Evolution of Economic system :Liberalism,Mercantilism,Laissez Faire ,Keynesian,Neo Liberalism ,Monetarism

 CLASSICAL LIBERALISM:

Politico-economic theory that developed in mid of 17^th century and advocate for civil liberties under rule of law with emphasis on individual autonomy, limited government, economic freedom, political freedom and freedom of speech .

MERCANTILISM: 

• Politico -economic system that prevailed during 16^th -18^th century in Europe .
• The theory focused on economic nationalisation advocating for more and more exports and less of less imports so as to become economically strong.
• It advocated for a strong government with maximum interference in the economic affairs .
• This theory promoted colonisation as it provided markets for exports and maximum benefits for ruling countries. 
• Its a coincidence that Adam Smith coined this term mercantilism and opposed this while advocating for Laissez Faire.

Economic Liberalism: 

• In contrast to mercantilism, Classical liberalism when applied in the realm of Economy strongly supports limited state regulation , market economy, private property in the means of production. 
• Free trade, deregulation of the economy, lower taxes and privatization are often hallmarks of economic liberalism.

Laissez Faire Economic System: 

• Politico-Economic theory, rooted in classical liberalism   developed in 18^th century and reached to its peak in 19^th century during industrial revolution. 
• The theory assumes that individual is the basic unit in society and enjoys a natural right to freedom. 
• It advocated for free market capitalism, no intervention of government in businesses and giving space to market .

KEYNESIAN ECONOMICS : 

• John Maynard Keynes popularly known as Keynes is the most influential Economist of the modern times .
• Classicals believe that free markets would automatically provide full employment—that is, that everyone who wanted a job would have one as long as workers were flexible in their wage demands but  Keynes was of the view that  free markets have no self-balancing mechanisms  leading to full employment.
• Classical economists could not avert the Great depression and yielded to Keynesian economics. 
• Keynesian is a demand side theory that focusses on increasing the demand by increasing the investments in the market preferably through active monetary and fiscal policies.
• Keynesian economists justify government intervention through public policies that aim to achieve full employment and price stability. 
• This theory was popularised till 1970’s and monetarists came thereafter but the Keynesian have relevance during 2008 and corona .

Animal Spirit :

The 'animal spirit' is a term coined by the famous British economist, John Maynard Keynes, to describe how people arrive at financial decisions, including buying and selling securities, in times of economic stress or uncertainty.

Neo Liberalism:

• Principles of Classical liberalism / Laissez Faire  emerges as neo liberalism in 19^th century and during 1970’s onwards in the contemporary times. 
• Neo liberalism is about promoting the free markets, recommending for  limiting the government subsidies, reforming tax regulations to increase the tax base, decreasing deficit spending, and limiting protectionism. 
• Thatcherism, Reaganism and LPG reforms in India are examples of Neo liberalism .

MONETARISM: 

• The idea advocated by Freidman  in 1970-80’s was in fact revival of neo classical Quantity theory of money. 
• The argument was that it is not demand but the supply of money in the economy that defines the economic activity in the economy. 
• The monetarism believes that the government should avoid counter cyclical policies and should only regulate the money supply in the economy  . 

Money supply and inflation is governed by the relationship M x V = Px T. where,

 M = the money supply,

V = the velocity of money,

 P = average price level, and

T = Output in the economy or the volume of transactions occurring in the economy.

Monetarists believe that the causation is from left to right ie An increase (or decrease) in the supply of money will affects production, demand, employment  depending upon the variable factor in the equation.