Keynesian vs Says Law

1233 Words5 Pages
Should the government influence the economy or stay away from it? Should economic policy be focused on long term results or short term problems? This and other such beliefs form the difference between the two major schools of thought in economics: Classical and Keynesian economics. For one thing, Keynes refuted Classical economics' claim that the Say's law holds. The strong form of the Say's law stated that the "costs of output are always covered in the aggregate by the sale-proceeds resulting from demand". Keynes argues that this can only hold true if the individual savings exactly equal the aggregate investment. While Classical economics believes in the theory of the invisible hand, where any imperfections in the economy get corrected automatically, Keynesian economics refuses the idea. Keynesian economics does not believe that price adjustments are possible easily and so the self-correcting market mechanism based on flexible prices also obviously doesn't. The Keynesian economists actually explain the determinants of saving, consumption, investment, and production differently than the classical economists. Classical economists believe that the best monetary policy during a crisis is no monetary policy. The Keynesian theorists on the other hand, believe that Government intervention in the form of monetary and fiscal policies is an absolute must to keep the economy running smoothly. In addition, Classical economists believed in the long run and aimed to provide long run solutions at short run losses. Keynes was completely opposed to this, and believed that it is the short run that should be targeted first. Keynes thought of savings beyond planned investments as a problem, but Classicists didn't think so because they believed that interest rate changes would sort this surplus of loanable funds and bring the economy back to an equilibrium. Keynes argued that interest
Open Document