government intervention
• fiscal or monetary policy

Monetary

• Allen Greenspan
• Ben Bernanka

1. Congress cannot time policy options
2. Government can best control health of economy by regulating banks and interest rates

• Easy or Tight Money
• Easy Money leads to recession
• Tight Money leads to inflation
• change the required reserves if needed
• use bonds through the open market operations
• use interest rates to change discount rates and federal fund rates