Question

Recall our discussion of Scientific Paradigms and Research programs.  What core beliefs of the Classical model did Keynes challenge?  Why are classical (and New Classical) Economists so resistant to Keynes’ theories?

Answer 1

Following the key classical beliefs that were challenged by the Keynes:

• Supply creates its own demand. Keynes does not agree with such a proposition. The demand is regarded as the key factor by Keynes. Over the short run, the supply is driven by the change in aggregate demand.
• There are flexible wage and price, thus, equilibrium is automatically restored, while the Keynes does not assume that wage and price are flexible, these are rigid over the short run.
• Keynes contends that government intervention is needed to correct the disequilibrium in the economy.

Classical or new classical says that market works automatically, thus government intervention is not required, Rational expectation theory of new classical economists say that any actions of government would be rightly anticipated by the people, so they will change their behavior accordingly, thus economic policies of govenment would be of no use.