Government & Economics
Mr. Mintzes & Mr. Philbin
Economic Theories of Adam Smith, John Maynard Keynes,
and Milton Friedman
Adam Smith, John Maynard Keynes and Milton Friedman are three
prominent economists that continue to influence the study of
economics today. The three share both similarities and dissimilarities in
their economic theories, demonstrating that the field of economics is vast,
flexible, and able to be interpreted in many ways. Smith is arguably one of
the most prominent classical theorists, while Keynes is the creator of
Keynesian economics. Friedman was initially a Keynesian economist, but
then became a monetarist after reinterpreting the Keynesian consumption
function. All three supported the free market, although Keynes believed that
it could only operate freely once full employment had been achieved by fiscal
policy measure.
One main difference in the theories of Smith, Keynes, and Friedman
is their stance on government regulation.
Smith and Friedman believed that there should not be any
government interference in the market, while Keynes believed that
government intervention was necessary in times of economic crises.
Smith ascribed to the view that markets were self-correcting and that
economics recessions were only temporary. The only role the government
should play in an economy was to protect competition and the market
(laissez-faire). Both Smith and Friedman were strong advocators of the idea
of laissez-faire. On the other hand, Keynes argued that the government
should solve problems in the short run rather than wait for markets to
correct themselves in the long run.
Another area in which the economists disagreed dealt with what determined
the level of output and employment in the economy. Keynes’s theory stated
that the interaction of aggregate demand and aggregate supply determined
the level of output and employment. He sought to explain the determinants
of saving, consumption, investment and production through this theory.
Opposing this theory was Friedman’s idea that employment and output
levels depended on the money supply; in the short run, increases in money
supply growth would cause employment and output to increase, while
decreases in money supply growth would have the opposite effect. Smith
believed that the level of employment depended on the amount of capital
stock and in the way it’s employed.
The economic downfall that our country is currently undergoing has brought
about a resurgence of Keynesian economics. The most obvious Keynesian
theory we are adopting is Keynes’s belief that government intervention is
necessary to stabilize the economy or bring the economy out of recession.
Former President George W. Bush spearheaded the $700 billion Troubled
Assets Relief Program in October 2008 to aid US financial institutions, and
President Barack Obama furthered Keynesian ideas by his implementation of
various stimulus packages to help stimulate the economy. The revival of
Keynesian economics is most evident in the United States, but there are also
traces of Keynesian influences in other countries such as China.
1.
The “prime the pump” theories of John Maynard Keynes were followed
during another period in US history prior to the 2008 recession. When was
that? What steps were taken by the government during that period – giving
specific examples, and what was the result? Your answer should be in
paragraph form, and since you are citing specific examples, it should be
more than one paragraph.
2.
The laissez-faire theories of Adam Smith were prevalent during several
periods in US history, particularly during the 19th century. What was the
impact of those policies on US industry and on American society? Your
answer should be in paragraph form, and since you are discussing two
aspects of American history (industry and society), it should be more than
one paragraph.