The Debate Between Keynesian And Classical Economists On Efficiency Of The Market Mechanism

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Critically examine the debate between Keynesian and classical economists on the efficiency of the market mechanism and the efficiency of government policy intervention. What lessons can be drawn from the 2007-2009 global financial and economic crisis The classical school is one of the economic thoughts; the key assumption of this school is that the market system is the most efficient system in the sense that the unencumbered market mechanism ensures the optimal allocation and utilisation of scarce resources. They also believed that “Supply creates its own demand.” (Taylor, 1984)In other words, in the process of producing output, businesses would also create enough income to ensure that all of the output will be sold. Another assumption is that the market system automatically restores economic equilibrium from any temporary shock, meaning government intervention is unnecessary. The second school of thought is the Keynesian school; the key assumptions of this school are that the market system is instinctively unstable in the sense that it falls to maintain economic equilibrium from time to time. Once disequilibrium occurs the market mechanism may not be able to restore equilibrium automatically, which could progressively lead to market failure or economic paralysis. Therefore the market mechanism may not be efficient and government intervention is most likely to occur in situations of market failure, for example the great depression or the 2007 and 2009 global crisis. (yin

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