Download Christian Ortiz Classical Economics Many key economic theories

Christian Ortiz
Classical Economics
Many key economic theories have been made over the years that have either
affected the economy either negatively or positively. Economics is the quantitative and
qualitative study on the allocation, distribution and production of economic resources.
Economists observe the trends in the economy, and try to find the pattern that is being
made. Theories are made by economist to try to understand what shapes the economy
and what creates the most revenue for its consumers. They often study the monetary
policy of a government and other information using mathematical or statistical
calculations. Since there are so many economist and different theories, it is hard to pick
which one will work best at any given time. Many debates are made over the key issues
that shape the U.S. market. But of the many ideas and theories of the economy, there are
two models that seem to be the most widely used. Classical Economics and Keynesian
Economics seem to be the foundation of modern economics. These two theories each
take a different approach to the economy, and each having its own benefits. There is
much discussion that is made that about which o model to choose. But After researching
this topic, and reading through what both theories have to offer and how they differ, I
came to a conclusion that the classical model works best. The classical model could be a
better fit for America, than compared to that of Classical Economics.
What is Classical Economics? Classical theory is the main root concept of laissez
faire, meaning a “free market” economy. It suggests that leaving the market alone
without any human or government intervention that eventually the equilibrium will be
obtained. This theory was the first school of thought for economists and one of the major
theorists and founders of Classical Economics was Adam Smith. Theorists like Smith and
others believe that the classical theory ensures economic resources are allocated
according to the desires of individuals and businesses in the marketplace. Classical
economics uses the value theory to determine prices in the economic market. Classical
Economic theory assumes three basic ideas: Flexible Prices, Shay’s Law, and SavingsInvestment equality. Flexible suggests prices will rise and fall as needed, but can also be
affect due to the interference of government agencies including unions and laws. Shays
Law says that supply creates its own demand and demand is not based on production or
on supply itself. And the third assumption is that savings will equal the investment, which
will then lead to a new balanced equilibrium point.
Keynesian Economics was developed and founding by John Maynard Keynes.
Keynesian economic theory relies heavily on spending and aggregate demand to establish
the national market. Government interference such as spending, tax hikes or tax breaks
are vital in economic success. Keynesian assumptions include: Rigid or Inflexible Prices,
Effective Demand, and Savings-Investment Determinants. Rigid or Inflexible Prices
suggest that wages increases are easier to take while wage decreases hits resistance;
likewise, a producer will increase prices yet when needed will be reluctant to decrease
price. Effective Demand implies that only a portion of the household income will be used
for consumption. Lastly, the Keynesian theorists believe savings and investments are
based on one’s desire to save for the future and the expected profitability of the endeavor.
Both of these theories have a plan, either for the long haul or the short run.
Classical economics focus their energy on creating long-term solutions for the economic
problems that we face as a nation. Effects of government interference such as
government solutions, taxes, and inflation play a key role on how economists create
classical theories. They also look into the effects of existing policies and observe new
economic theories and how they are either improving or distorting the free market.
While classical theory looks for solutions that will work themselves out over the course
of time, Keynesian economist look for the immediate solution. They focus on what they
can do for instant. Their policies focus on the short-term needs and on figuring out how
to make quick corrections to economic problems. This is why government spending is
such a key cog of Keynesian economics. During the time of a recessions or depression,
people and businesses are less likely to have the resources to see any results of progress.
The government is seen as the only force to end these downturns through monetary or
fiscal policies providing instant economic results.
So as stated above one can see there several differences in Classical and
Keynesian Economics. Classical Economic theorists believe the Government should have
no role in the free market while Keynesians believe the Government is vital in having a
balanced market. I personally like the theories and ideas of the Classical Economists.
Although a completely free market may be a bit of stretch in this nation, I believe it is
good to have a market balance itself out. The government should intervene with the
market as little as possible. Too much government spending limits individuals and
businesses to valuable economic resources. Government spending and involvement can
stun the nations economic growth by diminishing the value of the private owner and
giving value to the public sector. This is why I prefer the idea of the Classical Model to
Keynesian Economics.