Keynes and the Classical Economists
Keynes and the Classical Economists: The Early Debate on Policy Activism
LEAR N I NG OBJ ECTIVE S 1. Discuss why the classical economists believed that a market economy would automatically tend toward full employment. 2. Explain why Keynes rejected the views of the classical economists. 3. Compare the views of Keynes and the classical economists with regard to the proper role of government.
s you discovered in Chapter 10, unemployment and inflation impose costs on our society. Today, many Americans assume that it is the federal government’s responsibility to reduce those costs by combating unemployment and inflation when they occur. 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.
A
THE CLASSICAL MODEL: THE CASE FOR LAISSEZ-FAIRE
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.
Say’s Law
The classical economists based their predictions about full employment
LEAR N I NG OBJ ECTIVE S 1. Discuss why the classical economists believed that a market economy would automatically tend toward full employment. 2. Explain why Keynes rejected the views of the classical economists. 3. Compare the views of Keynes and the classical economists with regard to the proper role of government.
s you discovered in Chapter 10, unemployment and inflation impose costs on our society. Today, many Americans assume that it is the federal government’s responsibility to reduce those costs by combating unemployment and inflation when they occur. 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.
A
THE CLASSICAL MODEL: THE CASE FOR LAISSEZ-FAIRE
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.
Say’s Law
The classical economists based their predictions about full employment