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Keynesian vs Neoclassical approach on the Economic crises

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One of the greatest debates in economics is between Keynesian Economists who believe that government intervention is necessary to restore the economy to its potential GDP while Classical Economists believe the market will correct itself. There are many resources on this topic from the internet including:

Federal Reserve Bank of San Francisco. Major Schools of Economic Theory: Keynesian School. Retreived November 15, 2010 from: www.frbsf.org/publications/education/greateconomists/grtschls.html#A8

Yergin, Daniel and J. Stanislaw. (1998) "The Chicago School" Excerpt from Commanding Heights pp. 145-149. Retreived November 14, 2010 from: www.pbs.org/wgbh/commandingheights/shared/pdf/ess_chicagoschool.pdf

Do you think there are certain economic crises that require government intervention (i.e Great Depression, Auto Industry failure, etc.)? Why or why not?

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Solution Summary

This solutions answers the issue of Keynesian economics of government intervention in the economy against Classical Economics of non-intervention. A sensitive issue is that whether government intervention is required in certain economic crises like the Great Depression and Auto Industry failure.

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A typical case of an economic crisis was the 2009 Global Economic Meltdown affecting the Auto Industry.

The year 2009 was one the lowest in the motor industry. This was the start of the world financial crisis in the world - the global economic meltdown. Economists and policy makers call this as "the most tumultuous year in the history of the U.S. auto industry-a period marked by recession and a crisis in global credit markets; the bankruptcy of General Motors Corporation and Chrysler" (Canis and Yacobucci: 2010) .

This is a challenging period who saw a rapid decline the in auto production.

More than half of Chrysler's production went down, followed by General Motors at 48% less production. Ford followed suit. There was a 34% reduction in production for the entire U.S. auto industry.
With the downward spiraling auto production sales suffered.

Government Intervention

To avert a further economic deterioration of the auto industry in the entire country, the U.S. made a swift but calculated decision. It granted GM and Chrysler received over ...

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