Chapter 24: Problem 18

Do neoclassical economists believe in Keynes' law or Say's law?

Short Answer

Expert verified

Neoclassical economists believe more in Say's law, which emphasizes the role of supply-side factors and the self-regulating nature of markets, rather than Keynes' law, which focuses on demand-side economics. This aligns with the neoclassical emphasis on efficient allocation of resources through free-market capitalism and limited government intervention.

Step by step solution

Understand Keynes' Law

Keynes' law is based on the demand-side economics theory of John Maynard Keynes, stating that "demand creates its own supply." According to this law, economic output is determined by the level of aggregate demand, as businesses and consumers determine how much to invest based on their expectations for future demand. When demand is high, businesses will increase production, and when demand is low, production will decrease.

Understand Say's Law

Say's law, on the other hand, represents the supply-side economics theory of Jean-Baptiste Say, stating that "supply creates its own demand." According to Say, production is the source of demand, as goods and services are produced to generate income, which is then spent on other goods and services, leading to an equal amount of demand. Say's law argues that there can be no general overproduction or underproduction of goods and services because production and demand are always in balance.

Analyzing Neoclassical Economists' Beliefs

Neoclassical economists emphasize the importance of supply-side factors in determining long-term economic growth. They believe in the self-regulating nature of markets and stress the need for efficient allocation of resources through free-market capitalism. Neoclassical economists generally value free markets and private property rights, arguing that governmental intervention should be limited.

Determine the Applicable Law

Based on the neoclassical economists' principles, we can conclude that they believe more in Say's law rather than Keynes' law. Say's law emphasizes the role of supply-side factors and the self-regulating nature of markets which aligns with the neoclassical economic perspective.

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