Neoclassical Macroeconomics

Liberalism and Capitalism were combined in the late 19th century through the concept of profit maximization from the Marginal Revolution.

This created Laissez-fare Capitalism which finally led to the Great Crash of 1929.

It proved that free markets, driven by profit maximization, could not be trusted to self-correct. This was opposite of Classical Economics which did not have profit maximization.

Because of profit maximization, the banks did not want to lend, fearing that the profits from new loans would not be enough to cover the losses from the Crash.

This created a tight monetary policy that worsened the recession into a Depression.

Keynes’ General Theory

The Depression drove Keynes to create a General Theory which enshrined the love of cash, as liquidity preference. The government would then control this cash through interest rates.

This created a centralized monetary policy by empowering the cantral bank to lend or borrow money from the banking system.

This allowed the government to control the money supply directly and therefore the economy indirectly.

To speed up the recovery, Keynes also advocated for deficit spending wherein the government created projects to hire people and spread money to the economy through multiplier effects.

This is why modern governments:

• are preoccupied with interest rates
• have hugde debts

Both these policies give power to both the private and public finance and are known as macroeconomics.

This violates Adam Smith’s maxim:

• not to enshrine money
• not to burden the government with finance and debt

Its main benefit is that involves the government into public works which is one of its core duties.