According to Professor Edith Kuiper, the history of economic thought deals with different theories and thinkers in a subject that became economics and political economy since the ancient days to present day. It involves many schools of economic thought. In the recent past, scholars such as Thomas Aquinas said that it was the obligation of many businesses to sell their products at reasonable prices. The earliest discussions of economics are in the ancient times, and from that time till the industrial revolution period, economics was not just a separate discipline but a part of the philosophy (Henderson, 28).
Plato’s book the republic contained references that showed specialization of production and labor. Aristotle who was his student, however, made some of the most common arguments that are still used in today’s economics. Aristotle was mostly concerned with the analysis of different forms of state that is the monarchy, constitutional government and democracy. In particulars for economists, Plato who was a scholar had drawn a plan of a society on the common resource ownership basis (Leeson, 43).
Though Aristotle advocated that there are many things that are held in common, not everything could be because of human nature’s wickedness. He advocated that it was better if the property could be held private but the use of it is common. He again discussed the overall nature of market exchanges and households. This is because there is a certain art of acquisition or getting wealth. Money, on the other hand, has the sole role of being a medium of exchange, and this means that, on its own it is totally worthless. Aristotle also points out that money which is a basic instrument, has made many people obsessed with its simple accumulation (Henderson, 28).
Keynesian economics is one of the classical economists that we discussed in class. It is the main determinant of national income in the short run especially when the prices are inflexible. Keynes explained in details the theoretical details as to why high market unemployment might not be self correct due to poor, effective demand and why price flexibility and monetary policy should be unavailing. Such terms as revolutionary, have been use by the economist as they described the impact on economics analysis (Leeson, 43).
Keynesian economics is further divided into post Keynesian economics and new Keynesian economics. Post Keynesian economics concentrates on macroeconomic adjustments and rigidities process. Its research on micro foundations is represented in terms of real life practices other than just the basic, optimal models. On the other hand, new Keynesian economics is mostly associated with developments of the Keynesian fashion. In this group, researchers have a tendency of sharing with other economists and insist on models employing small foundations and maximizing their behavior with a smaller focus on standard Keynesian themes that include wage rigidity and prices. These are the most common endogenous features of the model, which do not assume the older Keynesian models (Krugman, 29).
The Keynesian model sort to revolutionize the way economists think, especially in relation to the proposition of a market economy which tend to naturally restore itself to full employment. It was here that such concepts as consumption function, the marginal capital efficiency, the multiplier, liquidity preference and the principle of effective demand were introduced. Keynes together with other Cambridge economists came up with the Cambridge cash balance theory, which was a concept from the liquidity preference that was later central to Keynes’s theory. His idea about economics decision making and fast investment under certain uncertainties is directly traced to his treatise (Leeson, 43).
The Keynesian theory suggests that the involvement of the government in the determination of the economic status of a country is enormous. Moreover, the government should determine the course of the economy through active policy development. The active policy development of the government is through the fiscal policy. The fiscal policy determines the extent of government expenditure and can be used to regulate the aggregate demand in the economy. Active participation of government in the determination of various economic indicators is usually reflected in the government budgets. An unbalanced government budget according to the Keynesian theory would be disastrous suggesting the adoption of counter cyclical policies (Krugman, 29).
These policies help to shield the economy from the dynamic and cyclic nature of the business and its environment. During a recession, the spending of a government can lead to massive deficits. This would result to long and delayed effects to the economy which would reflect laxity on the side of government. The theory suggests that the government should intervene during such economic times rather than wait for the market forces to adjust the economy.
The fiscal policies that are suggested include fiscal instruments such as government bonds. An economic stimulus reflects a deficit spending that can be used to correct the production levels of the economy. However, there negative effects of such interventions such as crowding out of private investors. The demand for labor in such an economic setup would lead to a spike in labor wages. Such fiscal policies are applicable when the unemployment levels are excessively high. An economic stimulus can also increase the market for the newly established investments or expanded businesses which lead to a situation in the economy known as crowing in. Justification of an expansion according to the Keynesian theory is the collapse of the labor market. Though this justification is at times considered being debatable, it is the most appropriate and general perspective of fiscal expansion (Krugman, 29).
Counter cyclic policies, which seek to, stop the effect of business market forces is recommended by the theory for various reasons. First they are effective in the regulating of inflation as well as regulate the aggregate demand in the economy. One such approach is raising the taxes of common house hold goods. This would have an effect of cooling down the economy and control inflation whenever there is adequate demand enlargement.
The government can also choose to engage in labor intensive infrastructure development strategies. This stimulates employment leading to stability in the labor market if the market was in crisis as a result of a down turn of the economy. On the other hand, during a boom in the economy the government can implement tax cuts thief counters the effects of the business during such a period. Moreover, the government can remove more incomes in the economy by reducing its spending. Reduced spending of the government during a booming economy has a counter effect to the expanding market (Krugman, 29).
The classical economics theory according to Keynes the private sector can play a significant role in determining the economic conditions of a country. Moreover, the government should be prepared with counter cyclic policies that reduce the effect of the private sector the economy.
Henderson, David R.. The concise encyclopedia of economics. Indianapolis, Ind.: Liberty Fund,
Krugman, Paul R.. The return of depression economics and the crisis of 2008. New York: NY:
Norton, 2009. Print.
Leeson, Robert. The eclipse of Keynesianism: the political economy of the Chicago counter-
revolution. Houndmills, Basingstoke, Hampshire: Palgrave, 2000. Print.