ECONOMIC THEORIESMATTHEW DANG

CLASSICAL• First modern economic theory, started in 1776 by Adam Smith• Classical: economic freedom and ideas such as laissez-faire and free

competition• “Invisible Hand”: free markets regulate themselves• The economy would grow the most with free competition and trade• When individuals follow their self interest the whole community

benefits• Individuals will make profit by producing goods that are in demand,

and people will buy what they want or need

CAPITALISM

• Capitalism: An economic system in which trade, industry and the means of production are controlled by private owners

• Goal: prosperity and profits in market economy• Risks: financial crises, job insecurity and income inequality• Allows for the right to hire and fire freely which emboldens the company to

take risks and hire people raising wages and employment• Individual entrepreneurs will make innovations and be the ones to take the risks• Competition between individuals and businesses innovation and growth

NEO-CLASSICAL• Term first used by Thorstein Veblen• Succeeded classical economics around the 1870s• Three Assumptions:• People have rational preference among outcomes that can be identified

and associated with a value.• Individuals maximize utility and firms maximize profits• People act independently on the basis of full and relevant information

MARXISM/• Theoretical successor to capitalism in historical materialism• Created by Karl Marx as an alternative to capitalism without

the problems of capitalism• Value theory: False, Use-Value: True• Modes of production will follow the criteria of use-value,

and production is done through economic planning• Distribution of economic output follows the principle of “To

each according to his contribution” where the amount they receive is equal to the contribution they put into the economy

SOCIALISM• First mentioned by Marx, though he dismissed it is impossible• Socialism: a mode of production where the criterion for production is

use-value• Elements:• Government controls all means of production• Production output is equal to demand and need• Does not include: rent, interest, profit, and money

KEYNESIAN• 1936: Created by John Keynes during the Great Depression• Keynesian Economic Theory: in the short run, the GDP is strongly influenced

by aggregate demand, or the amount of spending in the economy• Natural balance of the economy wouldn’t ensure full employment• Due to uncertainty investment wouldn’t be as high and there would be over-

saving• Fiscal policy controls economy• Increasing government investment by deliberately borrowing money creates

jobs

MONETARISM• Mainly attributed to Milton Friedman, adopted from

Keynesian Theory• Monetariasm: Inflation is a natural part of the economy• Monetary policy controls the economy focused on price

stability• Keynes’ theory of gluts and government spending’s effect on

the economy: FALSE• Governments control of the money supply can strongly

influence national GDP and the price level.• Inflation is an inherent part of the money supply

DEPENDENCY THEORY• Theory that more developed countries extract resources from less developed

countries while preventing those countries from becoming more developed.• Differs from modernization theory in which all countries will become

developed with the developed countries helping the developing improve.• Believes that underdeveloped countries are structurally and fundamentally

different from developed countries and in the world economy.

ACTIVITY

• Split the class into two groups, using either capitalism or communism• Everyone rolls two dice and records their sum• Communist group tallies the average, if above 6 everyone wins• Capitalists win if above 6• If 11 win twice as much, if 12 triple, if enough prizes