Economic Theory [Virtual Economy]

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Economic Theory

This room in the Library gives you details about the various different areas of economic theory. As economies have developed over time, so economic theory has developed as well to try to explain changing circumstances. In the 19th century and the beginning of the 20th century Classical theory held the balance of power in economic circles, but it began to lose it at the time of the Great Depression of the 1930s. Classical theory had difficulty in explaining why the depression kept getting worse, and an economist called John Maynard Keynes began to develop alternative ideas.

This marked the birth of Keynesian economics and most post-war governments managed the economy using Keynesian policies up until the beginning of the 1970s. Then Keynesian theory ran into trouble as unemployment and inflation began to rise together - a phenomenon known as stagflation Look up Stagflation in glossary . At this point another economist stepped in - Milton Friedman. He was known as a Monetarist, and along with a number of other Monetarist economists at Chicago University did a lot of work trying to explain what caused inflation.

However, the Conservative government of the 1980s gradually became disillusioned with Monetarism and then returned to a modern variation of classical economic management - Neo-Classical economics. Like Classical economics, it stresses the role of free markets in delivering the best possible level of economic growth.

For more details on each of these areas, use the links in the side panel or below: