Classical vs Keynesian
Classical economics and Keynesian economics are both schools of thought that are different in approaches to defining economics. Classical economics was founded by famous economist Adam Smith, and Keynesian economics was founded by economist John Maynard Keynes. The two schools of economic thought are related to each other in that they both respect the need for a free market place to allocate scare resources efficiently. However, the two are quite different to each other, and the following article provides a clear outline of what each school of thought is, and how they differ to each other.
What is Classical Economics?
Classical economic theory is the belief that a self regulating economy is the most efficient and effective because as needs arise people will adjust to serving each other’s requirements. According to classical economic theory there is no government intervention and the people of the economy will allocate scare resources in the most efficient manner to meet the needs of individuals and businesses.
Prices in a classical economy are decided based on the raw materials used to produce, wages, electricity, and other expenses that have gone in to deriving an output finished product. In classical economics, government spending is minimum, whereas spending on goods and services by the general public and business investments is considered as the most important to stimulate economic activity.
What is Keynesian Economics?
Keynesian economics harbors the thought that government intervention is essential for an economy to succeed. Keynesian economics believes that economic activity is influenced heavily by decisions made by both the private and the public sector. Keynesian economics places government spending to be the most important in stimulating economic activity, so much so that even if there is no public spending on goods and services or business investments, the theory states that government spending should be able to spur economic growth.
What is the difference between Classical Economics and Keynesian Economics?
In classical economic theory, a long term perspective is taken where inflation, unemployment, regulation, tax and other possible effects are considered when creating economic policies. Keynesian economics, on the other hand, takes a short term perspective in bringing instant results during times of economic hardship. One of the reasons as to why government spending is so important in Keynesian economics is that, it is treated as a quick fix to a situation that cannot be immediately corrected by consumer spending or investment by businesses.
Classical economics and Keynesian economics take very different approaches to varying economic scenarios. Taking an example, if a country is going through an economic recession, classical economics states that wages would fall, consumer spending would decrease, and business investment would reduce. However, in Keynesian economics, government intervention should kick in and stimulate the economy by increasing purchases, creating demand for goods and improving prices.
Summary:
Classical vs Keynesian Economics
• Classical economics and Keynesian economics are both schools of thought that are different in approaches to defining economics. Classical economics was founded by famous economist Adam Smith, and Keynesian economics was founded by economist John Maynard Keynes.
• Classical economic theory is the belief that a self regulating economy is the most efficient and effective because as needs arise people will adjust to serving each other’s requirements.
• Keynesian economics harbors the thought that government intervention is essential for an economy to succeed.