(2) Say’s Law of Market

Classical approach

 “According to Say's Law 'Supply creates its own demand', is central to the classic
vision of the economy.

 “According to French classical economist, J. B. Say, the production of goods and

services generates expenditure sufficient to ensure that they are sold in the market. There
is no deficiency of demand for goods and hence no need to unemployed workers.”

 According to him, full employment is a normal condition of market economy.”

Keynes approach

 “J. M. Keynes has strongly refuted Say's Law of Market with the help of effective
demand. Effective demand is the level of aggregate demand which is equal to aggregate
supply. Whenever there is deficiency in aggregate demand (C + I), a part of the goods
produced remain unsold in the market which lead to general over production of goods and
services in the market. When all the goods produced in the market are not sold, the firms
lay off workers. The deficiency in demand for goods create unemployment in the
economy.”

(3) Equality between Saving and Investment

Classical approach

 “The classical economists are of the view that saving and investment are equal at
the full employment level. If at any time, the flow of savings is greater than the flow of
investment, then the rate of interest declines in the money market. This leads to an
increase in investment. The process continues till the flow of investment equals the flow of
saving.”

 Thus, according to the classical economists, the equality between saving and
investment is brought about through the mechanism of rate of interest.

Keynes approach

 J. M. Keynes is, however, of the view that equality between saving and investment is
brought about through changes in income rather than the changes in interest rate.

(4) Money and Prices

  The classical economists are of the opinion that price level varies in response to
changes in the quantity of money. The quantity theory of money seeks to explain the value
of money in terms of changes in its quantity.

 “J. M. Keynes has rejected the simple quantity theory of money. According to him, if
there is recession in the economy, and the resources are lying idle and unutilized, an
increased spending of money may lead to substantial increase in real output and
employment without affecting the price level.”

(5) Short and long Run Analysis

 According to classical economists, money is only demanded to make regular

expenditure under the need transactions demand.

 “The Keynesian economists are of the view that people hold money for transaction
as well as speculative purposes. So far 'transaction demand' for money is concerned, it is a
function of income. The higher the income, the higher is the transaction demand for
money and vice versa. The speculative demand for money is a function of rate of interest.
The higher the interest rate, the lower is the money balances which the nation holds for
speculative purposes and vice versa.”

(6) General Versus Special Theory

 The classical theory is based on four unrealistic assumptions

◦ (i) role of the government in the economy should be minimum.

◦ (ii) all prices and wages and markets are flexible.

◦ (iii) any problem in the macro economic is temporary.

◦ (v) the market force come to the rescue and correct itself.

Keynes theory

“The market mechanism eliminates over production and unemployment and establishes full
employment in the long run. The classical theory relates only to the special case of full employment.

 J. M. Keynesian theory is a general theory. It has a wider application on all such

situations of unemployment, partial employment and near full employment.”