Macro Econ

Topics: Economics, Macroeconomics, Classical economics Pages: 3 (1057 words) Published: March 20, 2013
Classical and Keynesian Economic Theories
Economics can be defined as a social science concerned primarily with description and analysis of the production, distribution, and consumption of goods and services. There are two main schools of thought when it comes to economics: Classical and Keynesian economics. Each theory takes a different approach to the economic study, but neither approach is flawless. First, looking at the Classical economics theory, it is based largely on the thought that free markets can adjust themselves if left alone. Adam Smith, the founder of the Classical economics school of thought and author of 'The Wealth of Nations,' states his thoughts as "there being an invisible hand (and automatic mechanism) that moves markets towards a natural equilibrium, without the requirement of any intervention at all" (Nikaido). He believes that eventually the free market will lean toward equilibrium. The main fault with Classical Economics is that Smith did not consider the greediness of humanity. Within classical economics, there are three basic assumptions; one, flexible prices, two Say’s Law, and three savings-investment equality. First, flexible prices, states that the prices of everything: supplies, labor, land, etc., would need to equally increase and decrease based on the economy. Taking a look at wages specifically, we know that our society is on top of it when it comes to raising wages, but very cautious when it comes to lowering. Looking at Say's Law, ‘supply creates its own demand’. “The Say's law suggests that the aggregate production of an economy must generate an income enough to purchase all of the economy's output" (Kates). Essentially, generating supply would cause its own demand; but our nation works the opposite by first looking at demand and then supplying it. Finally, savings-investment equality is the assumption that requires the household savings to equal capital investment. Making Classical Economics much like Communism, it looks...
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