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Classical Vs. Keynesian Models Of Income And Employment

 Classical Vs. Keynesian Models of income and Employment

Keynesian Revolutionary Theory has the following Points

  • Whole Employment

    The classicists assumed in the subsistence of whole employment in the financial system and a condition of less than whole employment was considered as abnormal. They hence didn’t think it requisite to possess a particular thesis of employment. Conversely, Keynes regarded the subsistence of whole employment in the financial system as a special case. He put forth a general thesis of employment applicable to every capitalist financial system.

  • Say’s Law

    The classical study was based on Say’s Laws of Markets’ “that supply creates its own demand.” The classicists thus ruled out the possibility of over production. “Keynes greatest achievement according to Prof. Sweezy was the liberation of Anglo-American economics from this tyrannical dogma.”

    Redundancy results from the insufficiency of effective demand for the reason that people do not expend the whole of their earnings on consumption. Thus the development of the principles of effective demand and consumption function is a revolutionary contribution of Keynes to economic theory.

  • Laissez Faire

    The classical economics was based on the laissez faire policy of a self-adjusting financial system with no government intervention. Keynes spared the policy of laissez faire for the reason that he assumed that enlightened self-interest did not always operate in the communal interest and it was this policy which tended to the Great gloominess. He hence, preferred state interference and hassle the significance of public investment to bridge the gap shaped by the deficiency of private investment.

  • Remuneration Slash

    Pigou, one of the foremost classical economists, preferred the strategy of reimbursement slash to solve the difficulty of redundancy. But Keynes stood against such a strategy both from the hypothetical and application view points. Hypothetically, a reimbursement slash strategy hikes redundancy instead of eradicating it. Applicably, labourers are not prepared to admit a cut in money wage. He hence preferred a supple fiscal strategy to a supple wage strategy to raise the level of employment in the financial system.

  • Thrift

    The classicists highlighted the significance of saving or thrift in capital formation for financial development. To Keynes thrift was a private virtue and a public vice. Hike in aggregate thrift tends to a drop in aggregate consumption and demand thereby diminishing the level of employment in the financial system. Keynes advocated public spending instead of public thrift to eradicate redundancy. He therefore, shattered the last pillar of the bourgeois argument that dissimilar earnings tended to enhanced thrift and to capital formation for development. This view might be termed revolutionary.

  • Saving – Investment

    The classicists assumed that saving and investment parities at the whole employment level and in case of any disparity the parity was brought about by the mechanism of rate of interest. Likewise, investment is ascertained not only by rate of interest but by the marginal efficiency of capital.

  • Business Cycle

    The classical economist failed to provide an adequate explanation of the cyclical phenomena. They could not give explanation about the turning points of the business cycle agreeably and usually referred to boom and depression. Keynes real contribution to the business cycle study is based on the description of turning points of the cycle and in the variation of attitude as to what should and should not be done by the government to control the cycle.

  • Monetary Thesis

    The classicists artificially separated the fiscal thesis from the value thesis. Keynes conversely integrated fiscal thesis and value thesis. He also brought interest thesis into the domain of fiscal thesis. He considered the rate of interest as a purely fiscal phenomenon. He highlighted the demand for money as an asset and separated it into transactions demand, precautionary demand and speculative demand to describe the ascertainment of the rate of interest in the short run.

  • Macro Examination

    The classical economics was a micro economics study which the orthodox economists tried to apply to the economy as a whole. Keynes conversely adopted the macro approach to economic problems. But the Keynesian revolution lies in its macro dynamic orientation of aggregate income, employment, productivity, consumption, demand, supply, saving and investment.

  • Strategies

    The classical economists being the votaries of laisse-faire policy had no faith either in financial strategies. They assumed in the balanced budget strategy. Keynes conversely, stressed the significance of deficit budgets during deflation and surplus budgets during inflation along with cheap money and dear money strategies correspondingly. He was therefore a practical economist whose models clarify both inflationary and deflationary episodes and prosperous and depressed economics.

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