These economists believe that aggregate demand is influenced by public and private decisions. The public means the government, and the private means individuals and businesses. Aggregate demand sometimes affects production, employment, and inflation. When the economy starts to slack, they rely on the government to build it back up. Keynesian economists, similar to Classical economists, also believe that the economy is made up of consumer spending, government spending, and business investments.
Classical Laissez-faire Economics The earliest organized school of economic thought is known as Classical. The father of this school is Adam Smith. Smith used the concept of the invisible hand to describe the role of the market in the allocation of resources. In the market, the interaction of demand and supply determines how much of a good will be produced and the price that is charged for that good. Absent any explicit guidance mechanism, the invisible hand guides participants in the market towards an outcome that efficiently allocates resources to the production of goods that society desires.
In this way the markets should be thought to function as a ‘democratization’ of capitalism, whereby investors determine what our collective economic efforts should be put towards. Since much of our society is economic in nature, the markets move our lives and national priorities. But this idea of the financial markets is at present perverted instead into a view of them as a simple money making scheme. Most money in the market is made off of day trading, rather than long term investment. This means that instead of a share’s price being determined by the true worth and stability of a company, that it is mostly beholden to speculation and the “horse race” of the stock market.
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 order for a the US economy, a mixed economy, to continue to function and grow, the Federal Government must intervene and impose economic regulation to counter failures encountered in the markets for public and merit goods, and from excess market power in certain industries, better known as monopolies. Public Goods Public goods are an area of our market that can experience failure, when the market demand is not consistent with the actual demand from the public, which causes a shortage in the amount of public goods available for consumption. Investopedia.com defines a public good as, “A product that one individual can consume without reducing its availability to another individual and from... ... middle of paper ... ...Web. 15 Nov. 2013. .
The concept of value is central to economics. Objective value is the equilibrium free market price. Subjective value arises from individuals' preferences, and so influences economic agents' behaviors. In microeconomic theory supply and demand attempts to describe, explain, and predict the price and quantity of goods sold in perfectly competitive markets. It is one of the most fundamental economic models and it is used as a basic building block in a wide range of more detailed economic models and theories.
Keynes saw the possibility of this arising from circular cycle such as this, where demand depends upon income. But income in turn depends upon expenditure. Thus, income is expenditure: in our market economy, every dollar of income comes from somebody's spending. But expenditure in turn depends on demand. Thus he imposed that this might tentatively account for depressions whereas: “low income produces low demand produces low expenditure produces low income.” This sounds like circular interpretation, but Keynes argued that it is the causation that is circular.
However, John Maynard Keynes, an opponent of Adam Smith whom is placed on the left side of the spectrum would not embrace the ideas that the source suggests. He would argue that government intervention is necessary for an economy to recover from a depression. Individuals should embrace this source and ideas of capitalism to a degree because it is possible for government intervention to resolve issues and allow the economy a chance for a full recovery.An ideology that does not involve government intervention and is based on laissez-faire is known as Capitalism. It was created by Adam Smith – the father of Capitalism as a result of this ideology, a metaphor known as the Invisible Hand Theory was developed. He felt that in a society, producers and consumers as individuals should control the economy in which the Invisible Hand Theory states that an individual will pursue their own self-interest, in doing so it will indirectly benefit the community.
The idea is that these entities must maintain a balance on the equilibrium through its outputs to both the economy and ecosystem. Socially responsible companies are those who go past what is required by government or environmental groups. In today’s world where global issues such as global warming and poverty continue to become more concerning for the public, it is even more important for companies to ensure the welfare of society. The other variable of this question is financial performance. This portion is measured quantitatively rather than through action.
They felt that the market will be able to keep itself stable, without the intervention of the government. Jean Baptiste Say believed that supply would create its own demand. The classical economists had an assumption that the aggregate production of goods and services in the economy generate enough income to purchase all output. They also had the assumption that savings by the household sector matches investment expenditures on capital goods by the business sector. The policy of laissez-faire was that the government should have minimum interference in the economic affairs of individuals and society.