Discuss the salient features of Classical theory : The Classical Theory and the Keynesian Theory are two principal schools of notion in economics that provide differing views on how economies feature and how authorities intervention have to be approached.
Here are the salient features of each theory and their key differences:
- Market Mechanism: The Classical Theory emphasizes the importance of free markets and their ability to efficiently allocate resources, determine prices, and achieve equilibrium. It believes that market forces will naturally adjust to any imbalances.
- Laissez-Faire: The Classical economists advocated for minimal government intervention in the economy.
- Flexible Prices and Wages: Classical Theory assumes that prices and wages are flexible and can adjust quickly to changes in demand and supply. This flexibility helps in maintaining equilibrium and preventing long-term unemployment.
- Effective Demand: Keynesian Theory challenges Say’s Law by emphasizing the role of effective demand, which means that there can be insufficient aggregate demand to utilize all the available resources, leading to involuntary unemployment.
- Aggregate Expenditure: Keynesian economics focuses on aggregate demand as the driving force of economic activity. It suggests that fluctuations in aggregate demand can lead to business cycles of booms and recessions.
- Government Intervention: Keynesians argue that government intervention is essential to stabilize the economy, especially during times of recession or depression. They advocate for fiscal policy (government spending and taxation) and monetary policy to manage aggregate demand.
- Market Mechanism: Classical economics places strong faith in the self-adjusting market mechanism, whereas Keynesian economics highlights market failures and emphasizes the need for government intervention to correct these failures.
- Demand and Unemployment: Classical economics downplays the possibility of demand deficiencies causing persistent unemployment, while Keynesian economics emphasizes the role of inadequate demand in causing unemployment.
In summary, Classical economics is rooted in the belief in market self-regulation and limited government intervention, while Keynesian economics highlights the potential for market failures and advocates for active government policies to manage economic fluctuations.