Question

(Neo)-Keynesian and (Neo)-Classical economists have debated for more than a century on whether or not the invisible hand of the market can allocate scarce resources efficiently and equitably without the aid of government intervention. One important dimension of this debate is the extent to which prices are rigid in the short term.

Discuss one or more of the following prompts:

• Based on your professional experience, comment on how and why the Classical and the Keynesian views of the macroeconomy are useful paradigms to frame a business environment in which internet and the information technology revolution play a progressively more important role.
• Consider, in particular, the implications of pricing for websites such as Amazon.com, eBay, and service companies like Uber.
• Provide arguments supporting your position, including evidence related to your professional experience.

Answer 1

The differences between Keynesian theory and classical economy theory affect government policies, among other things. One side believes government should play an active role in controlling the economy, while the other school thinks the economy is better left alone to regulate itself. The implications of both also have consequences for small business owners when trying to make strategic decisions to develop their companies.

Keynesian Economics and the Economy

Keynesian advocates believe capitalism is a good system, but that it sometimes needs help. When times are good, people work, earn money and spend it on things they want. The spending stimulates the economy, and everything runs smoothly. But when the economy goes downhill, moods change.

During tougher times, businesses start closing and firing their employees. People don't have money to spend, and they try to save what little they have left. When people quit spending, the economy loses its momentum and spirals farther down.

The Keynesian View of Government Intervention

Keynesian theory says this is exactly when government intervention makes sense. If people aren't spending, then the government has to step in and fill the void. However, there's just one problem: The government doesn't have its own money. It has to take money away from the people and companies to spend it. Higher taxes for businesses take money away that could otherwise be spent on more investments to grow the company.

Classical Economics and the Free Markets

The theory of classical economics is that free markets will regulate themselves if they are left alone. Markets will find their own level of equilibrium without interference by people or the government.

In a classical economy, everyone is free to pursue their own self-interests in a market that is free and open to all competition. When people work at jobs making things, they get paid and use these wages to buy other products. In essence, workers create their own demand for goods and services.

Role of Government in the Economy

Classical economists do not like government spending, and they especially detest more government debt. They would prefer a balanced budget because they do not believe the economy benefits from higher government spending. Keynesians are okay with government borrowing, because they are convinced that government spending increases aggregate demand in the economy.

Unemployment and Inflation

Keynesian enthusiasts favor government involvement and are more concerned about people having jobs than they are about inflation. They see the role of workers as using their abilities to contribute for the good of society. Keynesians do not worry about the cost of goods or the purchasing power of the currency.

Classical economists have some concerns about unemployment but are more worried about price inflation. They see inflation as the biggest threat to a strong long-term growth of the economy. Classicists believe the economy will always seek a level of full employment. They think unemployment results from government interference in the free market or the existence of a monopoly in an industry.

Prices and Market Influences

Classical supporters want a market that is free to find its own levels of supply and demand. They believe that prices should fluctuate based on the wants of consumers. The market will adjust itself to any shortages and surpluses of products. Keynesians believe prices should be more rigid and that government should try to maintain price stability. They would like to see the government influence people and corporations to keep prices within specified ranges.

The Future Growth of the Economy

A key difference between Keynesians and classicists is how to predict and treat the future growth of the economy. Keynesians focus on short-term problems. They see these issues as immediate concerns that government must deal with to assure the long-term growth of the economy.

Classicists’ focus more on getting long-term results by letting the free market adjust to short-term problems. They believe short-term problems are just bumps in the road that the free market will eventually solve for itself.

Whether Keynesian or classical economists are correct in their views cannot be determined with certainty. Business owners have to use the actions of politicians and business leaders as signposts to help them make their own decisions about the growth of their companies.

Uber, Amazon, Netflix, and Tesla all have one thing in common: even though they're some of the best brands in tech, the strength and viability of their business models are what propel them to the top of their industries.

A compelling brand image can attract a lot of attention and new customers, but without a sound and realistic business model to monetize all that attention and retain those customers, you’ll never grow or reach your potential as a business.