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SynopsisSynopsis of of

Adam Smith Adam Smith and and

John Maynard Keynes John Maynard Keynes

ByBy

Emma ShanleyEmma Shanley

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Adam SmithAdam SmithScottish EconomistScottish Economist

1723-17901723-1790 Born in Kirkcaldy, Scotland 5 June 1723Born in Kirkcaldy, Scotland 5 June 1723 School in KirkcaldySchool in Kirkcaldy 1737—University of Glasgow1737—University of Glasgow Studied at Oxford University 1740-1747Studied at Oxford University 1740-1747 Lectured in Edinburgh and Glasgow Lectured in Edinburgh and Glasgow

University between 1748 to 1763.University between 1748 to 1763. Author of The Publication “The Wealth Author of The Publication “The Wealth

of the Nations”of the Nations”

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The Power of the Invisible HandThe Power of the Invisible Hand

Pursue individual interestPursue individual interest Result: Benefit society in generalResult: Benefit society in general E.g. set up business for profit and E.g. set up business for profit and

create employment for people at the create employment for people at the same time.same time.Believed people were driven by selfishness and this was morally acceptable as this benefited society.

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Laissez-FaireLaissez-Faire

Promote free tradePromote free trade Build up the infrastructure of the countryBuild up the infrastructure of the country Provide a legal systemProvide a legal system Defend the countryDefend the country

Believed the government should not interfere except for to provide the following:

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Productive and Non-productive Productive and Non-productive LabourLabour

ProductiveProductive

Produced goods for Produced goods for salesale

Making money to Making money to reinvestreinvest

E.g. Baker E.g. Baker

Non-productiveNon-productive

ActorsActors TeachersTeachers EngineersEngineers

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The Labour Theory of ValueThe Labour Theory of Value Distinguished between value in use and Distinguished between value in use and

value in exchange. See my example below.value in exchange. See my example below.

DiamondsDiamonds

• Has limited number of Has limited number of uses.uses.

• Large value in Large value in exchange.exchange.

Water

• Has many usesHas many uses• Small value in Small value in

exchangeexchange

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The Canons of TaxationThe Canons of Taxation

EqualityEquality– Tax payments should be – Tax payments should be proportional to incomeproportional to income

CertaintyCertainty– Tax liabilities should be clear – Tax liabilities should be clear and certainand certain

ConvenienceConvenience: Taxes should be collected in : Taxes should be collected in a manner convenient for taxpayera manner convenient for taxpayer

EconomyEconomy – Taxes should not be expensive – Taxes should not be expensive to collect and should not discourage to collect and should not discourage business.business.

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The Division of LabourThe Division of Labour

Improve the productiveness of labour. Improve the productiveness of labour.

For instance, the making of a single pin For instance, the making of a single pin involves eighteen separate operations, involves eighteen separate operations, which are entrusted to eighteen separate which are entrusted to eighteen separate workmen; and the result is, that whereas workmen; and the result is, that whereas one man working alone could make one man working alone could make perhaps only twenty pins in a day, several perhaps only twenty pins in a day, several men working together, on the principle of men working together, on the principle of division of labour, can make several division of labour, can make several thousands of pins per man in one day. thousands of pins per man in one day.

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Exam Questions ExamplesExam Questions Examples2006 section B

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John Maynard KeynesJohn Maynard KeynesBritish EconomistBritish Economist

1883 - 19461883 - 1946

Born in Cambridge, EnglandBorn in Cambridge, England Son of John Neville Keynes Son of John Neville Keynes

Professor of Economics at Professor of Economics at CambridgeCambridge

Won a scholarship to Eton and later Won a scholarship to Eton and later to Kings College Cambridgeto Kings College Cambridge

Lectured at Kings College from Lectured at Kings College from 19081908

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PublicationsPublications

A Treatise on Money – 1930 A Treatise on Money – 1930 BestsellerBestseller

The General Theory of The General Theory of Employment, Interest and Money - Employment, Interest and Money - 19361936

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Fiscal PolicyFiscal Policy

Government controlled tax levels and public spending. 

E.g. an economy has slowed down

• Unemployment levels are up • Consumer spending is down • Businesses are not making any money

Government decreases taxation• Consumers have more money to spend.• Government spends money by buying services from the market

(such as building roads or schools). • Jobs are created.

Result:More money in the economy and less taxes to payBusiness will now begin to make money again

He did not believe in Laissez-FaireLaissez-Faire

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The Theory of the MultiplierThe Theory of the Multiplier

Injection of money into a business.Injection of money into a business. Creates more income than the Creates more income than the

amount invested.amount invested. The formula for the Multiplier is as The formula for the Multiplier is as

follows:follows:

11

1 – MPC + MPM + MPT1 – MPC + MPM + MPT

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The Liquidity Preference Theory of The Liquidity Preference Theory of Interest RatesInterest Rates

Rate of Interest fixed by the Central Bank

• Settles at a level which brings about equal Supply of and Demand for Money

• Supply meant the money in circulation.

• Demand meant the reasons why people want to hold onto money rather than invest it.

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Saving and InvestmentsSaving and Investments

Savings and Investments were not Savings and Investments were not equal to each other.equal to each other.

Savings were greater than the amount that entrepreneurs are willing to invest.

Causes underemployment in the economy.

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Exam Question ExamplesExam Question Examples2002 section A

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The EndThe End