Classical economists claimed that free markets regulate themselves, when free of any intervention. Adam Smith referred to a metaphorical invisible hand, which will move markets towards their natural equilibrium, without requiring any outside intervention. As opposed to Keynesian economics, classical economics assumes flexible prices both in the case of goods and wages. Another main assumption is based on Says Law: supply creates its own demand – that is, aggregate production will generate an income enough to purchase all the output produced; this implicitly assumes, in contrast to Keynes, that there will be net saving or spending of cash or financial instruments. Another postulate of classical economics is the equality of savings and investment, assuming that flexible interest rates will always maintain equilibrium.
Posted on: Fri, 14 Nov 2014 02:31:12 +0000
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