Economics studies the monetary policy of a government and other information using mathematical or statistical calculations (Differences). Classical and Keynesian are two completely different economic theories. Each theory takes its own approach on monetary policy, consumer behavior, and government spending. There are a few distinctions that separate these two theories. To begin, the Classical Economic Theory was made in the 1700's, which was during and after industrialization. Say's Law, which is the law of the market, is a principle of classical economics that says "supply makes its own demand" (Classical vs. Keynesian). It is supply driven and is also based off of a Laissez-Faire economic market. As we learned in our previous studies, Laissez-Faire means free market, which does not depend on the government. Having little to no government allows individuals to act according to their own self interest in regards to economic decisions. Government spending is not a major part in the Classical Theory. It is more focused on consumer spending and business investment because they are the most important parts of economic growth. Classical economists believe that too much government spending will increase the public sector and decrease the private sector where wealth is created. This theory is mainly focused on making long term solutions to economic problems. Classical economists also take into consideration how new theories and current policies will effect, negatively or positively, the free market environment (Differences). In contrast, the Keynesian Economic Theory was presented in the 1930's, during the Great Depression, by a man named John Maynard Keynes (Classical vs. Keynesian). It relies on spending and aggregate demand which makes this theory demand driven. These economists believe that aggregate demand is influenced by public and private decisions. The public means the government, and the private means individuals and businesses. Aggregate demand sometimes affects production, employment, and inflation. When the economy starts to slack, they rely on the government to build it back up. Keynesian economists, similar to Classical economists, also believe that the economy is made up of consumer spending, government spending, and business investments. However, the Keynesian Theory says government spending can improve economic growth in the absence of consumer spending and business investment (Differences). According to the Keynesian theory, wages and prices are not flexible. A static price will give a horizontal aggregate supply curve in the short run (Classical and Keynesian Economics). The main goal of the government stimulus was to save and create jobs almost immediately.
Keynesianism and monetarism are both ways to stabilize the economy and promote growth when need. In keynesianism, government uses fiscal policy which is a list of policies that government spending and taxing can be used to improve the performance of an economy. The government produces stabilization by taxing and spending yearly plans. Taxing can occur when inflation is high and lowering taxes tends to occur during a high percentage of unemployment. By lowering taxes, it increases disposable income or the party of income that goes to financial responsibilities. When people have more money, they are able to spend more which in return goes into jump starting the economy. Monetary Policy is another policy used in Keynesianism which is a list of protocol designed to regulate the economy by setting the amount of money that is in circulation and controlled interest levels. The Federal Reserve system also known as the central banking system in the U.S. which holds control of this policy. Monetary policy has three tools used my the Federal Reserve to enforce this policy. Reserve Requirement is the first tool that determines the lowest amount of money a bank must possess and is not able to lend out. The second way to enforce monetary policy is by using the discount rate or the interest rank a bank will charge. The f...
Comparing Keynesian Economics and Supply Side Economic Theories Two controversial economic policies are Keynesian economics and Supply Side economics. They represent opposite sides of the economic policy spectrum and were introduced at opposite ends of the 20th century, yet still are the most famous for their effects on the economy of the United States when they were used. The founder of Keynesian economic theory was John Maynard Keynes.
Classical economics as postulated by the 19th century British economist David Ricardo states – in modern economic terms – that an economy will achieve its natural levels of employment (full employment) and reach its potential output on its own without any government intervention. While the economy may undergo periods of less than natural levels of employment or not yet reach its potential output, it will, in the long run, do so. If Mr. Ricardo was still alive, his favorite album would be The Long Run by The Eagles (1979). Using modern economic terms to further describe classical economics, an economy will tend to operate at a level given by the long-run aggregate supply curve. While many believe that the concepts of classical economics are for a by-gone era, that is not always the case.
Before the introduction of Keynesian economics and Milton Friedman’s Monetarism theory, there was classical economics. These economists believed in self-adjusting market mechanisms, however with that the market needs perfect competition. Wages and prices in the market must be flexible. These economists believe that supply and demand pulls would always help the economy reach full employment.
Just as classical liberalists did not want government intervention in the market, they do not want it affecting their life in other major ways. As defi...
Keynes and Hayek each approach the economy from a different perspective. In Keynes’ estimation, it is all about the flow of money. The economy is improving when money is moving, and thus, stability is achieved as much as is possible. Consequently, spending, and more specifically government spending, is the key to unlock the door blocking economic growth. By contrast, Hayek contends that money is not everything. What the money is used for, whether it be saved, invested, loaned, or spent, also plays an important role in the progression of the economy. Growth comes from saving and investing not consumption and spending. The stability of the economy, according to Hayek, is brought about by the forces of supply and demand.
Very few people truly believe in every aspect of Neoclassicalism. This is due to its belief on the assumption that supply and demand are equal and that the markets are always clear. Neoclassicalism is heavily devoted to mathematical models to describe the economy and the interaction between individuals within. These models tend to stray away from reality; in a way they show that neoclassical theories aren’t necessarily realistic, but they still help find the answers economists need. George E. P. Box said “Essentially, all models are wrong, but some are useful.” This is proven by Neoclassical
...more of a Keynesian thinker more than a new classical thinker. Although it might be true that having free market is the right way of having a stabled economy, but unemployment will still be high and might be increasing which is still till now one of the troublesome that governments face today. Plus, what happens if recession hits or even worse we go back to 1930’s where there was the great depression, it was proved then and will be proved again if happened that the only way to solve a sort of crises is by government intervention (basically spending). Yes it will increase inflation but creates more job opportunities and unemployment will decrease if government intervention occurs. Yes in the long run this might be bad but people care about tomorrow more than they care about 3 or 4 years from now or even more. As Lord Keynes once said “in the long run we are all dead”
John Maynard Keynes classical approach to economics and the business cycle has dominated society, especially the United States. His idea was that government intervention was necessary in a properly functioning economy. One economic author, John Edward King, claimed of the theory that:
The clash between Hayek and Keynes has defined modern economics. On one hand we have Keynes standpoint, which was if investment exceeded savings, there would be inflation, but if savings exceeded inflation, a recession would be present. On the other hand Hayek presented ideas of less government initiative and to have people make their choices on economic decisions more freely. Hayek argument on Keynes government spending was that if the economy should be more concerned with consuming or investing.
The disparities between the two views of the economy lead to very different policies that have produced contradictory results. The Keynesian theory presents the rational of structuralism as the basis of economic decisions and provides support for government involvement to maintain high levels of employment. The argument runs that people make decisions based on their environments and when investment falls due to structural change, the economy suffers from a recession. The government must act against this movement and increase the level of employment by fiscal injections and training of the labour force. In fact, the government should itself increase hiring in crown corporations. In contrast the Neoliberal theory attributes the self-interest of individuals as the determinant of the level of employment.
My research in Classical Economics and Keynesian Economics has given me the opportunity to form an opinion on this greatly debated topic in economics. After researching this topic to great lengths, I have determined the Keynesian Economics far exceeds greatness for America compared to that of Classical Economics. I will begin my paper by first addressing my understanding of both economic theories, I will then compare and contrast both theories, and end my paper with my opinions on why I believe Keynesian Economics is what is best for America. Classical Economics is a theory that suggests that by leaving the free market alone without human intervention equilibrium will be obtained. This theory was the first school of thought for economists, and one of the major theorists and founders of Classical Economics was Adam Smith.
The two most influential economists that helped to shape our economy with their thoughts and theories that are still used in modern economy are Adam Smith a classical economist and John Maynard Keynes a neoclassical economist. These two economists are the most famous economists of all times. Even though that its known that their thoughts are opposites to one and other they also share some similarities for example as suggested by (Stephen Yearwood. (2013)) “Both understood that the key to economic prosperity is to keep the money circulating.” They both According to (Greydark (2009)) Demonstrated “that the field of economics is vast, flexible, and able to be interpreted in many ways.” Each influenced the growth of economic thought and birth of modern market based societies. According to (best brielle. (2010)) “Each economist has similar ideas yet different opinions that distinguish them as economic leaders”.
Keynesian method and world-systems theory deserve special attention. It is Keynesianism that makes possible for the radical political economists to apply the bipolar model, centered on
To begin we must first understand what Neoclassical Economics actually covers and is all about. Thorstein Veblen first brought up the term neoclassical economics in the early 1900’s. What many economics believe that follow neoclassical economist believe is that everyone wants to maximize there own personal utility and will make all of there decisions based on this concept. It is thought that everyone essentially thinks like this to maximize his or her personal satisfaction. Also, that everyone makes this decision when they have fully