Discuss the salient features of Classical theory. How is it different from Keynesian theory?

 5 important Features of Classical Theory

1. The principal aim of the organisation is productivity.

2. It can be realised only by a formal organisation structure.

3. The workers are like cogs in the machine; they have to be fitted to the structure.

4. The formal structure has to be based on:;

(a) Rules and regulations,

(b) Divisions of labour and specialisation,

(c) Standardization of roles,

(d) Assignment of tasks and responsibilities,

(e) Hierarchy of authority,

(f) Control through this hierarchy,

(g) Order and discipline and

(h) Observance of a few other principles.

5. The workers are to be encouraged through monetary incentives.

The Classical Model was popular before the Great Depression. It says that the economy is very free-flowing, and prices and wages freely adjust to the ups and downs of demand over time. In other words, when times are good, wages and prices quickly go up, and when times are bad, wages and prices freely adjust downward.

The major assumption of this model is that the economy is always at full employment, meaning that everyone who wants to work is working and all resources are being fully used to their capacity. The thinking goes something like this: if competition is allowed to work, the economy will automatically gravitate toward full employment, or what economists call potential output - just like the expressway at an average speed of 55 miles per hour.

Remember what happened when traffic slowed down because there were too many cars? After a few minutes, everything went back to normal. Classical economists believe that the economy is self-correcting, which means that when a recession occurs, it needs no help from anyone. So that's the Classical Model.

The Keynesian Model

A second model is called the Keynesian Model. As I said before, this model came about as a result of the Great Depression. Economist John Maynard Keynes observed that the economy is not always at full employment. In other words, the economy can be below or above its potential. During the Great Depression, unemployment was widespread, many businesses failed and the economy was operating at much less than its potential.

Think back to the expressway that Bob was driving on. Picture Bob behind the wheel, when the business truck fell on to its side and traffic came to a complete standstill for a long time. It was stuck until the police and the tow truck came. When economist John Maynard Keynes was observing the Great Depression, he realized that the economy could be well below its potential for a long time, and that something was causing it to get stuck. It may be self-correcting like the classical economists were saying, but it was taking way too long.

In the meantime, people were losing jobs and were suffering. Keynes believed that the government and monetary leaders should do something to help the economy along in the short run, or the long run may never come. In fact, he is quoted as saying 'In the long run, we are all dead.' 

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