WHAT, ACCORDING TO CLASSICAL THEORY, CAN CAUSE RECESSIONS?I MEAN ACCORDING TO CLASSICAL ECONOMISTS THERE IS NO SUCH THING AS A RECESSION BECAUSE PRICES ARE FLEXIBLE.SO WHAT CAUSED THE RECESSION IN...
WHAT, ACCORDING TO CLASSICAL THEORY, CAN CAUSE RECESSIONS?
I MEAN ACCORDING TO CLASSICAL ECONOMISTS THERE IS NO SUCH THING AS A RECESSION BECAUSE PRICES ARE FLEXIBLE.SO WHAT CAUSED THE RECESSION IN THE FIRST PLACE?
To be more precise, classical economists say that there is no such thing as a recession that lasts a long time. They do not deny that recessions can happen, but they argue that, left to itself, the economy will get back to equilibrium before long (there is not a specified time).
There are a number of things that could cause recessions. There could be a drop in consumer confidence. There could be a "supply shock" like an increase in the price of oil. There could be a sharp drop in government spending or an increase in interest rates.
In economics recession is defined as a period of significant decline in total output, income, and employment in an economy. Such a decline takes place in many different sectors of economy. When a recession last for a very long period, say extending beyond a year, and is severe, it is classified as a depression.
You are right in saying that in classical economics there is no concept like rescission or depression. Thus classical economics offers no explanations on causes of recession. Modern economics have advanced many different theories on causes of recession and ways of avoiding them. But reality is that we still do not understand this completely and are not in a position to eliminate cycles of recessions and booms that occur in every economy. I personally believe that swings in collective sentiments of the people in an economy play a very important part in these recurring economic upswings and downturns.