eon & Defi fon of Piblic Finance: {The studs of the rote of the government in branch of economies which the authorities and the ad Undesirable ones, the economy is called the Public government revenue and government stment of one or the other to achieve desirable nance. Its the expenditure of the public effects and avoid The purview of public finance is considered t allocation of resource: (2) disteibution of me Government ean pay ir spendin; borrowing is a metho? of di taxes. A deficit is the uy o€ deficits over time burden: « ver time, ani harrow the options of (© be threefold: governmental effects on (1) efficient ‘ome, and (3) macroeconomic stabilization i by borrowing (for example, wi istributing tax burdens through time rath erence between government spending and the total public debt. Deficit finance allows gives governments an important fiscal poli ‘Necessor governments Public finance is clos..y connected to issues of income distribution and social equity. Goverments ean reai«veate income through transfer payments or by designing tax systems that reat Iugh income ane ow-ineome households differ nly The pu'vse choice apy . ns, and bure government bonds), although jet thant a replacement for revenues, The accumulation governments to smooth tax icy tool, Deficits can also ‘ach to public finance sceks to explain how sel(-interested voters, W rats actually operate, rather than how they should operate. Publics uinee has ber defined and described by different schools of economic thought differents. There are twee important theories of public Finance, which are as follows: 1) Classical Theory 2) Kest-s Theory 3)M ve's They+ Classical theory of Public Finance: 1 Introduction: Classical theory was the first modern school of economie thought. It began in 1776 and ended round 1870 with the beginning of neoclassical economics. Clussical theory asserts that markets funetion best with minimal government interference . Ie was developed in the late 18th and early 19th century by Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Robert Malthus, and Jobin Stuart Mill, Many writers found Adam Smith's idea of free markets more convincing than the idea, widely accepted at the Lime, of protectionism. Classical eeonamists observe that markets generally regulate themselves, when free of coercion. Adam Smith was one oft dividuals who helped establish classical economic theory. Adam Smith referred to this as 2 metaphorieal “invisible hand," which refers to the notion that private incentives are aligned with society welfare maximization under certain competitive conditions. Smith warned repeatedly of the dangers of monopoly, and stressed the competition nportance of Adam Smith's “The Weatth of Nations”. classi 1776 is usually considered to mark the beginning theory. The fundamental message in Smith's influential book was tha: the wealth of nations was based not on gold but om trade: That when two parties freely agree to exchange things of value, because both see a profit in the exchange, total wealth increases. Classical ‘economists originally dilTered from madem libertarian economists in seeing a role for the state in providing for the common good, Smith acknowledged that there were areas where the market is not the best way to serve the eommon good, and he 1ook it as a en that the gs eater proportion of the costs supporting the common goad should be borne by those best able to afford them According to J. B. Say, ‘Supply ereates its own demand and thus overruled any possibility of unemployment or over production”. This is the view of whole classical schoo! of thought. iCond, 'ssion about the Classical Theory: 2A@DVIre, Classical thear theory is that the alw; GDP thay is the» econ. ‘pable OF achys is obtained Sconomy back to the situral le that the economy always at or near the tural level of real GDP—i theory. the first moder» saiy based on two Firmly lil heliefs. Classigal School oF economic thought, reoriented economics from individual intelests io national ir crests, When cisssical theary «1 AEStiOn mVOlved hoa soe sOUugTT TS own mone, cul. society was undergoing man: uss. The primary economic iely could he orp ed snound a system in which every indisidval + sain, Classical economies focuses of the growth in the wealth of fations “VW promotes ~olicies that c fate. Lalional economic expansion, Classic: theory NpHORS ine hide the beliefs that markets se Tegulale, prices are flexible for goods SRE NGUSS. Supply cre es ls owndemand, and th eis equalily heiween savings ——— and investments, ————— ~— limesiments, essay nt possible for « society to grow s ogether. During this tine period, elassie: lowers for further ana! amd services in addit Reve Cirle. TR maw Sveuses ce} Classical 2eovoniste egting te lfehas G iolie Frere, is # Unit unless its members were committed to wor ing al theotists devel oped the theory of value oF price w sis of markets and wealth. ILanalyzed and explained the rice of goods » to the exchange value.3) Phservations related to Classical Theory: Classical theory was developed according to specific ecanomic observations is lieve a kets regulate 4 Selftepulating market that means classical theorists believed that free atl regu themselves wlren they are fe of any intervention. Adam Smith veferetro he nelriets ability to sel regulate as the “invisible hand" because markets move towards rratural equilibrium without octside intervention, ; ans ¥ Flexible prices: classical economics assumes that priees are Mexible for goods and wanes. They also asstmed that money only affects price and wage levels. + Supply ereaes its own demand: based on Sas Lass, classical theorists helieved Tht supply ereates its own demand. Production will generate an income enovglt to purchase all of the output produced. Classical economies assumes that there will ne a net saving or spending of cash ar financial instruments. . ¥ Equality of savings and investment; classical theory assumes that flexible interest rates will ahvays maintain equilibrium. ¥ Calculating reul GDP: classical theorists determined that the real GDP «an be ealeulstes! Without knowing the money supply or inflation rate. Real and Nominal Variabl xil economists stated that real and weminal variahles eam be analyzed separately, ) P6ntribution of Classical Theory: Analyzing the growth in the wealth of nations and advocating policies to promote such growth was a niajor focus of classical economists. Jobin Hicks & Samuel Hollander, Nicholas Kaldor Luigi L, Pasinewt and Paul A. Samuelson have presented formal models as pati of their respective interpretations of classical political economy 3 Wale theory: Classical economists developed a theury of value, or price, to invest dynamics. William Petty introduced a fundamental dis Price to facilitate the portrayal of regulatities in Transient influences that are di ie ceonamic on between market price and natural y prices, Market prices are josticd by aniany that cult to thenrize about nt any abstract level. Nauta prices, according to Petty, Smith, and Ricarda, for example, capture systematic and rersistent fines Operating at a point in time. Market prices always tend toward natural prices in process that Smith described as somewhat similar to gravitational attractexcessive’ theory of endogenous money, the i Soe ee = Li at ‘banks can only control the terms ez.» the rate of interest) on which loans are made, etiam of Classical Theory: “According to the classical eeonomists the method of overcoming the problem of unemploy ent 4s the cutting down of competitive wage rate as explained in the Marginal Productivity then However, such a solution is not applicable in practice particularly in the third world countries ‘where the supply of labor exceeds the demand for it but laborers are already living at low subsistence level. Thus as a result of cutting down the wage rate they would eventually be led 0 starvation. This would lead to the creation of a new problem instead of solving the problem of ‘unemployment moreover in this age of democracy laborers cannot really tolerate such # tow ‘wage rate and would express their grievance through trade unions, strikes, ete, | _ This theory represents the working of a laissez faire economy which fluctuates through changes in the forces of demand and supply. This means that it is rather impossible {0 achieve @ stable equilibrium at full employment level in such an economy. Therefore. the problem of unemployment will surely exist to a certain extent in a laissez faire economy. It appears that this theory is more applicable in a socialist economy where the government attains full control oF the whole economic system and can therefore cut the wage rate so as to maintain full employment. ‘The classical theory of full employment only takes into account the demand for lwhor as | indicated by the MRP curve and it totally ignores its supply whereas in reality wage rate is J determined through the interaction of forces of demand and supply | \ ‘Classical economists assume that there is perfect competition in the product.and factor markets. ‘This is not realistic because in the modern capitalist economies there is strong tendeney towards i i RO: Slate ine bredifr oortous, criticisms er, — ati iheThe theory oF what deters ined n levelop a por between land and j {for of valve. He extcized Smith for desttibing reat as price-determining, stead of price- ‘ftermined, end saw the Inbor theory of value asa good approximation. Some historians of economic thought, in particular, Sraffian economists, see the elassieal theory ‘of prices as determined from three givens: a) The level of outputs at the level of Smith's "effectual demand", b) technology, and 1) wages From these givens, one can rigorously derive a theory of value, But neither Ricardo nor Marx. the most rigorous investigators of the theory of value during the Classical period, developed this theory fully. Those who reconstruct the theory of value in this manner see the determinants of natural prices as being explained by the Classical economists from within the theory of “economics, a) cit at a lower level of abstraction, For example, the theory of wages was closely Sennected fo the theory of popuilation. The Classical economisis took the theory of the cterminants oF the level and growth of populstion as part of Political Economy. Since then, the theory of population has been seen as part of Demography. In contrast to the Classical theo the determinants of the neoclassical theory value: a) tastes b) technology, and ¢) endowments fe seen as exogenous to neoclassical economics, (lussical economics tended to stress the benefits of trade. Its theory of value was largely aisplaced by msiginalist schools of thought which sees "use value" as der ing from the marginal whlity that consumers finds in a good, and “exchange value” (i.e. natural price) as determined by she marginal opportunity- or disutility-cost of the inputs that make up the product. Ironically, Sonsideting the attachment of many classical economists to the fies market, the largest school of economic thoug)t that still adheres to classical form is the Marxian school.{he establishment of monopoties, ‘Thi snd aad sippy inthe product and nope. This hinders the working of ie forces of dems Evidently we gathor from the theory that elassieal economists were against labor laws, minimum wage legislation, (he concept of collective bargaining, unemployment allowances, etc. However nowadays the negation of such practices would be considered unjust and against morality Moreover cutting down the wage rate would retard growth rate of the economy because & reasonable wage rofe always act as an incentive to stimulate product Last out not the least practical experience shows that there has massive unemployment in the past in advanced countries. Following are the evidence which establish the existence of ‘unemployment in these countries. During the Second World War the Uni the rate of unemployment in the country at that time Kingdom had suffered greatly by unemployment as ied from 10% to 22%, During the year 1932-37 the level of unemployment in the United States of America was 15 million. In spite of the application of economies policies the level of unemployment could not be reduced to less thar 7.5 million in 1937. Thus this clearly point out that the theory of full employment was jus: imaginary, Finally during the period of the great depression, i. e in the early 1930's. There way massive unemployment throughout the world and the reality of this phenomenon establishes a notion against ihe concept of full employment 6) Conclusion with remarks: % Classical theory is he most early theory of Public Finance It believes that “supply creates its own demand’ * State should introdvce a small budget ” A balance budget isthe best budget © Deficit budgeting should be avoided if possible.