adam smith vs. john maynard keynes

A detailed Summary of adam smith vs. john maynard keynes

Economics was a subject of which few thought about consciously until the eighteenth century. It is true that since the beginning of time people have used economics, but it was seldom given any thought. When a caveman traded a buffalo for a new club he did not have the knowledge that he affected the entire caveman economy and their way of life. Adam Smith is accredited as being the most influential economist of the eighteenth century and for all practical purposes one of the first economists that anyone has ever heard of.

Ironically, Adam Smith's great economic break-through is that no one should worry about the economy. The economy will take care of itself because it is driven by self-interest. Given that greed is a quality that drives just about everyone, this should not be a problem. Society has needs and wants, so the public will always demand goods. It is up to producers to supply the public with these goods and services. The goods that are demanded will be produced more and other products will not. It is the economic variation to natural selection. Competition in the market place will drive down prices and raise quality and efficiency. There is no need for government regulations because the market will always correct itse

lf, eventually. The only elements needed are greedy profit driven producers and stupid people to buy their products.

John Maynard Keynes used fiscal policy in order to protect against inflation and recession. Fiscal policy uses government spending and taxes to regulate consumer spending and demand. In case of an inflationary risk the government would raise taxes and limit the amount that consumers are able to spend. This would lower demand and drive down prices. During a recession the government would cut taxes to help ease the financial burden and encourage spending.

The FED can also adjust the discount rate to influence the economy. The discount rate is the interest rate that banks pay to borrow money from the federal reserve. If the FED raises the discount rate, then banks must also raise their interest rates as to not lose money on the loans they give out. High interest rates discourage borrowing much like the federal reserve requirement.

With the invisible hand, as long as consumers keep buying goods the economy will stay in check. Consumers will buy what they want at prices they feel are acceptable. Companies will produce these goods at the lowest possible price and in quantities based on public interest.

During the twentieth century, America has followed Keyensian economics. This is evident in examining the power that the FED has not just over America, but the rest of the world as well since the Untied States is an economic super power. The chairman of the FED, Alan Greenspan is said by many, to be the most powerful man in the world. Keyensian economics is much more precise than Smith's classic economics. The nation's economy is much too important to be left up to the invisible hand. Policies are required to make sure that the country continues to prosper.

Adam Smith believed that the government should only tax a necessary amount

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