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Contents
Contents………………………………………………………………………………………….1

Law of Demand

Introduction………………………………………………………………………………………2

20th Century……………………………………………………………………………………...2

21st Century ……………………………………………………………………………………..3

Conclusion……………………………………………………………………………………….4

References……………………………………………………………………………………....4
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Introduction
The economic theories have undergone shifts over the course of modern economic
history. John Maynard Keynes proposed some very radical economic ideas in the first
half of the 20th century regarding the role of the government in the economy that proved
quite influential and was adopted by the governments and policymakers after the
Second World War to rebuild the economy. However, the economic ideas were
challenged and critiqued by the monetary economists, most prominent being Milton
Friedman, challenged the ideas of Keynesian economics and argued in favor of the role
of money in the economy (Lioudis, 2019). The neoclassical theory dominated the
economic orthodoxy until the 1960s and 1970s (Gomulka, 2018), while neo-liberalism
dominated much of the latter part of the 20 th century. However, the recessions and
shocks in the first decade of the 20th century have caused some of the economists to
deviate from the neo-liberal economics orthodoxy and become more pluralist in their
approach (Jacobs and Laybourn-Langton, 2018). While modern Neo-Keynesian
economists have an understanding of the economic theory that is the economic model
that is quite similar to the economic orthodoxy, they tend not to agree with the free
market objectives of neo-liberalism. Economists using the complexity of ecological
economics, push for a more radical approach to developing a new economic model
(Jacobs and Laybourn-Langton, 2018). At the same time, there is a push from leading
economist and world institutions for adopting an economic model that supports
sustainable and inclusive growth and shifting from the ‘growth will even it up’ model to a
‘distributive by design’ model (Raworth, 2017).
20th Century
20th Century witnessed a revolution in economic ideas with several radical and
profoundly influential being proposed that have had a long-lasting impact on the
policymaking throughout the world. The most influential among these was the doctrine
proposed by John Maynard Keynes (18883-1946) who in his seminal work in 1936, The
General Theory of Employment, Interest, and Money called for a break-up from the then
prevailing economic orthodoxy of austerity and argued for the increased government
expenditure in the time of recession to revive the economy. Keynesian economists
argue in favor of manipulating the demand to control the economy (Lioudis, 2019).
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Keynesian economists do believe in the role of money supply in the economy; however,
they argue that left only to the monetary influences, the market would take a long to
adjust itself. Keynes famously argued that ‘In the long run we are all dead’ and therefore
governments should raise the consumption through increased expenditure to improve
the state of the economy.
Monetarist economists, most influential among them being Milton Friedman (1912-
2006), argued for laissez-faire government policy rather than the interventionist
approach advocated by the Keynesians. They put their trust in the role of the money
supply in controlling the economy (Lioudis, 2019). By controlling the money supply, they
proposed, the federal bank can influence inflation and by influencing the inflation, it can
impact the future interest rates. Thus, they argued for the important role of monetary
policy in shaping the economy.
The New Classical Macroeconomics, founded by Robert Lucas in the late 1970s,
attempted to build upon the Keynesian idea by adding the microeconomics’ notions to it
(Liberto, 2019). They maintained that due to the stickiness of the wages and prices,
they adjust more slowly to the short-term economic fluctuations and supported the
expansionary monetary policy, arguing that expansionary fiscal policies of the
government, supported by the deficit spending, would encourage savings rather than
promoting demand. Real Business Cycle Theory, proposed in 1982, replaced Lucas's
model as the standard model of New Classical Macroeconomics. This theory tried to
explain the variations in the output and employment changes in technology and tastes.
Besides these, various other developments took place in different field of economics,
some of the prominent among these are – Efficient Market Hypothesis proposed by
Eugene Fama in 1965, Game Theory Revolution, Information economics of George
Akerlof, Development Economics of Arthur Lewis and Amartya Sen, and the Impossible
Trinity by Marcus Fleming and Robert Mundell, among others, Each of these ideas have
had a deep and long-lasting impact on the development of the economic understanding,
designing public policy and business strategies, and controlling the economy.
21st Century
The 2008 financial crisis led several economists to challenge existing mainstream
economic theories and models. There is a growing consensus among economists that
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the growth generated by the new-liberal economic model has been unsustainable and
led to rising inequality (Jacobs and Laybourn-Langton, 2018). However, there is no well-
developed standard alternative economic model that has been established yet. The new
economic theories, currently being debated, called by names such as 'institutional
economics', 'evolutionary economics' or 'innovation economics', put the knowledge,
technology, entrepreneurship, and innovation at the heart of the economic model rather
than seeing them as peripherals (Innovation Economics, n.d.). Innovation economists
suggest that economic growth is generated by productivity and innovation and urge
policymakers on these rather than traditional monetary and fiscal policies. Economists
are calling to make a shift from market dependent growth and incorporate distribution in
the growth to make it more equal and sustainable – to pre-distribute wealth rather than
redistribute wealth (Innovation Economics, n.d.). There is also an attempt to move from
a growth-addicted model to a growth agnostic model wherein economics thrive even the
growth is flat-lining.
Conclusion
There is an attempt in the 21st-century economic academic sphere to move away from
the economic orthodoxy and make the growth more inclusive. However, there are
several heterogeneous voices and no overarching consensus has been reached that
can replace the 20th-century neo-liberal model. Policymakers and businesses, to a large
extent, often resort to the 20th-century economic models to drive the economy.
However, as the growing inequality and economic shocks of the past decade have
shown, there is a need to rethink our approach towards economic growth to make it
more sustainable and people friendly.
References
Innovation Economics: The Economic Doctrine for the 21 st Century. Information
Technology & Innovation Foundation. Available at https://itif.org/innovation-economics-
economic-doctrine-21st-century [Accessed July 24, 2020].

Gomulka S. (2018). The Global Economy in the 21 st Century: Will the Trends of the 20th
Century Continue? Available at https://doi.org/10.1515/ceej-2017-0011 [Accessed July
24, 2020].

Jacobs M. and Laybourn-Langton L. (2018). Paradigm Shifts in Economic Theory and

Policy. Intereconomics, Vol. 53, No. 3, pp. 113-118.
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Liberto D. (2019). New Keynesian Economics. Investopedia. Available at

https://www.investopedia.com/terms/n/new-keynesian-economics.asp [Accessed July
24 2020].

Lioudis N. (2019). Keynesian and Monetarist Economics: How Do They Differ,

Investopedia. Available at https://www.investopedia.com/ask/answers/012615/what-
difference-between-keynesian-economics-and-monetarist-
economics.asp#:~:text=Monetarist%20economics%20is%20Milton
%20Friedman,Keynesian%20economics%20involves%20government%20expenditures.
[Accessed July 24 2020].

Raworth K. (2017). Seven ways to think like a 21 st century economist. OpenDemocracy.

Available at https://www.opendemocracy.net/en/transformation/seven-ways-to-think-
like-21st-century-economist/ [Accessed July 24, 2020].