Preview

The Difference Between Classical and Keynesian Economics

Good Essays
Open Document
Open Document
2274 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
The Difference Between Classical and Keynesian Economics
Macroeconomics considers the performance of the economy as a whole, which involves two major approaches to study the pattern and influence on the economy. Economists who believe in either of the types of thoughts are at loggerheads about various aspects about the way the economy influences people and vice-versa. Here, I have tried to draw a brief comparison that highlights the major differences, which brought into the new agenda;-

Difference between Classical and Keynesian Economics

Keynes refuted Classical economics' claim that the Say's law holds. The strong form of the Say's law stated that the "costs of output are always covered in the aggregate by the sale-proceeds resulting from demand". Keynes argues that this can only hold true if the individual savings exactly equal the aggregate investment.

While Classical economics believes in the theory of the invisible hand, where any imperfections in the economy get corrected automatically, Keynesian economics rubbishes the idea. Keynesian economics does not believe that price adjustments are possible easily and so the self-correcting market mechanism based on flexible prices also obviously doesn't. The Keynesian economists actually explain the determinants of saving, consumption, investment and production differently than the classical economists.

Classical economists believe that the best monetary policy during a crisis is no monetary policy. The Keynesian theorists on the other hand, believe that Government intervention in the form of monetary and fiscal policies is an absolute must to keep the economy running smoothly.

Classical economists believed in the long run and aimed to provide long run solutions at short run losses. Keynes was completely opposed to this, and believed that it is the short run that should be targeted first.

Keynes thought of savings beyond planned investments as a problem, but Classicists didn't think so because they believed that interest rate changes would sort this
Continue Reading
View Writing Issues

You May Also Find These Documents Helpful

  • Good Essays

    ECO372 Aggregate Demand And Supply Mode
    • 1227 Words
    • 4 Pages

    ECO372 Aggregate Demand And Supply Mode

    When viewed through the perspective of the Keynesian model (which focuses entirely on the short-run) these policies currently in use are having the desired effect on the economy. Lower interest rates and creating more money are encouraging spending which, in turn, are holding prices and employment within manageable levels. On the other hand, when viewed through the perspective of the Classical model there is a problem with this policy, interest rates cannot be lowered…

    • 1227 Words
    • 4 Pages
    Good Essays
    Read More
  • Good Essays

    Economics Outline Ch 17
    • 474 Words
    • 2 Pages

    Economics Outline Ch 17

    * The term fiscal policy refers to the federal government’s deliberate use of its taxation rates and expenditures to affect overall business activity. The Keynesian economists and the supply-side economists have two theories about how to obtain stabilization. Keynesian economists advocate the use of government spending to stimulate economic activity and reduce unemployment during recessions. A simple circular flow of income and output model is given. Supply-side economists advocate reductions in tax rates to stimulate private investment and employment.…

    • 474 Words
    • 2 Pages
    Good Essays
    Read More
  • Satisfactory Essays

    Ap Euro Chapter 24 Key Terms
    • 653 Words
    • 3 Pages

    Ap Euro Chapter 24 Key Terms

    10. Keynesian economics- Theory based on the principles of John Maynard Keynes, stating that government spending should increase during business slumps and be curbed during booms.…

    • 653 Words
    • 3 Pages
    Satisfactory Essays
    Read More
  • Good Essays

    Unit 2 Analysis Of A Political Cartoon
    • 826 Words
    • 4 Pages

    Unit 2 Analysis Of A Political Cartoon

    Keynes believed that classic liberalism itself was unstable. You need government intervention to straighten some issues out.…

    • 826 Words
    • 4 Pages
    Good Essays
    Read More
  • Good Essays

    Macro Assignment 2
    • 994 Words
    • 3 Pages

    Macro Assignment 2

    Keynesian economist believe that long periods of high unemployment are a result of inadequate overall demand and feel government intervention is a key component of a prosperous economy. The school of thought sees unemployment as an aggregated demand and company profitability. One factor affects another in a sense. If wages are low then consumers have less money to spend which then turns to less of demand for products to be created which then leads to a decrease in investments and staff by employers, ultimately resulting in high unemployment. This supports the idea of cyclical unemployment. Unlike the classical economy, Keynesian focuses on the short run instead of the long run. Therefore to avoid this Keynesian economists support monetary and fiscal policy to stabilize the business cycle.…

    • 994 Words
    • 3 Pages
    Good Essays
    Read More
  • Good Essays

    Steer Market Vs Hayek
    • 616 Words
    • 3 Pages

    Steer Market Vs Hayek

    The Hayek and Keynesian economic differences can be summed up as free market versus a steer market. “Hayek viewed the market as capable to correct itself, when facing shocks, by taking advantage of competitive forces, and regarded government and central bankers' policy efforts to restore growth as causes of more instability.” (Terzi) In a free market, savings are encouraged along with market investment. “Keynes viewed the economic (macro) system as vulnerable to periodic declines in demand, and regarded traditional (micro) adjustment mechanisms (such as wage and price declines) as ineffective to restore growth and prosperity.” (Terzi) Whereas the steer market relies on the “boom and bust” cycle. This includes: boost aggregate, stimulus packages, and bail outs to corporations and businesses. The United States has been favoring the Keynesian system in the most recent decades; however, it was founded on capitalism and Hayek's model of investing and production. In the most recent decade, we experienced the housing bubble of 2008. Interest rates rose after the boom and loans were being given out loosely causing inflation. This is typical of the “boom and bust” cycle. Where spending is encouraged, inflation then…

    • 616 Words
    • 3 Pages
    Good Essays
    Read More
  • Good Essays

    Fear of the Boom and Bust
    • 389 Words
    • 2 Pages

    Fear of the Boom and Bust

    The You tube video Fear the Boom and Bust is a very entertaining and interesting rap debate between the two economists, John Maynard Keynes and Freidrich Hayek, concerning the boom and bust cycle. In the video the economists come back to life and rap about their conflicting theories as they go out for a night on the town. This video is a fun and educational way to learn and discuss the two competing economic philosophies and how they relate to our current economic situation. The two economists go back and forth advancing their economic perspectives on economic issues as their approach to the market, government and consumer spending, the role of savings, human action and motivation and the power of investments. It is pretty amazing how the creators of this rap were able to take economic theories and turn them into catchy lyrics. The chorus of this rap sums up the basic conflict between the economists. Keynes and Hayek both rap that “We've been going back and forth for a century” and Keynes says he wants to “steer markets” and Hayek says he wants them “set free”. They both rap together “There's a boom and bust cycle and good reason to fear it” as Hayek blames “low interest rates” and Keynes disagrees and says “it's the animal spirits” implying the bulls and bears. Then each economists views are summarized in two verses. Keynes stresses that in order to get the economy out of the bust they need to utilize the stimulus of government spending so that if consumers have money and spend it then businesses will thrive and create jobs. However, Hayek says it is not the bust that is the main problem but the boom. He says that allowing low interest rates and extending credit encourage investments that cannot be maintained over time and raps that “The boom plants the seeds for its future destruction”. As we see from our current economic problems that the government turned more to Keynes approach to deal with the financial crisis by stimulating markets with…

    • 389 Words
    • 2 Pages
    Good Essays
    Read More
  • Good Essays

    econonmic forcasting
    • 524 Words
    • 3 Pages

    econonmic forcasting

    From 1776 until 1936 the Classical model was used in the United States. Classical economic theory believes in the concept that the free market requires no or little government intervention. Ensuring that resources are used according to the choices of the individuals and businesses in the market place; Classical economics uses value theory to determine the prices in the market. Classical economy has the ability to self-regulate without government intervention. This method was sufficient until 1936 during the Great Depression and the economy wasn’t repairing itself and regulating the market. To better understand the Great depression John Maynard Keynes, a British economist, published a new set of theories that formed a new type of economics now referred to Keynesian economics. The Keynesian Theory suggests that the economy relies on government spending to help jumpstart it during downturns like a recessions. From 1936 to 1973 Keynesian economics served as the chosen economic model in most…

    • 524 Words
    • 3 Pages
    Good Essays
    Read More
  • Satisfactory Essays

    Keynesian and Hayekian economics
    • 617 Words
    • 3 Pages

    Keynesian and Hayekian economics

    Hayek found a few faults with Keynesian Economics. First off he pointed out that Keynes’s argument about savings is actually an argument about the dangers of hoarding. “It’s agreed that hoarding money is deflationary in its effects. No one thinks that deflation is in itself desirable.” So…

    • 617 Words
    • 3 Pages
    Satisfactory Essays
    Read More
  • Good Essays

    Nether Keynes Or Hayek Battle-Who Is Right?
    • 458 Words
    • 2 Pages

    Nether Keynes Or Hayek Battle-Who Is Right?

    Nether Keynes or Hayek seems to be 100% on the mark with their theories. Keynes favored the heavy hand of government in economic policy and how it should be treated. This also led to a period of time of the greatest growth from the mid 70’s to the 90’s. This also lead to the crash of 86’ and the recessions in 83-85, 86-88, 90—92 and allowed for legislation to be passed (‘96 Dodd, Schumer and Frank housing bill) that created the housing bubble that burst in 2008. It could be also argued that this type of economics contributed to the tech bubble in the late 90’s. The fundamental ideal of forcing loans to be made and borrowing with no securing capitol in place and printing more money to cover what was being paid out is the folly of having a governmental controlled economy, bringing us closer to a what in turn will become a socialist society.…

    • 458 Words
    • 2 Pages
    Good Essays
    Read More
  • Satisfactory Essays

    Keynesian Theory
    • 393 Words
    • 2 Pages

    Keynesian Theory

    Keynesian economics gave a solution to this problem through aggregate demand management. Keynesian economists believe that to pull an economy out of a rut, the entire population must contribute. Under the aggregate demand management theory, governments take control of the aggregate level of spending by encouraging spending. To do this, the government must create incentives for the population to spend money, such as tax rebates, lower interest rates, and reward systems.…

    • 393 Words
    • 2 Pages
    Satisfactory Essays
    Read More
  • Powerful Essays

    Macro Economics
    • 3337 Words
    • 14 Pages

    Macro Economics

    If I were having a conversation about why the economy is experiencing high unemployment and what the government should do about it, with a Keynesian and a Classical economist I think that the economists would explain the situations in the following way and would support the following policies.…

    • 3337 Words
    • 14 Pages
    Powerful Essays
    Read More
  • Satisfactory Essays

    Expansionary or Contradictionary
    • 462 Words
    • 2 Pages

    Expansionary or Contradictionary

    The American government manages the overall pace of economic activity and looks to sustain high employment levels and stability in prices. In order to achieve these goals the government uses Fiscal and Monetary policy. Fiscal policy is used to determine the appropriate level of spending and taxes, whereas monetary policy manages the supply of money in the economy. When the economy enters a recession, governments stimulate it with deficit spending, whereas during an economic growth governments control it with higher taxes to achieve a surplus. These policies are based on the concepts of British economist John Maynard Keynes (1883-1946). Consumers mainly influence fiscal policy by their spending habits. For instance, if they become concerned about the economy they will save more and spend less, which will result in less production, increase in unemployment level and an overall lower spending rate. In general, the power is held by the consumer. If we become more reasonable with our spending, saving and investing for the better, this would positively impact our economy. (Brooks)…

    • 462 Words
    • 2 Pages
    Satisfactory Essays
    Read More
  • Powerful Essays

    John Maynard Keynes
    • 2191 Words
    • 9 Pages

    John Maynard Keynes

    Although much of his ideas were often misunderstood throughout his life, Keynes offered bright new insights into the nature and origin of financial theories. In his most well known writings, The General Theory of Employment, Interest, and Money, which was published in 1936, Keynes worked to break down the prior ideas of traditional economics and point out its inadequacies, which became obvious during the downturn of the economy. He felt a new approach was needed, and through his work in The General Theory, he sought to bring this transformed stance to light and make sense of the economic crisis that surrounded him. Keynes entire social theory is based upon the concept of human behavior in regards to their money and the expectations of which will always be brought into a future which is uncertain. It was a time of great economic hardship, jobs were scarce and the economy was in a downward spiral, it was then that Keynes took to his efforts in shifting the economic ideas from those of the classical model to one of a more hands on approach. In his book Keynes speaks to three main ideas, the propensity to consume, the state of ones liquidity preference as determing the rate of interest, and the marginal efficiency of capital or the anticipated return on their investment in capital assets.…

    • 2191 Words
    • 9 Pages
    Powerful Essays
    Read More
  • Good Essays

    Is the Dismal Science Really a Science?
    • 834 Words
    • 4 Pages

    Is the Dismal Science Really a Science?

    But in economics, theories that were once discredited surge back into favor. John Maynard Keynes and the view that government spending can create prosperity seem immortal. I thought stagflation had put a stake in the heart of this idea back in the 1970s. Suddenly, he's a genius once again. F.A. Hayek, Keynes's more laissez-faire sparring partner, is drawing interest. There are various monetarists to choose from, too. Which paradigm is the "right" way to think about the boom and the bust? Or are they all wrong?…

    • 834 Words
    • 4 Pages
    Good Essays
    Read More

Related Topics