Economics Neo Classical and Keynessian Essay Example

that people aren’t rational and you can’t automatically shift prices, he says prices and wages are sticky and not so flexible, this prevents the economies resources from being fully employed and the economy returning to its natural level of GDP. The Keynesian sticky wage model is essentially built to accommodate demand shocks which can have considerable effects on output as Keynes believes the economy is not necessarily self correcting. (econmacro. com)

Neo-classists say that firms main aim is to maximise profits, producers attempt to produce units of a good so that the cost of producing the incremental or marginal unit is just balanced by the revenue it generates. In this way they maximize profits. Firms also hire employees up to the point that the cost of the additional hire is just balanced by the value of output that the additional employee would produce. They believe that the purpose of money is to exchange goods and services. Whereas keynes stated that money was used to increase economic wealth, he recognized that people wanted to save and invest money, why?

Because consumers have day to day bills to pay, as well as many customers saving precautionary incase of job loss or injury. Keynes argued that when there are unused resources in an economy, changes in spending are more likely to impact employment and output rather than prices. (Blaug, Mark 2008) Keynesians believe that if left alone full employment will never be reached and that active help from fiscal and monetary policy is required. (Parkin et al,. 2008:676) Government intervention is needed to increase aggregate demand to reach market clearing within the economy.

Increased tax

prices and increased government spending is needed when the economy is on a down turn to get aggregate demand to its balanced position within the economy even if this does mean deficit increasing. Keynes advocated what has been called countercyclical fiscal and monetary policies. Fiscal policy defined: “Where the government alters the balance between government expenditure and taxation” Monetary policy defined: “Where the central bank alters the supply of money in the economy and manipulates interest rates.” (Sloman et al. 2012)

Whereas neo-classical economists believe that the government don’t need to intervene with the economy and will only cause harm if done so. The government are in place to ensure that markets within the economy are competitive to prevent monopoly, they should balance the budget with no deficit so that government expenditure equals tax revenue. Government are in place to provide public goods such as health and education as well as trying to dilute trade union power so wages can go up and down to balance the economy.

Neo-classists disagree with Keynes Fiscal policy of using government expenditure to stimulate aggregate demand as it just merely just “crowds out” private expenditure. If taxation money is used to fund projects this is effecting the free market consequently meaning businesses and public have less money to spend and invest. Over the past century the economy within the UK has fluctuated considerably with the participation of different theories and policies which have been put into place by various economists.

The neo-classical approach to the economy became apparent between the 18th and 19th century first stated in Adam Smiths book ‘Wealth of Nations’ published in 1776

(Parkin et al,. 2008:463) including fundamentals that still dominate mainstream economics today. Keynes analysis in General Theory of Employment, Interest and Money, published in 1936 inspired by the great depression had an opposing view to the neoclassical economists. The Keynesian revolution replaced the neo-classical model after what was known as “The wall street crash” in 1929.