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.