Outline of Macroeconomic Theories

Mid 1700s

Classical Theory
 
Supply determines the state of the economy.
  Smith:  Costs determine Supply.
     Supply determines Price.
                  Price determines Demand
  Say’s Law:  Supply calls forth its own Demand.


1800s

Early Critiques of Classical Theory

Recurrent problems appear to be chronic & internal to the market.
Malthus:  Depressions, poverty & unemployment are too chronic to be simply adjustments to equlibrium.
Marx:  -  Capitalism is prone to generating ever-increasing internal crises that it cannot resolve, e.g.  Depressions, chronic under-employment,  & instability.
Institutionalism (Early 1900s): Historical, political, social institutions influence and constrain economic activities and forces.


1930's

Keynesian Theory

Explicitly rejects Classical Macro Theory.

The market is most often not in equilibrium and often produces sub-optimal equilibriums.


Demand (total spending) determines the state of the economy.
Government should use Fiscal policy to stabilize the business cycle.

Monetarism

Claims that  recessions are caused by a low Money Supply, and inflation is caused by an over large Money Supply.
Rejects Fiscal policy as ineffective, distortionary, and inflationary.
Monetarism influenced policy during Great Depression.

1940s - 1970s


The Classical - Keynesian Synthesis
(Neo-Keynesian)

Restores Supply & Demand equilibrium framework by including Keynesian theory as the Demand-side analysis.
Classical theory governs Supply analysis.
Keynesian theory governs Demand analysis.

Neoclassical Macro-Model

The foundations of the model are firmly set in Neoclassical micro-theory:

1) Supplies and demands of resources determine the prices and     allocations of those resources.

2) The employment of resources and the technological possibilities determine the aggregate supply of goods.

3) The aggregate supply and aggregate demand of goods determine the equilibrium rate of interest.

4) Money demand and money supply determine the price level.

Late 1970s & 1980s

Monetarism

Peak influence of Monetarism occurs during  high inflation in 1970s & 1980s. Large reduction in Money Supply results in successive recessions, but lowers inflation over a decade.

Supply Side Theory
“The Trickle-Down Theory”

Claims Demand-side Fiscal policy is ineffective in stimulating the economy,  resulting in inflation. Only Supply-side Fiscal policy  (tax-cuts to producers & wealthy households) can stimulate the economy.

1990s

Clinton Version of S.S.

Targets specific producers, markets, industries for tax cuts to stimulate production.

New Classical Theory

Argues that the market’s ability to learn from past government policy renders all  economic policy ineffective, since people’s responses offset the potential impact of the policy, Also Keynsian macro models sare inconsistent with the miccrp models


2000 - 2004

Supply-Side or Keynesian Revival?

Bush revives S.S. rhetoric and Keynesian fiscal policy  via tax cuts disproportionately benefiting the wealthiest households and corporations.


The following material was adapted from the History of Economic Thought website  (http://cepa.newschool.edu/het/) at the New School for Social Research website.
The material has been edited for brevity and clarity.
Neo-Classical Macro

The Neoclassical model of the macroeconomy has what may be regarded as a "supply-determined" equilibrium. Indeed, the first step of Neoclassical theory is to recognize that there are scarce factors of production (or resources) that need to be efficiently allocated to satisfy as many wants as possible. Thus, the crux of Neoclassical theory is to take a given endowment of factors (resources) and … determine the most efficient allocation possible. The operator is the price system or … price-sensitive demand and supply functions to determine the equilibrium price that will clear it.

To understand the major relationships, let us the follow a …quick summary of the essence of the Neoclassical macro-model:

    (1) Supplies and demands of resources determine the prices and allocations of those resources.

    (2) The employment of resources and the technological possibilities determine the aggregate supply of goods.

    (3) The aggregate supply and aggregate demand of goods determine the equilibrium rate of interest.

    (4) Money demand and money supply determine the price level.

We ought to emphasize a fifth feature of this model, namely that the foundations of the model are firmly set in Neoclassical micro-theory: (1) output, factor employment and investment are derived from firms' profit-maximizing decision (2) labor supply, consumption and savings are derived from household utility-maximization and (3) market-clearing conditions are imposed on all markets.


Institutionalism

Deploring the universalist pretensions of much of economic theory, the Institutionalists stressed the importance of historical, social and institutional factors which make so-called economic "laws", contingent on these factors. Much of everything in the economic world, they argued, was not immutable but rather conditioned by the influence of an always changing history - whether acting on the individual directly, or indirectly through the institutions and society which surround him.

An interesting development in recent decades has been the gradual encroachment of the "imperialistic" New Institutional schools on territory that has typically been reserved for the Institutionalists. . To a considerable degree, these schools of economists turned the old Institutionalist position on its head - using Neoclassical economics to explain history, social relations and the formation of institutions rather than the other way around, as the old Institutionalists proposed, of using history and institutional concerns to explain economic behavior, structures and patterns.

-from: http://cepa.newschool.edu/het/schools/institut.htm