Classical vs. Keynesian Economics
It wasn't until the great depression in 1930 that Adam Smith’s philosophies began to be questioned. Ideas such as laissez-faire meant that free economies could regulate themselves without any government intervention and dominated majority thought in America for over a century. Adam Smith is known as a classical economist because he strongly believed that the economy would always reach equilibrium no matter how long it took. He emphasized the idea in The Wealth of Nations that labor brings wealth to an economy because the more one works, the more one earns. This results in greater input into the system and the equilibrium of demand and supply. In contrast, there stood some economists who believed that in order for equilibrium to be reached effectively, there needs to be some form of government intervention to boost the train along its tracks; the economy along its road of stabilization. Maynard Keynes’ ideas were especially appreciated by and accepted into society during The Great Depression. The concept of classical economics most likely did not expect people to be jobless during the fall of prices. Originally, if prices fell, demand would rise, resulting in economic regulation. However, while prices fell in the 1930’s, people were also losing their jobs, so no matter how inexpensive a good or service may have been, people were still unable to afford it. This was a major factor that contributed to the cause of The Great Depression. Maynard Keynes decided that in order for economic equilibrium to be reached through the concept of laissez-faire, time would be needed, and lots of it. He decided that government action should be taken and needed to be encouraged. As opposed to Adam Smith’s idea that individuals affect input and output in an economy through spending, Keynes’ main principle to his theory was that not only should the people spend, but the government should also be the one to do the spending. He figured that if the...
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