Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

John Maynard Keynes (1883–1946)

If Adam Smith is the father of economics, John Maynard Keynes is the father of modern-day macroeconomics.

In 1936, he wrote The General Theory of Employment, Interest and Money. He was writing during the Great Depression, a prolonged period from 1929 until the late 1930s that saw large and persistent falls in output and high unemployment. The economists of the day had a hard time explaining the causes of the Great Depression.

Keynes argued that in the short run, aggregate demand determined output and that it might take a very long time for output to adjust to its natural level. Thus, a clear case existed for governments to intervene with expansionary policies (see Chapter 3) in order to get economies out of recession.

Keynes famously quipped that ‘in the long run, we are all dead’. He meant that policy makers shouldn’t be concerned only about what happens to an economy in the long run – the short run matters a lot too.

Importantly, the short run determines economic conditions such as unemployment, living standards and inflation today.


Milton Friedman (1912–2006)

The ideas in Keynes’s General Theory (see the preceding section) dominated macroeconomics for several decades. So much so that many macroeconomists identified themselves as Keynesian.

Enter Milton Friedman, who led a small group of influential economists known as the monetarists. The monetarists were very concerned that economists still only understood very little about how the economy works. They argued that trying to fine tune the economy by constant government

intervention was likely to lead to even more instability. They believed that just following simple rules was better – such as a steady rate of growth in the money supply.

Friedman was an early critic of the Phillips curve – the seeming trade-off between unemployment and inflation (which we discuss in Chapter 12). Friedman argued that such a trade-off can’t exist in the long run: it goes against basic economic theory that money (something nominal) can affect unemployment (something real). Ultimately Friedman was proved correct, because the Phillips curve relationship broke down when policy makers tried to exploit it.