This document summarizes a lecture on the history and development of macroeconomic theories. It discusses how theories like Keynesian economics were developed in response to economic crises like the Great Depression. It outlines the rise of deregulation and supply-side economics in the late 20th century in response to stagflation. It also discusses ongoing debates between different schools of macroeconomic thought and criticisms of policies like privatization and financialization.

1. CORE Macroeconomics
Concepts &
Terminologies
understanding Key Economic
Indicators & their significance vis-à-vis
economic development
Talk at NDU, on 19th September, 2014
Dr. Asad Zaman, VC PIDE.

2. Recorded Talk: Audio + Slides
Core MacroEconomics Concepts in Historical Context
KEY IDEA: Theories are responses to emergent economic
problems, and can BEST be understood within the
historical context in which they were formulated.
Macroeconomic theories are presented as analysis and
solutions of economic crises in USA.
Wednesday 01st October 2014 at PIDE
http://pide.org.pk/index.php?option=com_content&view=article&id=804
Recorded talk available (search) from following websites
http://pide.org.pk
http://asadzaman.net/online-lecture/economics/

3. Economics: Humanities or Science?
HISTORICAL CONTEXT
 Who invented the
theory?
 What problem was it
designed to solve?
 What happened
when theory was
applied to solve the
problem?
SOCIAL SCIENCE:
 Theories are like
scientific laws.
 Universal Invariants.
 Who invented the
theory and When
and Why DOES NOT
MATTER

4. Your Vote? Science or Humanities?
 What does Harvard University have to say?
 SOCIAL SCIENCE: Application of SCIENTIFIC
METHOD to study of human beings and
societies.
 QUANTITATIVE METHODS – MEASURE
everything.
 Mathematical Laws of Motion for Humans &
Societies.

5. The Battle of Methodologies:
Historical/Qualitative
 Must look at historical
context to understand
theory.
Math/Physics Laws
 History is UNIQUE –
impossible to learn any
laws.

6. Science Won – Truth Lost !!!
 Since 1890’s STEADY DECLINE in
understanding of economics –
 WHY? WRONG method being used to try and
understand economic events.
 THERE are economic LAWS – Supply &
Demand.
 LAWS of consumer behavior.

7. Goals of Macroeconomic Policy
 Full Employment == Maximum Production
 Stable Prices
 Rapid Growth {NOW a little bit Controversial}
CONTROVERSIES about how to achieve these
goals. ALSO Full Employment as a means of
providing meaningful jobs to people VERSUS
Maximizing Production of Goods and Services.
Growth VERSUS Sustainable Growth,
Pro Poor Growth

8. First Crisis: Great Depression 1929
 GD took Economists by COMPLETE SURPRISE
 Irving Fisher: “There may be a recession in stock
prices, but not anything in the nature of a crash.”
 Julius Barnes: “The spring of 1930 marks the end of
a period of grave concern. American business is
steadily coming back to a normal level of
prosperity.”

9. BIG PUZZLE – Still Unsolved
 WHY did GD Happen?
 Economy was ROARING along – Full Employment.
Massive Production of Everything. Everyone Happy.
 SUDDENLY – factories close, 20% unemployment, stock
market crashes, banks collapse. Life Savings Destroyed.
Complete Misery.
 WHY ???? – Stock Market Crash  Banking Collapse
 Productive Capacity is there, Labor is there, no war, no
destruction.

10. KEYNESIAN (MACRO)ECONOMICS:
INVENTED TO SOLVE GD PUZZLE
 CLASSICAL ECONOMICS: UNEMPLOYMENT
cannot happen. SELF-REGULATING Economy
 WHY? LAW of Supply & Demand.
 Wages will fall to restore full employment.

11. PUZZLE: Do Wages Fall?
 One thousand applicants for FOUR positions at
IIUI.
 Similar situations all over Pakistan.
 WHY dont wages fall to eliminate
unemployments?
CONVENTIONAL ECONOMIC THEORY is incapable
of dealing with the MOST IMPORTANT
ECONOMIC PROBLEM: Unemployment.

12. Banking Crisis  Regulation
 Glass-Steagall Act
 Maximum Interest Rate
 Federal Deposit Insurance
 Restriction to ONE state operation.
RESULT: Very few banking failures until 1980’s.

13. Wrong Theories  Huge Impact
In Mundell’s (2000)
assessment, ‘had the
major central banks
pursued policies of price
stability instead of
adhering to the gold
standard, there would
have been no great
Depression, no Nazi
revolution, and no World
War II’.

14. Keynesian Solution: Macroeconomics
 Problem: SHORTFALL in EFFECTIVE DEMAND
 SOLUTION 1: MONETARY POLICY – Increase money
supply, people have more money, will spend
DEMAND 
 Possible Problem: LIQUIDITY TRAP. No one wants to
borrow money, even at ZERO interest rate.
 SOLUTION 2: FISCAL POLICY: Government engages
directly in investment and public works. CREATES
Demand.

15. Battle of Ideologies
Free Markets
Key Proponents: Hayek,
Friedman
 Minimize Government
 Privatization
 Liberalization
 De-Regulation
 No interference with free
markets
Regulation
 Fiscal Policy, Monetary
Policy
 Employment Policy
 Social Welfare
 Trade Unions
 Regulations on Monopoly
 Incentives for Industry &
Exports

16. Economics of 20th-21st Century
Naomi Klein: The SHOCK DOCTRINE: The
Rise of Disaster Capitalism
www.asadzaman.net
The Rise and Fall of the Market Economy
Current Crisis in Economic Theory
Capitalism in Crisis

17. Keynes rules – post WW2
 Low AD  Unemployment – High AD 
Inflation
 Phillips Curve.
 Stable, Sound Economies, Prosperity
50-70
 Klein: Chicago School – waiting for a
crisis. Monetarists versus Keynesians.

18. The Keynesian World
Low Agg.
Demand
 Low production
 Excess Capacity
 UNEMPLOYMENT
High Agg.
Demand
 Production at
maximum capacity
 Full Employment
 INFLATION

19. Keynesian Quarter Century 48-73
TOBIN: All advanced
democratic capitalist societies
adopted Keynesian strategies
of demand management after
World War Two.
Unparalleled prosperity,
growth, expansion of world
trade, and stability. During
this ‘Golden Age’ inflation
and unemployment were low,
the business cycle was tamed.
Britain and other Western
countries had full
employment for a quarter of a
century after the war because
their governments were
committed to full
employment, and knew how
to secure it; and they knew
how to secure it because
Keynes had told them how

20. Trouble in Keynesian Paradise
Multinationals
Military Industrial
Complex

21. "ONLY A CRISIS-ACTUAL OR PERCEIVED-PRODUCES
REAL CHANGE. WHEN THAT CRISIS
OCCURS, THE ACTIONS THAT ARE TAKEN
DEPEND ON THE IDEAS THAT ARE LYING
AROUND.
That, I believe, is our basic function: to develop alternatives
to existing policies, to keep them alive and available until the
politically impossible becomes politically inevitable.
Milton Friedman -- Preface to Capitalism & Freedom 1962.

22. Preparing IDEAS for Crisis:
 Great Depresson: A Monetary History of US
 Inflation/Employment Tradeoff: Natural Rate of
Unemployment.
 Fiscal Policy: CROWDING OUT Hypothesis.
 Monetary Policy: Rational Expectations.

23. Utilize Post-Crisis Confusion
 PRIVATIZATION
 Slash Social Welfare Programs
 De-Regulation
 Free Trade – Collapse Domestic Industry, let
multinational rule.
 Free Exchange Rates – LOWER EXCHANGE Rates.
 DEBT TRAP

24. Oil Crisis & rejection of Keynes
 Stagflation – IMPOSSIBLE according to Keynes.
 NEW SOLUTION: SUPPLY SIDE ECONOMICS
 Rise of Reagan & Thatcher
 New Respectability of Hayek, Friedman and
Chicago School
POST KEYNESIAN CONFUSION: SEVEN
SCHOOLS OF MACROECONOMIC THOUGHT

25. Reagan DE-REGULATES S & L
 DISASTER FOLLOWS
 S&L make huge gambles with others money
 Losses of around $80 BILLION
 MORE THAN ENTIRE EARNINGS OF BANKING
INDUSTRY FOR PAST FIFTY YEARS
 GOVERNMENT BAILOUT – LOOTERS PROFIT,
PUBLIC LOSES.

26. Margaret Thatcher: Iron Lady
 Busted Labor Unions – Especially Coal Miners
 Subsidies and Tax Breaks for the Rich.
 Massive increase in Unemployment.
 Reduction in Social Welfare.
 De-Regulation of Finance Industry.
 RESULTS: Concentration of Wealth, Increase in Poverty.

28. Fall of Russia &
Washington Consensus
 Privatize, Liberalize, De-Regulate
 Let free markets work their magic
 Complete Catastrophe in Chile, Russia
 NAOMI KLEIN: THE SHOCK DOCTRINE, Rise of
Disaster Capitalism.
 Originator of Washington Consensus admits to
failure
 World Bank Admits to Failure.

29. Megatrends: Financialization
 Massive shift of resources from real sector to financial
sector.
 Wall St. Rookies earn million dollar salaries by playing
with pieces of paper and conning prospective buyers into
get rich quick schemes.
 No relation between earnings and Value
Added/Productivity.

30. Megatrends: Neo-Colonialism
 Mossadegh of Iran
 Salvador Allende of Chile
 Long list of popular leaders deposed by coups
and replaced by Leaders favoring
multinationals.
 Debt Model: Debt pays salaries of leaders, who
do tax farming for multinationals.
 Good governance – free currency exchange –
no regulations – privatizations – all favor MNC

31. Invisible Hand of Multinationals
Poor Countries
Bottom 3 Billion
Rich Countries
TOP 85
INDIVIDUALS

32. The Battle of Ideas Perspective
 1776: Britain has 50 year lead in
Industrialization
 Theories of FREE TRADE & FREE
MARKETS emerge in England
 Adopted Everywhere
 Disaster for the Colonies, Depression in
Europe

33. Protection in USA & Europe NOT
in Ottoman, India, China, Japan
 Alexander Hamilton: 1755 – 1804
 Friedrich List == 1789 to 1846.
 NO Protection in India – Industries destroyed.
 Opium Wars: 1839-42, 1856-1860 – Free Trade in China
 Opening of Japan: 1852-56
 Capitulations of Ottoman Empire 1830 – 1870.

34. Selling FREEDOM
 Freedom for Capitalists to make profits.
 Freedom for laborer to sell his body/time for wages
 No freedom for government to regulate sale of labor –
no minimum wage, health & benefits etc.
 No freedom for labor to band together and negotiate
against powerful capital.
 No freedom for weak nations to protect their infant
industries, against highly advanced MNC’s.

35. Timeline of Ideological Warfare
1776
• Invention of Free Trade Weapon in England
• England has 50 year lead over R O W
1800
• Protection in Europe/USA
• None for India,China,Japan,Ottomans
1860
• Europe, USA catch up to England
• India, China, Japan, Ottomans destroyed

36. Early Twentieth Century
1850-
1930
•Golden Age of Classical Econ
•W in Europe – W in Asia
1929-50
•Theoretical Confusion
•Regulation/Isolation  WW2
1950-75
•Keynesian Economics
•Capitalism saved from Communism

37. Late 20th to Early 21st Century
1970-
2007
• Reject Keynes -- FREEDOM
• Reagan-Thatcher / Russia Falls
2007-
Current
• GFC refutes ALL Macro Theories
• Prices are KEY to decentralization
FUTURE
• New Type of Economics Required
• Islamic Economics?