An opinion about Keynesian and Classical view

Trần Thiên Phước

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Extreme different situation applies different principles, therefore one cannot blindly and solely agree one the classical view because of the extreme differences between the 18th century world and the present world. However, it doesn’t entirely invalidate the classical principle.

Classical perspective was built in a “small world”, an almost isolated nation with limited economic interactions among nations (Imperialistic nation and its colonies counted as one nation) and most of them promote self-sufficient policies; also the technologies back then were quite primitive and unadvanced and they didn’t affect society as much as they would today. Therefore one nation’s economy was dependent one a small numbers of factors, in a small scale, and classical principles may hold true.

However, if we compare the classical world (18th, 19th century) to our world today, they are entirely different. We live in a globalized and interdependent world where interactions among many nations are a norm; cultural interactions happened frequently due to internet access, long distance telephone, easy, fast and cheap transportation of the Airlines; nations’ economy is interdependent to each other; for example Japan needs natural resources such as oil from Middle East, iron and tin from China, Southeast Asia, food from America, or Middle East nations need manufactured goods from Europe and America. Also technologies have developed to a point where it greatly influence society and the question and fear of dependence on machines have aroused for years. With those extreme differences, no nation can safely promote its economy healthily solely based on the classical principles.

To illustrate it more clearly were the evidences of failures and consequences caused by the sole dependence on classical theory. Most notable was the Great Depression occurred during the 30’s in America and in Europe. It evidently proved that lasses-faire didn’t work, the economy didn’t automatically heal itself after a prolonged period of time, supply was abundant but demand kept decreasing, the saving failed to transform it into investment due to banking system failure (one factor that classical world didn’t fully develop and the majority of people didn’t save money in the banks), which was one of many internal factor despite classical statement of only external factors affect the economy.

There came the Keynesian theory, with the step-in of government to solve the problem. It was paradoxical to believe that the government intervention help to solve the problem because despite the active government intervention through the New Deal, the humane problems were relieved but the economy did not improve, evidence of that was the high unemployment rate during the New Deal’s years, low production and consumption rate. Keynesian theory failed to solve the same problem classical theory failed. It would be easy to understand if it stops there, however things complicated when World War II broke out and more intensive government intervention were put into place, the economy began to recover, for the most important reason, a sudden rise in demand for military supplies. Production kept rising without any changes in prices, interest rates; demand rose with no relation to supply. It proved that there was no relation to both theories.

Nevertheless, Keynesian theory helped to boom the economy of many nations after the war. Demonstration of that was the continuing high growth of America’s economy due to high military expenditure, miraculous recovery and growth of Japan after World War II due to government’s regulation in favor of domestic firms, and its subsidy for main and important industry. Same thing happened in the development of many Asian nations where government maintained a policy of high demand for export.

Nonetheless one cannot disregard the fact that Keynesian theory created large deficits that imposes burden on taxpayers that resulted in high taxes (what Americans are experiencing now, and will be if the large deficits kept growing) and threaten to bankrupt the nation in future. It had happened in Argentina. It also created inefficiency due to low competitive rate because of subsidy and protective policies; it happened in Japan that caused a long recession the entire 90’s, and Japan had a hard time recovering due to low consumption r despite high income because most Japanese decided to save rather than consume, resulting considerable unemployment rate – this contradicts Keynesian principles. In this case lasses-faire demonstrate its validity, because when the government deregulating and de-intervening in the economy, the economy automatically adjust itself because it create a more competitive atmosphere that force firms to modernize and constantly change their products, adjusting to consumers’ tastes and lowering the costs, which stimulate consumption.

In brief, classical principles are not entirely applicable to our modern world, however it doesn’t mean that Keynesian theory is the better choice for a healthy economy in the long run; both of them prove ineffectively in dealing with certain situations, and only a delicate and brilliant combination of the two prove efficiency. Nevertheless it didn’t create a good-enough solution that satisfies many people’s expectation; with that being said, a new theory is needed for a future healthy global economy.

author: Phuoc Tran
date of submitting: oct, 19 2005
Comments from the Writing Contest Board of Examiners

“Wrong hypothesis, "Keynesian theory helped to boom the economy of many nations after the war": How can a theory help boom an economy, or here what he means is the Keynesian government, or that the theory evolved in the post-war period??? Also, "classical perspective was built in a small world", yeah? Nowadays there are still people that choose to believe in the core classical view, only developed into a different name, so-called the Neoclassical. The essay discusses the difference between Classical and Keynesian, but fails to do the job to the most basic level. And what's new in mentioning these 2 "obviously clashing" views whereas anybody can pick up an introductory macroeconomics book to read? Grammar mistakes, not at all proofread”

“Phuoc's two essays stand out because they talk about rather complex and controversial issues, and he knows how to lay out his arguments. However, his sentences are sometimes cluttered and expressions not very clear. Without fact-checking all the details he mentions, I think he makes pretty persuasive cases in both essays.”
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