Essay Questions

Essay Questions

Introduction

Classical economic schools of thought have traditionally advocated that an output level that falls below the point of full-employment, just as in the instance of an economic recession, is not a point of equilibrium. Instead, the theory explains that predominant market forces naturally drive the economy during stagnation and guide it back to full-employment level. Therefore, classical economic theory supports that the economy has the natural competency to correct itself with absolutely no assistance or intervention from the government. This is defined as the self-correcting theory of laissez-faire economics (Coddington, 2003).

In stark contrast to classical schools of thought, Keynesian economic theory recommends a “mixed economy” where the public sector plays a crucial role with significant assistance from the government while the private sector plays a dominant role . The Keynesian approach to economics is mainly based on the belief that decisions made by the private sector invariably lead to adverse economic implications on a macroeconomic level. As a result, Keynesian theory strongly recommends that the restoration and re-stabilization of the business cycle, while demanding critical policy responses from the public sector, also demand an assessment of monetary and fiscal policy actions by the central bank and the government (Coddington, 2003).

Moreover, the Keynesian theory has proven successful in historical as well as modern policy disputes and the government's initiative to maintain a position of authority in critical economic decisions played a crucial role in the economic revival of the United States. For instance, the economic model was adopted at the time of the great Depression and played an integral role in overcoming the economic trials prevalent in that era. The model proved as successful during World War II, and in its aftermath, when the US economy pushed for economic expansion and aimed at overcoming stagflation between 1945 and 1973 . Owing to its overwhelming historical success, the global financial meltdown in 2008 triggered a revival of Keynesian thought.

Discussion

Distinguishing characteristics in Keynesian and classical theory

It is undeniable that there are very obvious and unmistakable distinguishing characteristics in Keynesian and classical school of thought. It is often contested that the underlying concepts advocated in the Keynesian school of thought betray unmistakable signs of anti-capitalism and are strongly inclined towards socialism. This is because, in stark contrast to classical theory, Keynesian theory actually advocates the encouragement of a strong government role in critical decision-making related to the economy policy matters.

There are many students and staunch supporters of classical school of thought who have shunned the viewpoints expressed in the theory for being too socialistic in nature . However, even despite such critical viewpoints, Keynesian theory is widely preferred during times of recession and stagnation as it suggests a safer approach where government intervention and assistance encourages faster economic recovery as compared to having blind faith in market-driving factors (Ghertman, 2009).

Keynes' works are strikingly incongruent to the popular classical economic theories of David Ricardo and John Stuart Mill. For instance, it is the central theme of classic thought that supply automatically regulates ...