Classical Economists' Position:

• 1. On Full Employment:

economy will perform near full employment most of the time;

supply and demand will be in equilibrium most of the time;

individual agents, and some parts of the economy may fail but the overall economy cannot fail because at anytime in a money economy the few industries or firms that may be failing are heavily outnumbered by the thousands and thousands of others that are doing well.

Why so?

Say's Law says supply generates income for the purchasing of what is produced

basis of supply-side economics;

for Say's law to be true, all income from production must be used on consumption

but income diverted to saving would wind up as savings and investment, and hence new production.

Why will all money saved be borrowed for reinvestment?

cost of borrowing money is directly tied to the amount available to be borrowed; low interest rates will discourage income earners from saving so immediate consumption will increase; high interest rates will encourage income earners to save (or postpone consumption for the future), and so immediate consumption will fall.

2. On the Flexibility of Prices and wages.

that all prices, and wages are flexible, that is, move upwards and downwards. In a money economy, the flexible cost of goods and services will always keep the economy stable or in a balance. Here is how and why.

(A) Scenario One: productivity is low (threat of recession): prices and wages will fall including the cost of borrowing money (or interest rate) investors will be encouraged to borrow, to invest in new business; new business means new hiring of workers; and the economy will grow itself out of recession.

(B) Scenario Two: full employment/high productivity (threat of inflation): high prices and still fast rising prices will discourage consumers and discourage further expansion of production; inflationary wages (money wages lose their value) will compel workers to ask for higher wages; higher wages increase the cost of production; higher production costs force producers to cut down on production slowing down the economy; and high interest rates will discourage investors.

3. On Business cycles

yes, the economy fluctuates but business cycles are not deep, nor do they involve all industries; because a pro-grow money economy will

the market itself will reverse inflationary and recessionary cycles-countercyclical forces.

4. On Government Spending as Stabilizer:

classical economists recognized only two components of the economy: C and I , and argued they the two are perfectly complementary, if C falls, it is because I is up; and if C is up, it is because I is down.

Keynes On:

1. Full Employment:

Yes supply and demand tend to equate at the point of equilibrium, but the resulting stability does not mean the economy is in full employment. In a hypothetical economy whose potential GDP is 100 units of production, equilibrium can occur at less than potential GDP levels of, say, 70 or 80 units when all that is produced is purchased by consumers.

Therefore there is the potential of unemployment equilibrium; equilibrium co-existing with lots of unemployment and underutilization of resources.

On Interest Rates:

Changes in interest rate is not the only nor most important factor when income earners make the decision to consume now or save for the future; the rate of profit (how much profit could be made) is a more important determinant of consumption now versus investment in the future.

2. On Wage and Price Flexibility:

prices may be flexible up and down, but wages and prices tend to be generally flexible only in one direction, upwards. How often do workers accept pay-cuts whenever company profits are down?. And while prices may fall to promote sales, often those lower sales' prices are phony.

3. On Business Cycles:

both C and I can go down severely and at the same time

Keynes recognized a third factor in the business cycle, G, the portion of the GDP spent on the orders of government.

4. On Government in the Economy

only G is easily flexible and responsive to government policy; in the US and other money economies, G can be quiet a substantial portion of GDP; the economy (money supply) can therefore respond to changes in G; the manipulation of G is necessary to avoid inflation and recession; to boost the economy out of a recession, increase G; and decrease G to reduce the money supply and fight inflation.