keynes theory and classical economy
This essay will compare the relationship between saving and investment of two schoolers view, which is Keynes and Classical economist view. In great depression Keynes argued with classical economist view of relationship between saving and investment. The key theory of Keynes is that the real consumption depends on disposable income. This theory can explain as C = C(Y) In that case consumption (C) and disposable income (Y) are measured in units. The background of this theory is in 1920’s classical economist who follows Adam Smith, David Ricardo and Say dominated capitalism state economy. According to classical economist, in economic system, recession is impossible or it will be sort it out by invisible hand. (Kates, 2009) However 1920’s great depression cannot be explain and solve with their theory. According to Say’s law a product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value, in other words supply creates their own demand. (Kates, 2009) To make any goods, firms need money for materials, labor source and transport, which is income for work force. The income for workforce lead to consumption of goods therefore there is no excess demand and full employment will occur. But why there is unemployed exist in real world? In classical economist view is that who are an unemployed is because of they works demand for high wages which is they are not deserved. If work force accepts low wages then there will be full employment. (O 'Brien and O 'Brien, 2004) It calls temporary unemployment. However Keynes totally disagree with classical economist view. He argues that full employment could not occur in modern economic system because of saving from households. When households saves from their wages, the households can not afford all goods from manufactures then it lead to firms will decrease their expenses for survival doing layoff workforces or reduced any expenses.( Sheehan, 2009) In the other side
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