How the Economy Works: Confidence, Crashes and Self-Fulfilling Prophecies

By Roger E.A. Farmer | Go to book overview

CHAPTER 2
Classical Economics

It is not from the benevolence of the butcher, the brewer, or the baker that
we expect our dinner, but from their regard to their own interest
.

—Adam Smith (1776)

This quote from Adam Smith, the father of modern economics, summarizes the most important idea of classical economics. Selfish behavior by individuals leads to an outcome that benefits everyone in society. Smith wrote his most important book, An Inquiry into the Nature and Causes of the Wealth of Nations, in 1776, the same year the Declaration of Independence was adopted in Philadelphia. After the publication of the Wealth of Nations, economists refined the ideas it contained and developed them into a body of classical economic theory. What is classical economics and why should it interest you?

Classical economics can be split into two parts: general equilibrium theory and the quantity theory of money. General equilibrium theory was developed in 1874 by a French economist, Léon Walras, who taught at the University of Lausanne in Switzerland.1 It explains how much of every good is produced and how the price of each good is set relative to every other good. For example, general equilibrium theory aims to tell us what determines how many hours will be worked by every person in the world, the number

-21-

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How the Economy Works: Confidence, Crashes and Self-Fulfilling Prophecies
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • Preface xi
  • Chapter 1- Introduction 1
  • Chapter 2- Classical Economics 21
  • Chapter 3- The Impact of Keynes on the World Economy 39
  • Chapter 4- Where the Keynesians Lost Their Way 49
  • Chapter 5- The Rational Expectations Revolution 65
  • Chapter 6- How Central Banks Impact Your Life 81
  • Chapter 7- Why Unemployment Persists 97
  • Chapter 8- Why the Stock Market Matters to You 109
  • Chapter 9- Will There Be Another Great Depression? 123
  • Chapter 10- Will Monetary and Fiscal Policy Work? 137
  • Chapter 11- How to Solve a Financial Crisis 153
  • Glossary 169
  • Notes 175
  • Bibliography 183
  • Index 189
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