Comparison Of Classical And Keynesian Schools Of Economic Thought In The Irish Housing Sector

Theoretical and conceptual framework of economics

1.Please compare and contrast two of the different schools of economics that we have discussed in class. In your view, which of these schools is the more compelling?

2.Which would you describe the Irish economy as: A) a command economy, B) a free market economy or C) a mixed economy?

3.How would you define ‘economic justice’ and what criteria would you apply?

The theoretical and conceptual framework of economics, as a subject itself, has developed considerably over the decades and it is currently a cumulative outcome of different concepts brought forward by different schools of thoughts at different periods. Each of these schools of thought have evolved under different circumstances and have different outlooks regarding economic activities (Stanford 2018). Their views contrast with each other, and depending upon the situations, the viability and applicability of the theories proposed by these economic schools of thoughts vary. The most discussed economic schools of thought are the Classical School and the Keynesian Economic School of Thought (Brue and Grant 2012). The concerned assignment will compare and contrast these two schools in various theoretical and conceptual aspects, resulting in determining the more compelling school of thought in the real economic scenario, especially focusing on the housing sector of Ireland. The assignment also tries to reflect on the different types of economies present and in the context of that tries to find the nature of the economy of Ireland. It also tries to discuss about the notion of economic justice.

The Classical School of Thought is the oldest economic school of thought, primarily proposed by eighteenth century economist, Adam Smith and followed by economists like Robert Malthus, David Ricardo and others (Sockwell 2016). On the other hand, the Keynesian School of Thought, is comparatively newer economic conceptual framework, which originated in the twentieth century from the macroeconomic ideas brought forward primarily by John Maynard Keynes and then developed and modified by the economists of this school (Tily 2016). The primary conceptual root on which the Classical economists have developed their theories and assertions over the years is the concept of the presence of a “Laissez-Faire” system in the economy, which means that the economy should operate in a free market situation with no or very little government intervention. The main working notion behind this concept of the Classical School of thought was that the businesses and productive activities function most optimally when there is no intervention from any third party, which primarily include governing authorities of a country (Burda and Wyplosz 2013). However, in the Keynesian school of thought, the government or the public sector plays a more crucial role than that in the Classical school of thought. Keynesian economists believe that leaving the economy in the hands of the market forces alone can lead to situations which can be hurting for one sector of the economy, while benefiting another sector (Keynes 2016). Thus, intervention of government is required to mitigate the negative effects of economic discrepancies. The Classical economists take markets to be perfectly functioning whereas the flaws of markets, including those of monopolistic tendencies, unequal distribution of market powers and others are incorporated in the Keynesian views.

Comparison of Classical and Keynesian Schools of Thought

In the Classical school of economic thought there exists the concept of full employment or at least no involuntary unemployment of resources in the economy, which again arises from the assumption of free market. However, Keynesian economists do not agree the same. Keeping the assumption of full employment in consideration, the Classical economists remain bothered about the allocation of resources for production purposes in the economy and are thus a supply-sided economic school of thought (Cate 2013). The Keynesian school of economic thought takes into account the demand side dynamics also. In classical purview, there is no role of government spending activities in the dynamics of any economy, while the Keynesian school of thought imposes considerable importance on the policies and expenditures of government as way-outs at times of economic hardships. The classical school of thought is mostly a long run economic theory, in which there exists a stable long run trend of economic growth and the theory tends to overlook the short run fluctuations in the economy (Brue and Grant 2012). On the other hand, the Keynesian view is mostly a short run overview of any economy, in which the short run and temporary fluctuations are taken into consideration. Thus the significance of government is more in the Keynesian school of thought than that in the Classical school of thought.

The Keynesian school of thought appears to be more compelling than that of the classical school of thought, especially in the real economic scenario (Burda and Wyplosz 2013). This can be explained with the help of the Housing Crisis which occurred in Ireland in 2007-2008. The property bubble started in the country in 2000s owing to the prosperity of the economy, which increased the investment and demand in the residential sector. The bubble burst specifically affected the housing sector of Ireland as can be seen from the following figure:

As is evident from the above figure, the consistent increase in demand for housing investment, which was even more facilitated by the banking sectors which lowered the interest rates thereby increasing borrowing in Ireland. The bubble which was created in this way in the residential sector of Ireland, burst in 2008, thereby bringing a huge recessionary situation in the country. The main reason behind the crisis can be attributed to the lack of proper government regulations in spending and investment habits. Leaving the growth dynamics of the economy in the hands of free forces brought about enormous market distortions which was eventually solved only by the intervention of the government of the country, thereby indicating towards the greater viability of the Keynesian theory over the Classical school of thought (Heijdra 2017).

Types of economic system

The economic systems existing in the different countries, in real global scenario, can be divided into three broad types depending on the nature, the characteristic traits and the level of control of the economy in the hands of the governing authorities of the country. The essay tries to discuss these types of economies and keeping their differences into consideration the essay tries to analyse the nature of the economy of Ireland.

Types of economic system  

The command economy or planned economic system is an economic framework where the government of the country plays greater roles than the free market system. The government of such countries determines the types as well as the quantities of goods and services to be produced in the economy as well as the price levels and the incomes of the residents of the country (Marglin 2014). Free Market economies, the production, pricing and demand supply decisions as well as the working of the different economic indicators are left in the hands of the free market forces and the government of the country does not have the power to intervene in the economic activities (Lewis 2013). Mixed economies are an amalgamation of both the free market economy as well as the planned economy and they have traits of both of these types. While there remains the presence of free market mechanisms in these economies, the economies are not devoid of government interventions totally and the government plays significant roles of regulating and intervening in the economic activities as and when required.

The Irish Economy

Taking the three types of economic systems and their differences into consideration the contemporary economy of Ireland can be termed as a mixed economy, as it has both the elements of a free market economic system as well as the elements of considerable government planning and intervention system (Irishtimes.com 2018). On one hand, the free market system in the economy facilitates the production and economic activities including income and profit generation in the private sector, thereby giving the economy somewhat Capitalistic structure, which benefits the growth of the industrial and commercial sector of the country considerably, in terms of profit maximization, higher revenue generation as well as in terms of efficiency (Whelan 2014). The concept of a free market comes from the theory of “Invisible Hand” proposed by Adam Smith (Oslington 2012). According to this theory, under a no-restriction situation, the market is forced to interact with each other and stabilizes in an equilibrium situation by mutual interaction, from where none of the economic forces have any tendency to deviate. On the other hand, the freedom of the private sector of the country is coupled with the presence of a centralized system of economic planning and regulations imposed by the governing authorities of the country. In addition, Ireland is also a member of the European Union, which implies that the country needs to abide by the rules and regulations of the Union as well.

Nature of the Irish Economy

Despite the presence of a free market mechanism in the country, government intervention is required for several reasons. Firstly, the essential merit goods like education and primary health care are provided by the government of the country. There also remain several socially desirable commodities or services which being non-profitable and non-excludable are not provided by the private sector. These services (like parks, libraries and transport infrastructures) are provided by the government of the country (Meade 2012). Secondly, to ensure the greater welfare of the residents of the country, the government of Ireland imposes several regulations like that of the minimum wage regulations as well as regulations in health and safety of the residents. Thirdly, there remains many under-privileged citizens in the country who are not absorbed in the private sector employment and income generation process. These groups include the jobseekers as well as the poor population who are incapable to find any employment or income source. The government of Ireland arranges for different social welfare benefits for these people by collecting taxes from the higher privileged individuals (Barr 2012).

The term “Economic Justice” is an abstract and wide-spread concept which have defined in different perspectives by different economists over the years. Broadly economic justice can be viewed as a significant component of social justice (Hahnel 2013). The same is defined as a framework of moral principles which are used in constructing economic institutions in a country, with the objective of providing equal opportunities to all the residents of the concerned economy, such that each of them can create enough material base for themselves, thereby enabling them to live a productive and dignified life as a whole, enriched with enough freedom and decision making ability infused in each of the residents of the economy (Unrisd.org 2018).

Criteria of Economic Justice

There are various principles and criteria of economic justice, which are defined by different scholars at different periods of time. As per the Kelso-Adler Theory there remains three primary criteria for implementation of economic justice in a society. According to the participative justice proposition, each of the individuals should get equal opportunities to participate in the productive works in an economy and should have equal access to the acquisition of private properties in the economy (Darity and Hamilton 2012).  This criterion of economic justice does not guarantee that all the individuals would yield same level of economic productivity and enjoy same economic welfare but ensures that every individual gets equal rights to participate and earn economic advantages according to their own capabilities and not discriminated in other perspective (Hayek 2013). According to the idea of distributive justice the output produced in an economy should be distributed among the participants in the concerned economy according to the amount of labour or inputs put by the individuals in the production process (Darity and Hamilton 2012). The term “Distributive Justice” may often be confused with charity in an economy.

However, these two concepts are not similar. While charity means provision of facilities or economic welfare to an individual according to his or her need, the concept of distributive justice refers to the allocation of economic facilities and outputs to an individual according to his or her contribution in the productive process of the economy. This criterion follows from the existence of participative justice in an economy. The social justice criterion of justice as a whole indicates towards the absence of any kind of market distortions in the economy, which by default benefits one class of the participants and affects another class of participants negatively in the same economy. Presence of distortions like monopoly, monopsonies (one buyer and many sellers), inequality in information distribution as well as distorted market powers among buyers and sellers often lead to benefits of one class at the cost of the welfare of the others, which automatically hampers the growth of equal opportunities of the latter (Possumah, Ismail and bin Mohd Shafiai 2014). The principle of social justice tries to detect such distortions and rule out the same.

Conclusion

As is evident from the above thee-part discussion, there exists two primary school of thoughts in economics , the Classical and the Keynesian school of thought, of which the latter seems more relevant and appropriate in the contemporary period. There also remain different types of economies in the global framework, of which the economy of Ireland is of the nature of a mixed economy. From the above discussion it can be concluded that the economy of Ireland shows traits of a mixed economy, where the substantial presence of market freedom does not lead to reduction in the role of government in the economy and the same also plays considerable roles in determining the dynamics of the economic indicators of the economy and in the growth of the economy itself. There are also other criteria for ensuring economic justice in any region and there exist various policies and strategies which are taken by the government of the countries to ensure the existence of the same in the economies. One such policy is the progressive tax policy under which the individuals are taxed according to their income, that is, an individual earning more is taxed more than an individual earning comparatively less.

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