keynes theory and classical economy

Topics: Keynesian economics, Macroeconomics, Investment Pages: 7 (1612 words) Published: June 9, 2015

This essay will compare the relationship between saving and investment of two schoolers view, which is Keynes and Classical economist view. In great depression Keynes argued with classical economist view of relationship between saving and investment. The key theory of Keynes is that the real consumption depends on disposable income. This theory can explain as C = C(Y) In that case consumption (C) and disposable income (Y) are measured in units. The background of this theory is in 1920’s classical economist who follows Adam Smith, David Ricardo and Say dominated capitalism state economy. According to classical economist, in economic system, recession is impossible or it will be sort it out by invisible hand. (Kates, 2009) However 1920’s great depression cannot be explain and solve with their theory. According to Say’s law a product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value, in other words supply creates their own demand. (Kates, 2009) To make any goods, firms need money for materials, labor source and transport, which is income for work force. The income for workforce lead to consumption of goods therefore there is no excess demand and full employment will occur. But why there is unemployed exist in real world? In classical economist view is that who are an unemployed is because of they works demand for high wages which is they are not deserved. If work force accepts low wages then there will be full employment. (O'Brien and O'Brien, 2004) It calls temporary unemployment. However Keynes totally disagree with classical economist view. He argues that full employment could not occur in modern economic system because of saving from households. When households saves from their wages, the households can not afford all goods from manufactures then it lead to firms will decrease their expenses for survival doing layoff workforces or reduced any expenses.( Sheehan, 2009) In the other side which is classical economist also argues that even though households save the money at the bank, this money will goes to companies to help investment which will stimulate the economic again and households save more money that what classical economist expected, interest rate will be down and it lead to entrepreneur can barrow more money to investment. (Asimakopulos, 1991) However Keynes still disagree with their view. He claims that saving and investment is not really linked because saving and invest from different sector, which is households and enterprise, there have different goal and aim for save and investment. (Gonick, 1975) For examples when enterprise invest in to something they might consider weather they will invest by who won from soccer match or weather. Investment by enterprise is very moody because the investment by these external circumstances and a sense of irrational investors. (Sheehan, 2009) In other words, when companies decide to invest, the interest rate of the bank only very partial factor. The household savings is also affected by the economic predictions or economic situation but the major affect is the income. (Stirati, 1994) When household’s income increase consumption and saving will be increase and when income decrease consumption and saving will also decreased but household consumption is changing by tendency to consume or savings propensity and it react at different rates depending on changes in income. (Sheehan, 2009) Consumption rises in income does go up according to the percentage rise in income savings rate rises faster than income rises which people enhance consumption when their disposable income increases. (O'Brien and O'Brien, 2004) But the increase of consumption is smaller than the increase of disposable income. This hypothesis can describe with the marginal propensity to consume. The General Theory focuses on refuting the classical conclusions that employment is determined by the price of labor, and proposes that employment...

References: Asimakopulos, A. (1991). Keynes 's General theory and accumulation. Cambridge [England]: Cambridge University Press.
Gonick, C. (1975). Inflation or depression. Toronto: J. Lorimer.
Kates, S. (2009). Say 's Law and the Keynesian revolution. Cheltenham: Edward Elgar.
Keynes, J. (2011). The General Theory of Employment, Interest and Money. [United States: s.n.
O 'Brien, D. and O 'Brien, D. (2004). The classical economists revisited. Princeton, NJ: Princeton University Press.
Sheehan, B. (2009). Understanding Keynes ' general theory. Basingstoke [England]: Palgrave Macmillan.
Stirati, A. (1994). The theory of wages in classical economics. Aldershot, England: E. Elgar.
Taylor, L. (2014). Capital, accumulation, and money. [Place of publication not identified]: Springer.
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Economics Classical Theory 2 Essay
  • classical theory Essay
  • Essay about Keynes
  • Classical Theory of Employment Essay
  • Keynes Theory of Income and Employment Essay
  • Classical and Neo Classical Theories Essay
  • Classical Political Economy Essay
  • Compare and Contrast the Way Keynes and Friedman Approach the Economy Essay

Become a StudyMode Member

Sign Up - It's Free