Which of the two major approaches to Economic policy (Keynesian or Classical) will lead the USA out of the economic crisis faster? What are two differences between those two types of economic policies?
The classical and the Keynesian theories are two alternative views of economic development. The first one is the idea of laissez faire in the natural process of economics, yet the second asserts the necessity of government interference into the market system. The classical economists based their theory of self-regulating market on a principle of Say’s Law. According to this principle, “Aggregative supply creates its own aggregative demand”. In other words, every manufacturer is the purchaser at the same time, and sooner or later everyone needs goods that produced by others. Thus, the macroeconomic market will always be in equilibrium. Adam Smith, a major proponent of the classical approach, wrote: “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.” (Lectures, p. 169, 1729) The financial crisis of 1929 came to downturn, and recession turned into the Great Depression. During the period of 1929 - 1933, earnings of the population decreased by 53 percent (real income fell by 36 percent). As a result, demand dropped significantly, which led to curtailment of production and more layoffs. Decline in output, unemployment and deflation, all together, indicated the failure of classical theory. A British economist John Maynard Keynes rejected the classical point of view on economic balance with “the invisible hand of market”; in his opinion, the state has to regulate proportion of investments and savings, prices and wages, supply and demand. He proposed to provide the adequate budgetary-financial and monetary-credit policy as well as control of the labor-market in order to prevent the spread of unemployment outside the limits that threaten economic stability....
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