ABSTRACT
This chapter begins by describing the economic theories that led neoclassical economists to advocate a laissez-faire, hands-off approach to the economy even in the depths of the Great Depression. It explains the 3 core theoretical ideas that drove neoclassical economists of the early 1900s to advocate a hands-off, laissez-faire approach to the economy: The Marginal Productivity Theory of Distribution, Markets Always Clear, and Say’s Law. The chapter examines the circular flow model of the economy and utilizes it to explain how neoclassical economists and John Maynard Keynes differ in their analysis of savings and investment. It explores the major ideas of Keynes, including the volatility of investment, sticky wages and prices, the macroeconomic problems created by wage and price deflation, the multiplier process, and stabilization policy. The chapter analyzes the economic interventions made by the US government from the New Deal to the present and the effectiveness of an economic system of “regulated” or “mixed” market capitalism.
