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Classical Economic Theories and Keynesian Economic Theories - Essay Example

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Classical Economic Theories and Keynesian Economic Theories

This essay makes an attempt to compare the classical economic theories and Keynesian economic theories. The essay takes a descriptive approach where economic theories of two different periods are compared and contrasted from three angles, namely beliefs, theories and policies.
Firstly on the basis of beliefs-Malthus, one of the classical economists believed that, if increase in population was not enough to depress the rate of long term growth it would affect the diminishing returns. And also believed that to ensure growth the government should adopt laissez faire approach which included free trade and free markets. In addition to this, Adam Smith, the Father of Economics who introduced the notion of invisible hand supported the economic activity and led to optimum equilibrium (Stoft, 2002). They also viewed if there is disequilibrium between leakages and injections then the price would adjust to restore equilibrium. In spite of these beliefs they were not much happy in the initial periods but later they had confident with them that their approaches will lead to success in the market. But all this beliefs were strongly opposed by John Maynard Keynes in his Keynesian theory. ...
Secondly on the basis of theories-the classical economist views that free trades and free markets should be adopted to encourage growth in the market. And the government should handle the situation if there is any imperfection that prevented free workings in the market by using supply side policies. For having full employment they recommended three major theories namely; (a) free market theory which described that market will reach to equilibrium at full employment and where the labor market worked properly, (b) Say's Law introduced by Jean Baptiste Say explains that increase in output of goods and services will lead to an increase in the expenditure to buy those goods and services (Krugman, 2008). Hence there will be no shortage for demand and there will be always job for the workers resulting to full employment and (c) Quantity theory of money which describes that there is a positive relationship between money supply and inflation. Whereas Keynes argued that to have an equilibrium market it is not necessary to have a full employment and introduced four major theories to support his argument namely: (a) Labor market which describes that there should not be wage cuts leading to demand deficit unemployment. (b) The market for loanable funds (money market), here he opposed the classical economists by stating that increase in investment is not because of increase in savings and people has spent less but was due to dependence on business expectations. (c) The Multiplier, here he views that for a huge increase in national income is due to increase in aggregate demand. And if there is a higher level of leakages the lower multiplier should be used and(d) Keynesian view of inflation, here he opposed the ...Show more
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Summary

Economic theories have been developed over the years on the basis of the changes in the economies and circumstances in the economy. These theories have been bifurcated into various categories such as classical, neo-classical, Keynesian and so on. Classical economic theories refer to those theories and beliefs that have been propounded by experts in the 18th and 19th centuries (Peet, 2009)…
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