Definition of Classical and Keynesian Economists:

The economists who generally oppose government intervention in the functioning of aggregate economy are named as classical economists. The main classical economists are Adam Smith, J. B, Say, David Ricardo, J. S. Mill. Thomas. The economists who are in favor of general intervention y the state in the aggregate economy are named asKeynesian economists !Alvin "ansen, #aual Samuelson, Tin urgen, R. $risch etc.,%.

&ontrast Between &lassical and 'eynesian (conomics)

The main points of contrast between the classical and Keynesian theories of income and employment are discussed in rief as under)

(1) Unemployment:
The classical economists e*plained unemployment using traditional partial e+uili rium supply and demand analysis. According to them) ,-nemployment results when there is an e*cess supply of la or at a particular higher wage level. By accepting lower wages, the unemployed wor.ers will go ac. to their /o s and the e+uili rium etween demand for la or and supply of la or will e esta lished in the la or mar.et in the long period. This e+uili rium in the economy is always associated with full employment level. According to the classical economists, unemployment results when the wage level of the wor.ers is a ove the e+uili rium wage level and as a result, thereof, the +uantity of la or supplied is higher than +uantity of la or demanded. The difference etween the two !supply and demand% is unemployment. J. M. 'eynes and his followers, however, re/ect the fundamental classical theory of full employment e+uili rium in the economy. They consider it as unrealistic. According them) ,$ull employment is a rare phenomenon in the capitalistic economy. The unemployment occurs, they say, when the aggregate demand function intersects the aggregate supply function at a point of less than full employment level. 'eynes suggested that in the short period, the government can raise aggregate demand in the economy through pu lic investment programs to reduce unemployment,.

!0% Says 1aw of Mar.et)

According to Say2s 1aw 2Supply creates its own demand2, is central to the classic vision of the economy. According to $rench classical economist, J. B. Say, the production of goods and services generates e*penditure sufficient to ensure that they are sold in the mar.et. There is no deficiency of demand for goods and hence no need to unemployed wor.ers. According to him, full employment is a normal condition of mar.et economy. J. M. 'eynes has strongly refuted Say2s 1aw of Mar.et with the help of effective demand. (ffective demand is the level of aggregate demand which is e+ual to aggregate supply. 3henever there is deficiency in aggregate demand !& 4 5%, a part of the goods produced remain unsold in the mar.et which lead to general over production of goods and services in the mar.et. 3hen all the goods produced in the mar.et are not sold, the firms lay off wor.ers. The deficiency in demand for goods create unemployment in the economy.

!6% (+uality Between Saving and 5nvestment)

The classical economists are of the view that saving and investment are e+ual at the full employment level. 5f at any time, the flow of savings is greater than the flow of investment, then the rate of interest declines in the money mar.et. This leads to an increase in investment. The process continues till the flow of investment e+uals the flow of saving. Thus, according to the classical economists, the e+uality etween saving and investment is rought a out through the mechanism of rate of interest.

J. M. 'eynes is, however, of the view that e+uality etween saving and investment is rought a out 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 +uantity of money. The +uantity theory of money see.s to e*plain the value of money in terms of changes in its +uantity. J. M. 'eynes has re/ected the simple +uantity theory of money. According to him, if there is recession in the economy, and the resources are lying idle and unutili7ed, an increased spending of money may lead to su stantial increase in real output and employment without affecting the price level.

(5) Demand For Money:

According to classical economists, money is only demanded to ma.e regular e*penditure under the need transactions demand. The 'eynesian economists are of the view that people hold money for transaction as well as speculative purposes. So far 2transaction demand2 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 alances which the nation holds for speculative purposes and vice versa.

(6) !ort and "on# $%n &nalysis:

The classicists elieved that a mar.et economy, through fle*i le interest rates, wages, and prices, return to a state of full employment in the long run. J. M. 'eynes played a ma/or role in suggesting as to how the government can reduce cyclical fluctuations through sta ili7ation policies. 'eynes analysis of economic pro lems is confined to short run. 'eynes says, 21et us forget the long run and focus on the short run. 5n the long run, we are all dead2.

(') $ole of tate in &c!ie(in# )i#! "e(el of *ncome and Employment:

The classical economists are of the view that in commodity and la or mar.et, the price mechanism wor.s with reasona le promptness. The supply ad/usts to demand through the fle*i le interest rates, wages and prices and the economic system returns to a state of full employment in the long run without government intervention. J. M. 'eynes puts less faith in mar.et forces. 8e stressed and argued for more direct intervention y the state to increase9decrease aggregate demand to achieve certain national economic goals. J. M. 'eynes considered fiscal policy as a steering wheel for moving the economy to a state of higher level of employment and price sta ility more +uic.ly. 5f aggregate income is low and elow the target national income, then appropriate e*pansionary fiscal policy should e adopted. (*pansionary fiscal policy involves decreasing ta*es and increasing government spending. 5n case the aggregate income is higher or a ove the potential level, then contractionary fiscal policy i.e. increasing ta*es and decreasing government spending should y ta.en up y the state.

(+) ,eneral -ers%s pecial .!eory:

The classical theory is ased on four unrealistic assumptions !i% role of the government in the economy should e minimum !ii% all prices and wages and mar.ets are fle*i le !iii% any pro lem in the macro economic is temporary !v% the mar.et force come to the rescue and correct itself. The mar.et mechanism eliminates over production and unemployment and esta lishes full employment in the long run. The classical theory relates only to the special case of full employment. J. M. 'eynesian theory is a general theory. 5t has a wider application on all such situations of unemployment, partial employment and near full employment.