Economic theories.

The first and one of the most notable classical economists of the 18^th and the 19^th century is Adam Smith. His prominent work “The Wealth of Nations” is the genius attempt of systematic analysis of the market economy. He argued that perfect run of market can be provided by the observance (maintenance) of the following laws: inviolability of property, honest fulfillment of duties and obligations by every member of society that to be the basis of market. He considered relations and freedom of and for every member of society in his economic or any other activities. Property might only be bought, but it can’t be stolen or expropriated. Stability in the society is provided by ownership and state is its guarantor. It is a state that develops the laws and looks after their observance. One of the most progressive points of view was Smith’s attitude to labour. He considered any kind of mental work like talent, education to be a capital. It was he who said that the productive labour is the main source of public welfare.

Yet the great depression of the 1930s demonstrated that, at least in the short term, the market system does not automatically lead to full employment. If people are pessimistic about the future they will save more money and consume less, leading to a fall in production and employment. John Maynard Keynes recommended governmental intervention in the economy to counter the business cycle: an increase in government spending or a decrease of taxation during a recession to stimulate the economy and increase output, investment, consumption and employment; and a decrease in government spending or an increase in taxation in a period of inflation.

If the post-war period was the era of Keynesianism, events after 1973 oil crises demonstrated that Keynes did not have all the answers, and the late 1970s and the 1980s saw the rise of various forms of neo-classicism, all of which agree that medium or long-term economic growth is damaged by short-term Keynesian or “stop-go” government policies to stabilize the economy.

The ultimate aim of Keynesian governmental intervention or “demand management” is full employment – when no involuntary unemployment exists. However, this is now widely considered to be impossible, and even undesirable, as it causes inflation to rise.

Monetarists such as Milton Friedman argue that the quantity of money in circulation and its velocity of circulation determine the average levels of prices, wages and economic activity, and that inflation is caused by excessive monetary growth. Other economists have used the same data to argue that it is increased business activity that causes the money supply to rise, and that the money supply follows prices, and not vice versa. Monetarists claim that Keynesian attempts to stabilize the business cycle only lead to rising prices and the crowding out the private investment, and that the business cycle, inflation and unemployment are the unintended results of misconceived government interventions and of exogenous variables. They insists that free markets and competition are efficient and should be allowed to operate with a minimum of governmental intervention. If money supply, rather than fiscal policy, is the major determinant of nominal GNP growth, the role of the government should be to ensure a fixed growth rate for the money supply.

“Supply-side” theorists agree with Keynesians that there is a role for economic policy, but they argue that it should focus on aggregate supply or potential output rather than aggregate demand. They recommend boosting supply in a stagnant economy by lowering taxes on capital and business profits, which will lead to an increase in the supply of inputs, namely capital and labour.