Explaint the viewpoints of Classical and Keynesian economists:
Classical economists generally think that the market, on its own, will be able to adjust while Keynesian economists believe that the government must step in to solve problems. The two camps have differing ideas on the causes and solutions of unemployment. The Classical economists believe that unemployment is caused by excess supply, which is caused by the high price level of labor. Based on supply and demand, when wages are held too high by social and political forces, demand would be low and supply would be high and that excess supply represents unemployed people. Classical economists believe that if the economy were left on its own, it would adjust to reach an equilibrium wage for workers and the economy would be at full employment.
It basically comes down to this:
Classical Theory: Government hasminimal role in the economy, and the macro-economy is self adjusting; meaningconsumers and businesses will correct any problems with the economyautomatically over time. Classical theory focuses on long-term goals.
Keynesian Theory: Government has a large role in the economy, and focuses onshort-term goals. Used mostly in times of recession, government spending is agood way to put money back into the GDP and in turn increase unemployment.
How did the economy that existed at the time of classical and keynes theories influence them?:
The Keynesian theory was the economic model in 1945–1973. It lost influence during the tax surge in 1968. Due to the tax hikes and lower employment, citizens became enraged and wanted less government interference . However, the economic downturn of 2007 has caused a researgence of Keynesian theory thought.
The classical theory failed in the 1930’s. During the Great Depression, the classicaltheory defined economic collapse as simply a lost incentive to produce, and themass unemployment as a result of high and rigid real wages. The classical theory supports that the twomain costs that shift demand and supply are labor and money. Through thedistribution of the monetary policy, demand and supply can be adjusted. Ifthere were more labor than demand for it, wages would fall until hiring beganagain. If there were too much saving, and not enough consumption, then interestrates would fall until people either cut their savings rate or startedborrowing.
Which theory is more appropriate for the economy today?
Today, citizens want the government to correct the economical situation. For instance, the government has bailed out large businesses and banks. Because of this, the Keynesian Theory is more appropriate for today.
Are today's economics policies working?
Yes and no. With all politicians on the hot seat to resurge the economy, many politicians have different idaes of what works. Some politicians cannot agree on certain policies and there are some policies in place that are working against each other. This does not work. In other words, there are good policies and bad policies. We need to reform our economic policies to get them stronger and working for the people again.
Hope this helps!