Essay about Milton Friedman's Economic Theories

2884 Words 12 Pages
History and Background

Before the introduction of Keynesian economics and Milton Friedman’s Monetarism theory, there was classical economics. These economists believed in self-adjusting market mechanisms, however with that the market needs perfect competition. Wages and prices in the market must be flexible. These economists believe that supply and demand pulls would always help the economy reach full employment. Full employment could be achieved by the market forces and with that changes the level of employment resulting in a fixed income and aggregate output. They believed that fixed income was a result of full employment and the price level was established by the supply of money in the economy. Since classical economist believed
…show more content…
Then wages will continue to decline until everyone who was job hunting is employed. The United States learned the hard way that the market was not self-adjusting enough to bring back full employment on its own. In the early 1930’s the unemployment levels were at an all time high of 24.9 percent. (See figure 1) When the wages fell as they were assumed to do; the lower wages did not return the market back to full employment levels. These major flaws in the past economic theories lead to the new ideas. Economist John Keynes explained that classical economics stated that wages and prices are very flexible; when in actuality they weren’t as flexible as previously assumed. Keynes argued that the market is self-adjusting, however it has a long time before it actually made its way back on the rise. “In the long run we are all dead” was quoted from Keynes. Keynes believed that it was the aggregate demand for goods in the economy that determined the level of employment and the level of output. “The core requirement for an economic boom is demand because demand for products and services drives producers to create more. This demand for products then creates demand for the workers in order to make these products or services. Inversely, if there is no demand for certain products or services then there is no need for extra hiring or to keep the same number of employees because the demand for the products wasn’t enough to cause a need for workers.” (Roberts, 2010) Because of these

Related Documents