The purpose of this report is to focus and analyses key macroeconomic debates that have occurred throughout the years, since the 1930s. The debates themselves relate to how three different paradigms, Classical, Keynesian and Monetarists, perceive the workings of an economy. Their ideologies will be examined by relating them to unemployment, inflation and quantity theory of money. These understandings will then be applied to the current day, in order to understand the ideology behind present economy.
2. The Great Depression and the Schools of Thought
Prior to the Great Depression many individuals and economists believed in the Classical school of thought and Adam Smith’s (1993) theory of the ‘invisible hand’, which was used to support their ideology that markets were self-correcting. Keynesian theory itself was born out of the Great Depression, where Keynes critiqued the classical economists, which further lead to the development of multiple paradigms and macroeconomic debates (Crain and Lee, 2009). Furthermore, Friedman introduced Monetarism which gained strength from the rapid inflation of the 1970s.
Unemployment is defined as the number of people, of working age, who are out of work, but are able and are seeking work (Begg et al, 2008). Classical economists believe in self-clearing markets, and therefore unemployment could only occur if labour markets failed to clear; due to real wage costs not falling sufficiently. The classical theory concluded that people should be encouraged to take wage cuts, in order to help reduce prices and reinstate export demand, thus correcting the balance of payments. Classical economists also encouraged saving, as this would, via flexible rates, lead to more investment and hence a growth in output and demand for labour. In the long run any unemployment would merely be frictional; people in the process of changing jobs.
3.1 Keynesian response
Keynesian economists criticized the...