The economic development of humanity began with the cultivation of land and the emergence of an agricultural society, gaining momentum through increasing commercial activities based on barter. Over centuries, it has evolved into new dimensions through technological, sociological, and political interactions. Following the Industrial Revolution of the 18th century, a rapid development process led to revolutions in key sectors such as transportation, technology, and communication, accelerating humanity's progress in much shorter periods compared to the past. Since the 20th century, societies and states have developed more frequent and complex forms of relationships with each other, leading to globalization in the last fifty years, characterized by integration and the formation of systems. Economic needs and development have adapted to this progress and have emerged as one of the most current fields, following fields such as medicine and engineering.
A brief overview of the field of economics reveals that it has been shaped by the stages and developments throughout history, influenced by political conditions and socio-structural factors, leading to the emergence of the concept of political economy. This concept gained strength, especially after the 1970s, with the view that interconnected scientific disciplines cannot be considered independently of each other and is still debated with topics such as war economy, energy conflicts, and industrial competition. Philosophically, the development of the field of economics is known to be influenced by two main views: liberalism and socialist (communal) views.
Liberalism, in its literal sense, means freedom. The liberal side began by advocating classical economic freedom, starting with Adam Smith's invisible hand approach and developing with Ricardo's concept of comparative advantage. This initial stage, forming the basis of the economic model, demonstrated that Supply and Demand create a balance at a certain Price and Quantity. Especially in the 20th century, the neo-liberal movement gained prominence, led by Hayek and Friedman, emphasizing the minimization of the state and the expansion of personal freedom. In this context, issues such as open markets, free trade, and privatization came to the fore.
This approach, implemented within the capitalist system, led to significant economic progress with the development of individual freedoms in the changing world after World War I and II. The period of monetary policy (monetarism) emerged with the merging of markets and increasing economic integrations. Liberal systems, especially preferred by the Western world, contain catalytic processes in the progress of states.
The second approach, especially influenced by Marx's communist principles, has the idea that the state contributes to the individual's life. It is a system that has developed after the Great Depression of the 1930s, progressed by economist Keynes, advocating for the strong role of the state. Unlike the freedom in the liberal system, it argues for the state to direct the economy and intervene, especially in unemployment. The IS-LM model, which emerged at the Econometric Conference held at Oxford in 1936, is advocated by this school. The assumption of fixed prices has been the main criticism of this model. The Phillips Curve, showing low unemployment rates in high inflation, is also developed based on this approach.
After the difficulties and stagflation of the 1970s, this approach was abandoned, and the new classical approach began to become more widespread. Especially with Lucas's interpretation of rational expectations, a new dimension was gained, and attempts were made to interpret contemporary issues by associating them with the concept of real business cycles. Later, Prescott and Kydland emphasized the impact of government policy declarations on markets and explained fluctuations as reactions to optimize external shocks to economic tools. The Keynesian approach sees economic fluctuations as market failures and advocates activating demand to create full employment, adhering to the view of adaptive expectations. One of the main differences between the two approaches is that the Keynesian approach emphasizes Demand, while the new classical approach emphasizes Supply.
Advocates of both approaches came together to work on a model suitable for themselves after the mid-1990s. Thus, the concept of dynamic stochastic general equilibrium (DSGE) emerged and is referred to as the new neoclassical synthesis. In this phase, the Keynesian side emphasizes imperfect competition and the role of the central bank in wages, while accepting the basics of the real economic fluctuation model. From the perspective of monetary policy, this involves controlling inflation and adjusting interest rates, production differences, and eco-political shocks for economic prosperity and stability.
Interpreting the DSGE model according to the conditions of the 2000s includes elements such as consumer preference behavior, cost adjustments in investment, variability in capital utilization, and business capital borrowing for wages. Most countries and central banks have adopted these approaches.
The Great Recession that began with financial markets in 2008 shows that the model did not take the financial sector into account sufficiently and excluded pathologies in the functioning of the market system. This situation leads economic actors to find themselves unable to implement their plans for optimizing the best in a situation where economic downturn signals are inevitable when economic collapse is predicted by governments. The process has given rise to the emergence of new Keynesian approaches. As suggested by Nobel laureate Krugman and others, Keynes' approach provides the best framework for understanding recessions and crises. The opposing side continues to oppose this view, predicting the collapse of market economies by governments and continuing to object to the IS-LM model due to objections. Whether the deficiencies in the past years will be sufficient and whether they will lead to more radical changes in macroeconomic models today remains a looming question mark.
Dr. Bilinç Dolmacı
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