The fundamental points at issue between the Keynesian and classical Essay

The fundamental points at issue between the Keynesian and classical traditions in UK - Essay Example It is known as Keynesian school of economic principle. It challenged classical economic thought that government has no role to play in correcting any economic disequilibrium. The great Depression helped in shaping many economic institutions including the Fed. Modern macroeconomics was also formed by the Great Depression. (Dornbusch and Fischer, 1994) This major economic recession originated in the U.S., but it spread to the rest of the world including the UK very soon. The Great Depression did last approximately for a decade. It was the period between early 1931 and March 1933 when the depression became great and spread to other nations. The period of Great Depression is mainly recalled for significant unemployment, massive poverty and political turbulence that it caused. For the period of 1931-1940, the rate of unemployment was hovering around 18 percent. During the period of Great Depression net investment was negative and there was a massive fall in consumer price index as well. B etween 1929 and 1933, the consumer price index dropped by 25 percent approximately. (Dornbusch and Fischer, 1994) Classical economists did not provide any elaborate explanations for such a huge economic downturn in developed nations like UK, USA and others. However, Keynes has recognized unchecked market movement as the prime reason behind such a great economic downfall. Classical economists mainly focused on the supply side of the economy to search for reason for this depression. However, Keynes held the aggregate demand side of the economy with great importance and recommended counter cyclical fiscal measures to improve aggregate demand. During 1933-1937, some recovery took place in the economy. Real GNP experienced a rapid growth at a rate of almost 9 percent annually. This rapid growth in GNP, however, fell to make a significant fall in the rate of unemployment. In 1938, another economic recession struck the economy and pushed unemployment rate up to 20 percent once again. The G reat Depression caused a number of nations to change their political structure as many economists including Keynes considered this severe recession a result of unchecked capitalism. (Dornbusch and Fischer, 1994) This paper will focus on the major points of differences between Keynesians and Classical school of thoughts placing focus on UK economy. 2. Keynesian versus Classical There are two major schools of thought in the field of macroeconomics- Keynesian and Classical. Like other developed nations, UK used to follow Classical policy tools to deal with its economic situation. However, all the Classical measures that used to place major focus on supply side with no government interventions failed drastically at the time of Great Depression of 1930s. This failure of Classical policy tools had persuaded UK economic policy makers to take into account suggestions by Keynes. The UK economy had once again set itself on the path of economic growth by moving from the way of unchecked market capitalism towards government regulated market economy. This section will focus on three core areas of differences between Keynesian and Classical- the area of aggregate demand, the role of investment and government intervention.. 2.1 Role of Aggregate Demand Keynesian Economics contradict Classical Say’s Law which stresses supply side of the economy. Keynesian Economics has emphasized on demand side and considered effective demand to be the most