My research of Classical Economics and Keynesian Economics has given me the opportunity to form an opinion on this greatly debated topic in economics. After researching this topic in great lengths, I have determined the Keynesian Economics far exceeds greatness for America compared to that of Classical Economics. I will begin my paper by first addressing my understanding of both economic theories, I will then compare and contrast both theories, and end my paper with my opinions on why I believe Keynesian Economics is what is best for America.
Classical Economics is a theory that suggests by leaving the free market alone without human intervention; equilibrium will be obtained. This theory was the first school of thought for economists and one of the major theorists and founders of Classical Economics was Adam Smith. Smith stated, “By pursuing his own interest, he (man) frequently promotes that (good) of the society more effectually than when he really intends to promote it. I (Adam Smith) have never known much good done by those who affected to trade for the public good.”(Patil) Classical Economic theory assumes three basic ideas: Flexible Prices, Shay’s Law, and Savings-Investment equality. Flexible prices in Classical theory suggests prices will rise and fall as needed but is not always true, due to, the interference of government agencies including unions and laws. Smith stated in the Wealth of the Nation (1776), “Civil government, so far it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.” (Patil) Shay’s Law implies supply creates its own demand and demand is not based on production or supply.
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The last assumption is that savings will equal the investment which will lead to equilibrium; however, Classical theorist are realist and know this will not always happen, thus, they believe the flexible interest rates will help with the equilibrium.
Keynesian Economics was developed and founding by John Maynard Keynes. He believed and wrote in his book “The General Theory of Employment, Interest and Money” that it is essential for the Government to play a vital role in economic stability. Keynesian theorist believe Government spending, tax hikes or tax breaks are vital in economic success. Keynesian assumptions include: Rigid or Inflexible Prices, Effective Demand, and Savings-Investment Determinants. Rigid or Inflexible Prices suggest that wages increases are easier to take while wage decreases hits resistance; likewise, a producer will increase prices yet when needed will be reluctant to decrease prices.
Keynesianism and monetarism are both ways to stabilize the economy and promote growth when need. In keynesianism, government uses fiscal policy which is a list of policies that government spending and taxing can be used to improve the performance of an economy. The government produces stabilization by taxing and spending yearly plans. Taxing can occur when inflation is high and lowering taxes tends to occur during a high percentage of unemployment. By lowering taxes, it increases disposable income or the party of income that goes to financial responsibilities. When people have more money, they are able to spend more which in return goes into jump starting the economy. Monetary Policy is another policy used in Keynesianism which is a list of protocol designed to regulate the economy by setting the amount of money that is in circulation and controlled interest levels. The Federal Reserve system also known as the central banking system in the U.S. which holds control of this policy. Monetary policy has three tools used my the Federal Reserve to enforce this policy. Reserve Requirement is the first tool that determines the lowest amount of money a bank must possess and is not able to lend out. The second way to enforce monetary policy is by using the discount rate or the interest rank a bank will charge. The f...
Franklin D. Roosevelt, president of the united states from 1933 to 1945 (and the distant cousin of Theodore Roosevelt), was the first to convert to Keynes’s theories. He implemented massive public works programs to put people to work. Called the “New Deal”, an echo of Theodore Roosevelt’s square deal, it consisted of a series of programs from 1933 to 1938. As well as providing employment through massive works projects such as the Tennessee valley authority, which built dams to generate electricity. New deal programs provided emergency relief, reformed the banking system, and tried to invigorate agriculture and the economy. Many other programs were also put into place with were used to attemp...
Comparing Keynesian Economics and Supply Side Economic Theories Two controversial economic policies are Keynesian economics and Supply Side economics. They represent opposite sides of the economic policy spectrum and were introduced at opposite ends of the 20th century, yet still are the most famous for their effects on the economy of the United States when they were used. The founder of Keynesian economic theory was John Maynard Keynes.
Adam Smith often called the “founder of modern economics,” utilizes his observational assumptions to construct his own rationale for society, economics, and human nature. His observations are based on sentiments regarding issues that are far ranging. Within the Wealth of Nations Smith makes claims regarding human nature, such as “self-love” is inherent, the faculties of reason and speech, and the nature of humans to “truck and barter.” Smith examines the notion of a free market economy that is based upon reason rather than belief. This poignant observation on human nature has its bias and facts, with regards to Smith’s examination of society.
Keynes and Hayek represent different options. Should we steer markets or set them free? “Which way should we choose, More bottom up or more top down?” (Fight of the Century). These questions reflect the opposite ways Keynes and Hayek address the economy. Keynes wants to “steer” the economy from the “top down.” From his understanding of the economy, Keynes theorizes that the market can be directed by those with the power to do so to accomplish goals leading to a prosperous economy. This is the basis in his approach to dealing with recessions where the government or central bank manipulates the economy. The other side is a free market from the “bottom up” on which Hayek stakes his claim. Instead of steering the economy, Hayek proposes to leave it alone. Do not try to control it, but let the market determine the interest rate and price level, as it eventually will, through supply and demand. In this way, control is not exerted downward, but reality is expressed from basic economic forces. Fundamentally, Keynes’s model focuses more on the spending and consumption aspects of GDP, and Hayek’s approach focuses more on the investing aspect which flows from saving. These are the options from which to choose. Keynes vs. Hayek, Short run vs. long run, controlled vs. free, top down vs. bottom up, each possibility has its negatives and positives. This debate is not wrapped up
Very few people truly believe in every aspect of Neoclassicalism. This is due to its belief on the assumption that supply and demand are equal and that the markets are always clear. Neoclassicalism is heavily devoted to mathematical models to describe the economy and the interaction between individuals within. These models tend to stray away from reality; in a way they show that neoclassical theories aren’t necessarily realistic, but they still help find the answers economists need. George E. P. Box said “Essentially, all models are wrong, but some are useful.” This is proven by Neoclassical
middle of paper ... ... In summation, I am more of a Keynesian thinker than a classical thinker. Although it might be true that having a free market is the right way of having a stable economy, unemployment will still be high and might be increasing which is still one of the problems that governments face today. Plus, what happens if recession hits or even worse we go back to 1930’s where there was the great depression, it was proved then and will be proved again if it happens that the only way to solve a sort of crisis is by government intervention (basically spending).
John Maynard Keynes classical approach to economics and the business cycle has dominated society, especially the United States. His idea was that government intervention was necessary in a properly functioning economy. One economic author, John Edward King, claimed of the theory that:
I believe that it's’ important to use our constitution as a guiding tool to help appoint the correct people for the job.John Maynard Keynes was a British economist where he fundamentally changed the theory and practices of macroeconomics and economic policies of government. Although he was revolutionary most of his policies were controversial and used Keynesianism economic to get people to stay away from them . His approach to macroeconomic management was different since the previous traditional laissez-faire economists believed that an economy would automatically correct its imbalances and move toward a state of equilibrium, They expected the dynamics of supply and demand to help the economy adjust to recession and inflation without government action. Laissez-faire economics thus regarded layoffs, bankruptcies and downturns in the economy not as something to be avoided but as elements of a natural process that would eventually improve. However that was not the case for the great depression. Keynes also believed that a given level of demand in an economy would produce employment however he insisted that low employment during the depression resulted from inadequate
Regardless, in regards to applying Keynesian economic policies toward the Great Depression, Former Federal Reserve Governor Ben S. Bernanke said “You 're right, we did it. We 're very sorry. … we won 't do it again” (Federal Reserve Board, 2002). Other economic theory must be developed to address some of the shortcomings of the Keynesian economic
There are two major views on the government’s role in the economy, the Keynesian view, and laissez faire. The Keynesian view is often held by liberals and democrats. This is the belief that it is the government’s responsibility to regulate and attempt to manipulate the economy. This is often characterized by taxing and subsidizing, and redistribution of wealth. The laissez faire philosophy is held by republicans and libertarians. In a laissez faire economy, the market determines where the money flows. Those who participate in the market determine the supply and demand with the way they spend their time and money.
Adam Smith is widely regarded as the father of modern economics and one of the greatest economists throughout the course of history. He is mainly famous for a two books that he wrote, these two books are considered thee base and infrastructure of the world of economics. The two books he wrote were, “The Theory of Moral Sentimental” and “The Wealth of Nations”. But although Adam Smith was such a great economic philosopher, he wasn’t a very good foreteller or future predictor. The economic scenario now is very different from the economic landscape of the 1700’s. Giant super-corporations can now govern the flow of the market, unlike Smith’s time’s. Even though elements of Smith’s ideas have changed over time, some of his beliefs remain important factors in economics to this day. One of those truly unique philosophies is the “Invisible Hand”.
The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions. The ideas of economists and politicians, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist." (John Maynard Keynes, the General Theory of Employment, Interest and Money p 383)
Economists Thomas Robert Malthus and David Ricardo. Although differences of opinion were numerous among the classical economists in the time span between Smith’s Wealth of Nations (1776) and Ricardo’s Principles of Political Economy and Taxation (1817), they all mainly agreed on major principles. All believed in private property, free markets, and, in Smith’s words, “ The individual pursuit of private gain to increase the public good.” They shared Smith’s strong suspicion of government and his enthusiastic confidence in the power of self-interest represented by his famous “invisible hand,” which reconciled public benefit with personal quest of private gain. From Ricardo, classicists derived the notion of diminishing returns, which held that as more labor and capital were applied to land yields after a certain and not very advanced stage in the progress of agriculture steadily diminished.
Keynesian method and world-systems theory deserve special attention. It is Keynesianism that makes possible for the radical political economists to apply the bipolar model, centered on