Econ Term Paper

Parker 1 Angelica Parker Mr. Rusty Gaudard AP Economics 9 May 2008 The History of Economic Thought: The Dollar Decline “…Air fares climb and prices rise in dollar terms for everything from beer in Munich to fine wine in Paris to gondola rides in Venice” (Dollar). The United States dollar decline. The value of a dollar in the United States has dropped as the “Bank of America's first-quarter earnings [have fallen] short of expectations” (Dollar). In comparision to other countries like Germany, Canada, and Japan the dollar is either the same or lower. Is the United States in the middle of a national recession? Perhaps it is the interest rates, downcasting economic data, or United States weighty reliance on exports from other countries has generated the dollar decline (Dollar). Certainly, insight from going back in time from first economic theories of money from popular econmists, can provide some answers. Heavyweight economic thinkers John Maynard Keynes, Milton Friedman, Adam Smith, and David Ricardo, all placed their own emphasis on money. Commonly noted as “the most influential economist of the twentieth century,” economist John Maynard Keynes developed his own contributions of effective demand and his reasoning for economic recessions and depressions (Skousen 138). Yet, Keynes’ Keynesianism did not fancy fellow economist Milton Friedman, who questioned Keynes in his book A Monetary History of the United States (Skousen 193). Freidman did not agree with Keynes’ thoery of monetary policy and instead “predicted…a phenomenon known as stagflation” (Skousen 198). Just like Friedman, Wealth of Nations, Adam Smith, was also not in accord with Keynes with reguards to his popular theory of natural liberty

Parker 2 and savings (Skousen 11). Lastly, economist David Ricardo believed in the adoption of free trade to lower money wages and therefore produce “raise real wages and profits” (Hoselitz 78). Each timeless economist made their own theories concerning money and the effects it has on the economy. Firstly, The General Theory of Employment, Interset and Money’s John Maynard Keynes, developed his own economic theories based on money. In 1933, Keynes lived through the Great Depression, a time where the stock market declined leaving “14 million umemployed [sitting], haunting the land” (Heilbroner 252). Naturally, this historical event birthed many economic theories based on money for Keynes. “World War II came along right after the publication of The General Theory, giving strong empirical evidence of Keyne’s policy perscription” (Skousen 163). Keynes saw this war as being “ ‘good’for the economy” (Skousen 163). “Literally hundreds of africles and dozens of books had been publihsed about Keynes and the new Keynesian model since Keynes wrote The General Theory of Employment, Interest and Money.” (Skousen 164). This book is what yeilded what became essentially the advancement of Keynes and his theories of economics. It was “from 1940 until the 1960’s” that “ ‘Keynesian’ ” economics domiated the field of the United States” (Heilbroner 286). “Keynes was a traditionalist,” who eventually married the “extremely beautiful” Lydia Lopokova, a man who “talked with Fraklin Roosevelt,” (Heilbroner 253, 260-261). It was solely because of Keynes economic contributions that eventually led him to discover President Franklin Roosevelt’s hands to be “firm and fairly strong…shortish round nails like those at the end of a business man’s fingers” (Heilbroner 261). Years before this Presidential meeting, Keynes viewed savings as, “savings are invested by business” (Skousen 158). This theory of his he called, “effective demand,” where national output is essentially decided by what

Parker 3 concusmers and businesses spend their money on (Skousen 158). He argues that in effective demand, recession or depression is proof of a shortage of effective demand. Keynes believed that “recessions and depressions can occur because of inadequate aggregate demand for goods and services” (Mankiw 766). Keynes said that effective demand is the aggregate output or the total of consumption and investment. “ ‘Aggregate effective demand’ ” is better known today “as gross demestic product” (Skousen 158). In addtion, Keynes saw a way out of recession through raising effective demand by including the government “to the national income equation” (Skousen 159). He believed that a simple raise from the government would cause the consumption and investment to echo it therefore, raising the effective demand. This was Keynes theory of effective demand and how it caused and could end recession (Skousen 159). In this theory, Keynes viewed the savings of money as “an unrealiable form of spending” (Skousen 158). Today, his theory of effective demand calls out for Americans to drain their savings because it is ultimately useless and “a drain on the economy and aggregate demand” (Skousen 158). President Bush is essentially applying this same concept of saved money draining the economy, through his economic stimulus checks. These checks are sent out with the purpose of encouraging Americans to boost the economy, by spending their money and not keep it saved. Keynes would agree with the President today because it coinsides with his theory of effective demand. The value of the dollar would benefit from the economy being boosted through economic stimulus checks, yet only if spent and not saved. Secondly, known for “his most famous empirical study, A Monetary History of the United States,” Nobel Prize winner Milton Freidman developed his own thoeries (Skousen 193). Friedman provided the world with “the virtues of free markets and classical economics” that counteracted Keynes’ Keynesiamsims’(Skousen 192). The book was Freidman’s agent through

Parker 4 which he propelled his ideas of Keynes’ view on monetary policy as being effective (Skousen 193). Freidman’s most recent death in the year 2006, provided him with the ability to criticize and disagree with previous economists. During the time when Freidman wrote about his diagreements with Keynes monetary policy. In the 1960s, the Great Depression and World War II came to an ending and “a conterrevolution had begun” (Skousen 192). In addtion, inflation was also going up during the 1960s and 1970s , which made “Friedman’s work on monetary economics [become] increasingly important and applicable” (Skousen 193). The “Keynesian veiw that monetary policy was ineffective” was what Freidman disagred with. In his book, he showed “that monetary policy was indeed effective in both expansions and contractions” (Skousen 193). Monetary policy being defined as “the setting of the money supply by policymakers in the central bank” (Mankiw 649). In addtion, money supply being defined as, “the quantity of money available in the economy” (Mankiw 649). Friedman saw how the Federal Reserve had effected the United States economy in the 1920s to 1930s (Skousen 194). Friedman believed in the monetary policy and that the government had simply “not publish[ed] aggregate money supply figures” (Skousen 194). All things considered, it can be seen in Freidman would have a say about today’s inflation with the value of the dollar. Yet another disagreement with Keynes, Friedman connected the “natural rate of unemployment” with “accelerating inflation” (Skousen 198). Keynes believed that “a ‘little inflation’ could do no harm and considerable good” (Skousen 197). However, Friedman disagreed and instead believed that “ ‘there is always a temporary trade-off between inflation and unemployment; there is no permanent trade-off’ ” (Skousen 198). This saying that Friedman thought of inflation as having the capability to do harm through unemployment of workers. Freidman even “predicted…a phenomenon known as stagflation” through his

Parker 5 correlation with inflation and it’s outcome with unemployment (Skousen 198). Today, Milton Friedman would see the current inflation as being a “temporary trade-off” (Skousen 198). Thirdly, mentor to Milton Fridman, Adam Smith, lived during the eighteenth century where “real and nominal prices…were not well understood” (Buchan 100). The price of “wages was as low as sixpence a day” (Heilbroner 44). The Enlightenment was a time in England where, “society presented itself as a brute struggle for existence in its meanest form” (Heilbroner 43). A day in age where the upper or leisure class lived in luxury, while the peasant estates suffered. “Children…were used and abused and paid a pittance by the miners to help drag away their tubs of coal” (Heilbroner 44). Born in Scotland, Smith is commonly noted “in his bestknown book, The Wealth of Nations,” yet, he never married (Buchan 3, 11). Smith contributed to the studies of economics through his principle of “ ‘natural liberty,’ the freedom to do what one whishes with little interferance from the state” (Skousen 10). His priniciple encouraged that economic labor, capital, money, and goods, “[lead] people to a better material life” (Skousen 10). Natural liberty is a pretty broad principle that does include people the right to become employed in the job of their dreams. In addtion, the ability of a seller to charge the wage of choice for the market, was granted. This being the contaray to the common policy in the eighteenth century where workers needed government permission to move (Skousen 11). “Smith desired high wages, but he thought they should come about through the natural workings of the labor market, not government edict” (Skousen 11). Smith stood by “natural liberty [including] the right to save, invest, and accumulate capital without government restraint” (Skousen 11). Once again, another fellow economist disagrred with the Keyisamisms’ of Keynes, by believing that savings produces economic growth. Instead, “Smith emphasized saving and frugality as the keys to economic growth”

Parker 6 (Skousen 11). If alive today, it can be seen that Smith would believe that people need to save their economic stimulus checks to produce economic growth. Smith would probably point the cause of the value of the dollar to fall as a result of people not saving their money. Yet again, Adam Smith would enforce natural liberty with no government edict. Forthly, “in the forty years since The Wealth of Nations England had divided into two hostile factions: the rising industrialists,…fighting for parliamentary representation and social prestige, and the great landowners, a rich, powerful, and entrenched aristocracy” (Heilbroner 79). Corn Laws had become enacted as England was had no choice but to buy foodstuffs from other countries. The growth of England’s population caused a bushel of wheat to quadruple in price because of the demand for grain (Heilbroner 79). As prices rose, so did the price of rent “to at least [double] over the preceeding twenty to twenty-five years” (Heilbroner 80). By the year 1813, virtual famine prices arouse from bad crops and war with Napolean. “The Corn Laws were finally wiped from the books and cheap grain was permitted to come freely into Britain” (Heilbroner 81). These were the currents event through which economist David Ricardo was inspired to write of and create theories from (Heilbroner 81). Through all of this, economist “Ricardo saw a bitter conflict” (Heilbroner 81). A tragic system was presented by economist David Ricardo in his book, Principles of Political Economy in 1817 (Heilbroner 94). Ricardo felt that British econmoy could reach a greater potential through “free trade, resource mobility, free competition, and monetary stability” (Hoselitz 78). He believed in the adoption of free trade to lower money wages and therefore produce “raise real wages and profits” (Hoselitz 78). He was against the taxes on captial, wages, raw materials, necessities, and poor laws. “All of these levies” he saw as ultimately lowering the rate of economic growth and tearing down the living conditions of the poor and rich (Hoselitz 78).

Parker 7 Certainly, Ricardo would not take a likeing towards the government imposed restrictions placed in the way the United States does trading today. Ricardo would certainly balme taxes as a source of lowering the rate of economic growth, and possible causing damage towards all classes of living style. Perhaps, Ricardo would view the value of the dollar as being depenadant and upon possibly caused because of these factors such as taxes. Heavyweight economic thinkers supplied the fundamentals of the economic foundation for money, some several decades ago. The current economic crisis of the declining dollar in the United States economy, can be applied to various theories and principles from these economists. Economist John Maynard Keynes contributed his thoery of effective demand (Skousen 138). In his theory, Keynes simply states that Americans must spend their savings as it was correlated with recession and depression (Skousen 159). Friedman went as far as to see the coming of the economic term stagflation. Wealth of Nations, Adam Smith, saw savings and his principle of natural liberty as keys to economic growth (Skousen 11). Lastly, economist David Ricardo reguarded free trade as the standard to improve economy, ultimately pointing at taxes as lowering economic growth (Hoselitz 78). The economic dollar decline and possible recession of today can be taken lightly or heavily. Or perhaps, a person can just be ignorant and quote Keynes with his “prevailing Keynesian notion that ‘money doesn’t matter,’ ” (Skousen 193).