Revised Topic Paper

Topic outline

Inflation and unemployment have a high-cost implication to society. Inflation is the general increase of services and goods in the economy. During inflation, the purchasing power of the currency, for instance, dollar weakens significantly meaning that the citizens must spend more money to acquire similar quantity and quality of services acquired before inflation. The debate to determine universally agreed causes of inflation persists on with various scholars fronting different theories since the early days of research into the topic (Sowell, 2015) (Kates, 2009).

Currently, most people believe that the responsibility of controlling inflation is a sole responsibility of the government. However, the issue of government intervention has raised sharp disagreement among various scholars in the field of economics. A group of economists commonly referred to as activists argue that the government must play a critical role in regulating the level of inflation. On the other hand, non-activists believe that the government has no role in controlling the level of inflation. This controversy started more than fifty years ago with debates between dominant classical economists and John Keynes. This discussion persists on even in a current field of research, and hence, the study of the two new perspectives of inflation and unemployment provide a critical backdrop for a deep understanding of the debate on policy activism (Rohlf, 2011).

The first part of the paper will focus on critical discussions to analyze the main reason as to why classical economists argued that the economy will be inclined towards full employment. The second part of the argument will be dominated by the Keynes views concerning classical economist’s arguments and why he was opposed to them. Finally, the Paper will compare the classical economist vies represented by Jean Batiste and the Keynes views in regard the proper government role.

Overview of the debate

The paper starts with exploring the debate between two schools of thought namely activist and non-activist economists by close analysis of classical economist arguments. The term classical economists for this research refer to economists writers between 1776 and1930. The most critical evidence that the research focuses is the view that market economy will always be inclined towards full employment. This was the main argument fronted by classical economists until their arguments were challenged by more modern theories after the period of severe economic depression. Virtually every classical economist believed strongly in the above assertion until their cases were brought under sharp criticism after the economic depression (Sowell, 2015) (Kates, 2009).

Jean Batiste and Say’s law

The main arguments of most classical economists were founded on a principle fronted by French economist known as J.B. Say. In his theory, Say formulated his economic principle that supply creates its demand. In summary, Say argued that, through the process of establishing supply, enterprises also create adequate demand to sell all of its products and services produced in the economy. Since this theory is central to the classical economist arguments, this research will critically examine it starting with the circular flow diagram. For instance, let’s assume that business wants to produce goods worth two hundred dollars to sell to the households. To produce such goods, the enterprise must acquire resources both material and human to produce the goods and services. The economic resources must be sourced from the household, and they must be compensated in the form of wages, salaries profits or interests. Consequently, the two hundred dollars will go back to the household sector. Assuming that the household sector utilizes all the money in the acquisition of goods and services, and then every production made will be entirely purchased by the household sector. The supply side will be deemed to have created its demand for the products and services. Based on Say’s theory most classical economists believed that nothing could prevent expansion of economy to provide full employment as well as create demand for its goods and services in the market. Many economists will immediately think of the place of savings in the Say theory and how it can affect the demand, but the theory suggests that savings by the household will be borrowed by enterprises to acquire capital for production purposes such as machinery and building among others. The classical theory of supply being able to create own demand through internal mechanisms led them to believe in the policy of laissez-faire (non- government intervention) (Kates, 2009).

Keynesian revolution

The doctrine of Laissez- Faire was predominantly held by classical economists until the time of high economic depression in 1929. Depression became a connotation for severe economic hardship where prolonged and massive unemployment hit the industrialized world. At the same time, production of goods and services fell significantly by approximately twenty-five percent. The economic depression lasted for almost a decade long and thus criticisms were fronted by new scholars such as John Maynard Keynes about the authenticity of classical arguments. Keynes formulated his theory of employment money and interest which was first published in 1936. In his theory, Keynes turned the classical arguments to directly the opposite by arguing that it’s the level of demand that influenced supply rather than supply creating its demand. In Keynes view, businesses produced as much as the perceived level of demand (Sowell, 2015) (Kates, 2009).

References

Hollander, S. (2007). Classical economics. Toronto: University of Toronto Press.

Kates, S. (2009). Say's Law and the Keynesian revolution: How macroeconomic theory lost its way. Cheltenham: Edward Elgar.

Rohlf, W. D. (2011). Introduction to economic reasoning. Boston: Addison Wesley.

Sowell, T. (2015). Say's law: An historical analysis. Princeton, New Jersey : Princeton University Press