THE EVOLUTION OF MACROECONOMICS IN THE UK Essay

THE EVOLUTION OF MACROECONOMICS IN THE UK - Essay Example In this sense, it can be implied that only in times of market failures are governments are justified to intervene. This paper will explore the different viewpoints of classical and Keynesian economic principles and concludes how prevailing economic policies are only transient and evolutionary. II. Fundamental Policy Issues A. Classical Economics The classical economic thought resides on the simple concept that the market can work effectively even without any form of human intervention. The market, as Adam Smith puts it, possesses an invisible hand that automatically puts the economy back into plump shape when otherwise with the guiding advocacy to let the government leave market activity into the interests of individuals (2009z: 400). Smith states that the â€Å"governments that intervene in the market activity only represent the wealthy and the powerful† rather than a mass (as cited in Sowell 1994: 23). Even to classical liberals such as Frederic Bastiat, state interference o n any activity which goes beyond its functions (i.e. maintaining order and justice) is a â€Å"usurpation upon conscience, upon intelligence, upon industry; in a word upon human liberty† (as cited in Haney 1911: 257). ... From this standpoint stemmed the principle of laissez-faire which would eventually resolve deficiencies in employment and output levels. B. Keynesian Economics According to the brainchild of Keynesian economics, John Maynard Keynes, the government is the only fundamental societal structure that can manage the aggregate demand from households, businesses, and the government itself to ensure price stability (Korten 2010). Keynesian economics assume the opposite of what classical economists theorise -- that a free market is not self-correcting so that it would result in unemployment in the process (the Great Depression, being the proof). Furthermore, market forces will consume a long period to bring back full employment because in the real -time market, demand is not sufficient to maintain full employment (Cowling & Sugden 1990: 108). Keynesian economists say that in order to efficiently sustain employment at full level, the government must push through monetary and fiscal policies (i.e . increase government spending and decrease taxation) in order to stimulate the aggregate demand for commodities, hence creating additional employment opportunities (Cowling & Sugden 1990: 108). When there is a right level of demand, the supply-side would look after itself (Cowling & Sugden 1990: 108). This would result in an increase of budget deficit (Cowling & Sugden 1990). However, Keynesian economists sustain that this is only justifiable. III. Theory A. Market Equilibrium: On Fluctuating Prices a.1. Classical Perspective Market clearing in both the labor and commodities markets is entirely possible because of equilibrium forces (Free 2010: 73). For instance, when the supply exceeds demand, the market reaches equilibrium if prices decrease which is only an inevitable