Question

Which economic school of thought should Canada structure its economic policy after Keynesian or Classical? Support Classical and explain why Canada should structure its economic policy after Classical economic school of thought.

Answer 1

Ans.

Indrodution

Macroeconomics explains and discusses macroeconomic phenomena from the standpoints of several schools of economic thought, each of which takes different outlooks and make different assumptions on how macroeconomic agents make decisions and how the corresponding markets operate. Therefore, building a vivid, holistic comprehension of how these schools of economic thought are distinct is a vital prerequisite for economics students to thrive academically and professionally in the discipline. Fulfilling this prerequisite becomes even more important as economics students pursue their education toward higher levels of education and graduate studies, during which students are expected to reach higher levels of Bloom’s taxonomy, including analysis, synthesis, evaluation, and creation. Two major schools of economic thought are the Classical and Keynesian schools. Indeed, they have become the backbone of modern macroeconomics, and economics student can have the backbone to perform well if they comprehend the essence of these schools well.

Explanation

classical economics affirms that markets perform best with minimal government intervention. This school of economic thought was established in the late 18th and early 19th century by classical economists such as Adam Smith, Jean-Baptiste Say. David Ricardo, Thomas Robert Malthus, and John Stuart Mill. Adam Smith's (1776) seminal book, entitled "An Inquiry into the Nature and Causes of the Wealth of Nations," is regarded as the bible of classical economics. The main idea of his influential book is the fact that the wealth of nations, which is indeed their productive capacity, is formed on the basis of trade (free exchange of value) and not gold or other natural resources. The main difference between classical economics and modern libertarian economics is the role that they consider for the government in providing for public goods and managing common resources. Classical economists assert that markets generally regulate and adjust themselves, and often have a tendency to move towards equilibrium through an "invisible hand." They believe in the notion that private incentives are aligned with societal well-being maximization under certain competitive conditions.

Neoclassical economics is a school of economic thought that primarily focuses on the determination of goods, outputs, and income distributions in markets from the perspective of supply and demand (Campus, 1987). This determination is generally facilitated through a utility constrained maximization by individuals and profit maximization by firms given a cost function, which technically contains information on a production function, available information, and factors of production. The transition from classical economics to neoclassical economics is usually called the marginal revolution, and has been made through the works done by economists such as William Stanley Jevons, Carl Menger, and Leon Walras.

DISTINCTIONS

1. CLASSICAL

*Equilibrium Pattern

*Long-run

*In the long run, prices always adjust up or down to ensure market clearing. (The concept was initially explained by Jean-Baptiste Say in 1801)

*Supply Side of the Economy

*Free Markets (and the Least Degree of Government Intervention)

*Economic Growth

Keynesians

*Disequilibrium Pattern

* Short-Run

*In the short run, markets do not clear. (Different markets do not clear for different reasons, e.g. goods market due to nominal price rigidity, and labor market due to efficiency wages)

*Public Policy and Government Intervention (Monetary Policy & Fiscal Policy)

*Demand Side of the Economy

*Business Cycles and Recessions