Synopsis of Adam Smith and John Maynard Keynes
1. Synopsis of Adam Smith and John Maynard KeynesBy
2. Adam Smith Scottish Economist 1723-1790Born in Kirkcaldy, Scotland 5 June 1723
School in Kirkcaldy
1737—University of Glasgow
Studied at Oxford University 1740-1747
Lectured in Edinburgh and Glasgow
University between 1748 to 1763.
Author of The Publication “The Wealth of the
3. The Power of the Invisible HandPursue individual interest
Result: Benefit society in general
E.g. set up business for profit and create
employment for people at the same time.
Believed people were driven by selfishness and this
was morally acceptable as this benefited society.
4. Laissez-FaireBelieved the government should not
interfere except for to provide the
Promote free trade
Build up the infrastructure of the country
Provide a legal system
Defend the country
5. Productive and Non-productive LabourProductive
Produced goods for
Making money to
6. The Labour Theory of ValueDistinguished between value in use and value in
exchange. See my example below.
• Has many uses
• Small value in
Has limited number of
Large value in exchange.
7. The Canons of TaxationEquality– Tax payments should be proportional
Certainty– Tax liabilities should be clear and
Convenience: Taxes should be collected in a
manner convenient for taxpayer
Economy – Taxes should not be expensive to
collect and should not discourage business.
8. The Division of LabourImprove the productiveness of labour.
For instance, the making of a single pin involves
eighteen separate operations, which are
entrusted to eighteen separate workmen; and
the result is, that whereas one man working
alone could make perhaps only twenty pins in a
day, several men working together, on the
principle of division of labour, can make several
thousands of pins per man in one day.
9. Exam Questions Examples2006 section B
10. John Maynard Keynes British Economist 1883 - 1946Born in Cambridge, England
Son of John Neville Keynes Professor of
Economics at Cambridge
Won a scholarship to Eton and later to
Kings College Cambridge
Lectured at Kings College from 1908
11. PublicationsA Treatise on Money – 1930 Bestseller
The General Theory of Employment,
Interest and Money - 1936
12. Fiscal PolicyHe did not believe in Laissez-Faire
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.
More money in the economy and less taxes to pay
Business will now begin to make money again
13. The Theory of the MultiplierInjection of money into a business.
Creates more income than the amount
The formula for the Multiplier is as follows:
1 – MPC + MPM + MPT
14. The Liquidity Preference Theory of Interest RatesRate 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
15. Saving and InvestmentsSavings and Investments were not equal
to each other.
Savings were greater than the amount
that entrepreneurs are willing to invest.
Causes underemployment in the economy.
16. Exam Question Examples2002 section A
17. The EndEmma Shanley