Compare And Contrast The Classical And The Classic Economic Model

Classic Economic Model versus Keynesian Theory: Recessionary Impacts

The Great Depression in 1929, sparked by a crash in the stock market, was a time which the U.S. economy suffered a tremendous loss in productivity resulting in negative GDP growth. Consumer spending and investment slowed for the next few years due to massive unemployment. “By 1933, when the Great Depression reached its nadir, some 13 to 15 million Americans were unemployed and nearly half of the country’s banks had failed” (“The Great Depression”). In tough economic times British economist John Maynard Keynes believed that government should step in the short run to boost the overall demand by instituting some form of economic spending stimuli. Classical economic

The government should not be attempting to artificially correct the demand and supply as this likely leads to an increase in long-term inflation. According to our text, economists supporting the classical model assuming pure competition, flexible wages, flexible prices and people’s self-interest any problems in the macroeconomy will be temporary (Miller). However, Keynes had a different view of how an economy should recover. Given the government is a large component of an economy as they spend and employ many workers Keynes believed it should step in and provide immediate support. Keynes claimed that prices in the economy were “sticky”. It essentially means that the prices charged for certain goods are reluctant to change despite changes in input cost or demand patterns (“Price Stickiness”). Keynes believed the natural increase in demand will not raise the price level or goods and services. Therefore, he argued that the government should intervene by increasing their spending to “prime the pump” of the economy. Governments have many levers to pull when it comes to influencing the direction of the

The largest issue is that after the spending program is completed the government rarely pays back the borrowed funds which add to the deficit. This raises the debt and some nations have risked insolvency such as the recent econominc crisis in Greece in which the economy is so far in debt it is on the verge of collapse. Also, some claim that Keynesian theory promotes entitlement programs that discourage people from production. A good example of a Keynesian policy was the U.S. raising the unemployment insurance payments from the general 26 to 99 weeks. Conservative economists felt that this extension provided a disincentive for the unemployed to find work. Keynesian economincs has long been adopted by more liberal political parties where they believe the government can solve most economic