Schools of thought in macroeconomics

Hello. My name is Ivan Cohen and I'm an associate professor in finance and economics at Richmond University, The American International University in London. And this is the last talk in the series in which we're going to look at schools of thought in macroeconomics. The way people think about macroeconomics or the economy in general depends often on the circumstances of the time. That is to say, when economists are trying to work out how the world around them works, it's influenced by the circumstances they face. So we're going to start by going back in time and seeing how macroeconomics was viewed before 1936. And in a short while, I'll make it clear why 1936 is considered such an important year.

Before 1936, we can look at a progression of ideas from mercantilism through the physiocrats into orthodox or classical economics.

Mercantilism was the dominant idea in Europe in the 16th to the 18th centuries. Essentially, mercantilism promotes government regulation of a nation's economy for the purpose of promoting state power at the expense of rival national powers. It's really all about trying to maintain the league position of a national economy compared to other national economies. And back in the 16th to the 18th century, it was felt the way to do this was the accumulation of wealth. And wealth was primarily seen as being the hoarding of gold, and in particular, the hoarding of gold by promoting a positive balance of trade. This means that an economy needed to promote its exports and deter or prevent imports. And you can see this just with a superficial glance at history. This is what is at the heart of European expansionism and imperialism during the building of the European empires during those 16th to 18th centuries. Now on the slide, there is a list of some of the key thinkers which you're welcome to go and look up. You may google them at your own time. I'm not going to spend any time discussing these individual thinkers. However, mercantilism soon came to be regarded as incorrect. That is to say that the wealth of a country is not really manifest in the amount of gold it has. This was first shown by a chap called David Hume, a nice Scotsman, using something called the price-specie flow mechanism. Put simply, this says that if a country exports more than it imports, those exports have to be paid for by other countries and that leads to an inflow of gold into the country. The inflow of gold increases the supply of money in the country and that in the short to medium term, what this is likely to do is become inflationary. And therefore, the price of that country's exports will start to go up and the amount of exports sold will come down. And therefore, any immediate trade surplus will be reduced by the inflow of gold. So we have an impact from the balance of trade through the movement of specie, which is gold, and that therefore impacts the money supply and impacts inflation.