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Alfredo Gonzalez

Dennis Watson

ECON-2020

9:00am (M, W, F)

April 23, 2017

ePortfolio Assignment Reflective Essay on Classical and Keynesian

Economics

As the semester comes to a close and students prepare for finals, an opportunity

presents itself to sit back and reflect on all the things learned in class this spring.

Its an opportunity to reconcile the knowledge acquired in Macroeconomics with

the day-to-day events taking place at home and around the world. Having

learned about and studied different economic principles, theories, and models,

we as students are now equipped with a basic understanding of economics that

will allow us to form our own ideas and opinions about the matter. Two of the

more prevailing schools of thought in the field of economics that we talked about

in class, were the classical model and the Keynesian model. This reflection

aims to succinctly compare and contrast the two models based on what was

learned in class and provide a personal assessment of each.

Classical and Keynesian economics, although fundamentally different, coexist

and are implemented together as needed. The reason this is possible is because
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classical economic theory, for the most part, addresses the economy in the long

run, while Keynesian theory does so in the short run. Both models are proven to

work but are needed at different times depending on the economy. Classical

economic theory, states that the economy is always at full employment, that

wages and prices are flexible, advocates for free trade, minimal government

intervention in markets, and states that the economy is self correcting, self

regulating, and always operates efficiently. The classical model has been proven

to work and has been the preferred school of thought for the last two centuries or

so. The biggest drawback in classical theory is that it fails to address short-term

snags in the economy and, as Keynes discovered, could potentially lead to a

catastrophic income adjustment mechanism that would plunge a nation deeper

into a recession (when faced by one) by contributing to less production, less

spending, lower wages, and less investing and saving. To summarize, the

classical model is the preferred working model in the US but has certain

limitations when it comes to large abnormal recessionary or inflationary gaps.

To contrast, Keynesian economics has only been around since the great

depression and came about as a way to try and explain, understand, and

hopefully solve the global economic problems begot by the Great Depression.

Unlike the classical model Keynes believed that the economy does not always

operate at full employment, that prices and wages are sticky (meaning they take

time to adjust to changes in the economy), and that fiscal and monetary policy

are sometimes needed when times are difficult. Keynes also believed that

because of the negative self-fulfilling notions of firms and consumers during


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rough times, the government should step in and spend more to compensate for

the lack of spending by people. The problem with Keynesian theory is that

government intervention (just like prices and wages) is sticky and it is difficult

once the government has intervened through policy and regulation, to step back

and let markets run their course once the economy has stabilized; what this does

is it creates a budget deficit and a greater, incessant national debt. Another

potential problem with this model is that the government could accidently shift

aggregate demand too far right and cause inflation. It is unsustainable for a

government to keep borrowing and spending money indefinitely and the

Keynesian model provides little incentive for people to improve their own

economic situation because they have government spending as a safety net to

fall back on.

To touch on the behavioral aspects of both theories, its important to keep in mind

that many people regard economics as a social science, what this means is that

the way people think of money and the economy (both future and present) plays

a huge role in how they make decisions that have a real impact on said economy.

As stated above, one of the problems with Keynesian theory is that there is some

degree of self-fulfillment when a firm or group of individuals has a negative

perception about what the current situation of the economy is or will be, whether

that notion is correct or not. What happens is that their decision making is then

based on their notion and this creates a chain effect impacting other firms which

in turn act accordingly, ultimately creating a spending gap that requires

government intervention to be fixed. This is one way how the behavioral aspect
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of economics can have an effect on the national economy. As far as the classical

model goes, it acts in the same way when dealing with human behavior, if

enough individuals or firms believe something, they will act accordingly, thus

impacting the economy; this can be in regards to employment (finding work),

investment, saving, purchasing, or producing. As seen in the first few chapters of

the course, supply and quantity demanded are inversely related so if a large

number of individuals thinks a price will fall or rise, the demand will change,

which in turn will impact the supply and at a large enough scale the whole

economy according to the classical model.

Personally I believe that both theories have their strong points and their

weaknesses and I think the key to fixing the current economic situation, which

has been characterized by overall sluggish growth, low workforce participation,

and stagnate wages, lies in a combination of the two models. For instance,

Keynesian economic policies could increase spending but at the same time be

limited as to how long they may remain in effect, that same spending could also

be used to promote other industries that do not include public welfare systems

like social security, and unemployment, these institutions could have funds cut in

order to encourage individuals to innovate and find alternative means of

sustenance and contribution to the economy (all these measures should be

reasonably implemented, leaving room for the government to assist those most

in need obviously). On the classical side, I do agree that the economy is self-

regulating and most the time operates to full capacity, I think that just like in

nature, economies are cyclical and the classical model will prevail in the long run
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as the economy changes over time. Although the last decade has been

characterized by stagnation I do think that eventually the economy will return to

normal functions until the next large recession happens, which could occur in

several decades or in another hundred years. Ultimately I believe that whatever

happens in the future of the economy and the way we overcome the challenges

facing us today, will largely depend on how this generation decides to prepare

itself for future challenges, I think that if we have a generation of educated

workers, progressive leaders, and an overall sentiment of benevolence, the

economy will thrive regardless of the economic model is implemented.