Question

1. Keynesian economics and neoclassical economics have been challenging, attacking and refuting one another ever since his General Theory from 1936. (a) outlines the basic dispute between them and (b) explains why so old and often repeated debate continues to be a major concern of the mainstream economics profession.

Answer 1

1.(a) The basic dispute between Neoclassic economics and Keynesian economics is that the former theory believes that the market itself can perfectly allocate its resources for production of required goods and services without any need of government interference( in the form of govt. spending) in the economic market place, whereas the keynesian economics says that government spending becomes necessary in case, aggregate demand falls short of aggregate supply to buy up available goods and services from market and ultimately demand and supply to be monitored and controlled by government.

1.(b) The debate between these two theories continues because both the theories have their positive and negative aspects and both are used in different economic situation in different economies of world. Following are some aspects why the debate continues :

a. According to neoclassic economics, market will itself correct the situation of recession/stagflation as govt. intervention could become counter productive as people tend to save the income provided by govt. in various forms like unemployment allowances, tax rebates etc and thus rendering the main motive of increasing the demand ineffective.

b. Neoclassic theory has not been as effective as Keynesian economics while dealing with recession , unemployment etc.