[MUSIC] Our next question deals with the proper role of government in managing the macro economy. Mr. Ricardo, if a recession hits what should the government do to fix it? >> Our government simply needs to be patient. If we prudently wait, market forces will certainly bring the economy back to full employment. >> Prime Minister Caines, what's wrong with waiting for the market to adjust? After all, we are a free market economy. >> Sir, it is simply bad advice. Absent government intervention, the recession will only deepen as incomes and production fall and unemployment rises. >> I would remind my liberal opponent that a government big enough to give you everything you want is a government big enough to take all you have. >> And I would remind my conservative opponent that, in the long run we are all dead. So waiting for a recession to end is simply foolish. >> Well, at least the voters will have a clear choice in this election. >> Professor Navarro here, and welcome back to The Power of Macroeconomics. In this lesson, I'm going to introduce you to one of the most important analytical tools in macroeconomics, the aggregate supply, aggregate demand framework. This framework is particularly useful because it may be used to analyze problems like inflation and recession as well as possible solutions to these macroeconomic problems through the use of discretionary, fiscal and monetary policies implemented by a nation's government. Now, to set the stage for the development of this aggregate supply, aggregate demand framework, I'm first going to introduce you to the one of the most important historical debates in macroeconomics. This is an epic clash between classical economist and Keynesian economist over the need or lack there of for the government to try to manage the ups and downs of the business In cycle. From the business and finance perspective, this classical Keynesian debate is particularly interesting as it provides keen insight as to how effective or ineffective the government may be in providing a stable and prosperous economic environment within which to invest and conduct business. [MUSIC] The basic question underlying the classical Keynesian debate are as relevant in today's modern debate over macroeconomic policy as they were more than 100 years ago. These questions include just how activist should the government be in the face of macroeconomic problems like inflation and recession? Is it in fact the government's role to use discretionary tools like fiscal and monetary policy to try and solve macroeconomic problems? And perhaps, most troubling, might a well intentioned government that does intervene to try to control inflation or stimulate economic growth actually do more harm to the economy than good? [SOUND] These are big questions and good questions, so let's start by diving into a little history to answer that. [MUSIC] The debate between classical economists and Keynesians goes back to the 1930s in a global macroeconomic phenomenon known as the Great Depression. The Great Depression of the 1930s was distinctive in two regards. It was a global event, dragging down the major economies not just of Europe and the United States, but of virtually all countries and continents around the world, from Africa and Asia, to North and South America. Even more troubling and unlike more isolated economic recessions and panics of the past, the Great Depression dragged on for many, many years. While the cause or causes of the Great Depression have been extensively debated, we now know that trade among nations fell by almost a third under the weight of an epidemic of protective tariffs and quotas. We also know that by 1932, more than 30 million people were on unemployment lines around the world while untold millions more literary starved to death. In the ensuing mystery and political unrest, the Great Depression helped spawn the rise of military dictatorships promising to restore the economic and political order. Fascists like Benito Mussolini of Italy and Francisco Franco of Spain. The increasingly authoritarian Communism with Josef Stalin in the Soviet Union, and of course, Adolf Hitler's Nazi Third Reich in Germany. Which together with Imperial Japan and its own virulent brand of militant nationalism would eventually start World War II. These were dark times, indeed. And it is against this backdrop that the great debate between classical economists and Keynesians over how to end the Great Depression took place. In our next module, we will see that this was primarily a debate over how economies adjust to recessionary conditions. Just how long any such adjustments may take place [MUSIC]
