Comparison between Classical and Keynesian Economics

Classical:
A School of economic thought exemplified by Adam Smith’s writings in the 18 th
century, that says that, Market works best when it is left alone. Any intervention
or too much regulation or influence or simply anything government does above
the scope of what is necessary to keep the market free, fair and lawfully just is
harmful since it disturbs natural flow of supply and demand, which are the best
real indicators of what people want.
Keynesian:
Keynes is widely thought of as the most influential economist of the 20th century
because of the application of his theories in response to the Great Depression. His
theories endorse government intervention in the free economy to stimulate
demand for goods and services. The purpose of government intervention, for
Keynes, was to stabilize prices and achieve full employment, where willing and
able citizens could find work.
SIMILARITIES:
1. “Government Spending” in Keynesian and Classical Economics
One of the similarities is that, despite the classical economics rejecting
government spending, they accept that, in the absence of personal spending and
business investment the government should spend so that it can help the public
sector, which will, in turn, create a conducive environment for private sector to
thrive. The argument is similar to the concepts of Keynesian economics, which
recommend excessive government spending as the only method of improving and
creating employment within the economy hence increasing output.

2. “State Intervention” in Keynesian and Classical Economics

Although the classical economics reject government intervention by proposing for

a long-term solution to the existing economic problems like inflation, they
recommend government intervention in situations where both consumers and
private business owners are unable to stabilize the economy for a long time. This
is similar to the Keynesian economic policies, which recommend government
intervention through fiscal and monetary policies to solve existing financial
challenges like recessions and depressions hence providing instant results

3. “Savings” in Keynesian and Classical Economics

Despite the classical theory, ignoring the fact that saving is a function of income
by regarding it as a function of interests rate, the approach acknowledges that
people do save for future consumption. This is similar to the Keynesian theory,
which has a perception that when interests’ rate goes up, the level of income will
be less hence making it difficult for people to save. Moreover, the two theories
conclude that people keep a certain proportion of disposable income for future
consumption without paying much attention to the decline in the value of money.

4. “Money Demand” in Keynesian and Classical Economics

Both theories pay significant attention to money supply and demand for money as
essential factors that influence the rate of interest within the economy. As
classical paid much attention to the borrowing motives like hoarding, the
Keynesian theory highlights the role of funds supply and bank credit which can
never be ignored as a determinant of the rate of interest. Keynes does pay
attention to money as a factor determining the rate of interest. This significant
relationship brings both theories together despite them having a different
perception of the management of the economy by the government .

DIFFERENCES:
1. The Keynesian View of Government Intervention
Keynesian theory says this is exactly when government intervention makes sense.
If people aren't spending, then the government has to step in and fill the void.
However, there's just one problem: The government doesn't have its own money.
It has to take money away from the people and companies to spend it. Higher
taxes for businesses take money away that could otherwise be spent on more
investments to grow the company.
2. Classical Economics and the Free Markets
The theory of classical economics is that free markets will regulate themselves if
they are left alone. Markets will find their own level of equilibrium without
interference by people or the government. In a classical economy, everyone is
free to pursue their own self-interests in a market that is free and open to all
competition. When people work at jobs making things, they get paid and use
these wages to buy other products. In essence, workers create their own demand
for goods and services.
3. Role of Government in the Economy
Classical economists do not like government spending, and they especially detest
more government debt. They would prefer a balanced budget because they do
not believe the economy benefits from higher government spending. Keynesians
are okay with government borrowing, because they are convinced that
government spending increases aggregate demand in the economy
4. Prices and Market Influences
Classical supporters want a market that is free to find its own levels of supply and
demand. They believe that prices should fluctuate based on the wants of
consumers. The market will adjust itself to any shortages and surpluses of
products. Keynesians believe prices should be more rigid and that government
should try to maintain price stability. They would like to see the government
influence people and corporations to keep prices within specified ranges.