Keynes and the Classical Economists free essay sample

But the issue of government intervention to combat macroeconomic problems provokes sharp disagreement among economists. Economists known as activists support a significant role for government. Nonactivists are economists who believe that government intervention should be avoided. This controversy originated more than 50 years ago with a debate between John Maynard Keynes and the then-dominant classical economists. The historical debate provides an important backdrop for understanding the ongoing controversy about policy activism. We will begin our exploration of the activist-nonactivist debate by considering the views of the classical economists. The term classical economist describes the mainstream economists who wrote from about 1776 through the early 1930s. For our purposes the most important element of classical economic 1 2 Keynes and The Classical Economists: The Early Debate on Policy Activism thought was the belief that a market economy would automatically tend toward full employment. Virtually all the major classical economists held that belief, and apparently people were satisfied with this description of the real world until the Great Depression caused them to question its validity. We will write a custom essay sample on Keynes and the Classical Economists or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Says Law The classical economists based their predictions about full employment on a principle known as Says Law, the creation of French economist J. B. Say (1776-1832). According to Says Law, Supply creates its own demand. In other words, in the process of producing output, businesses also create enough income to ensure that all the output will be sold. Because this theory occupies such an important place in classical economics, we will examine it in more detail, beginning with a simple they create income, payments that must be made to the providers of the various economic resources. Assume, for example, that businesses want to produce $100 worth of output to sell to households. To do that, businesses must first acquire the economic resources necessary to produce those goods and services. The owners of the economic resources are households, and they expect to be paid†in wages, rent, interest, and profits (remember, profits are the payment for entrepreneurship).