Keynesian Economics vs. Classical Economics

Objective—to present the differing theories of Keynesian economics and classical economics.

Support—

Keynesian economics is based on the theories of the British economist John Maynard Keynes. He theorized that private sector decisions often result in inefficient outcomes and that the central bank’s active monetary policy and the government’s active fiscal policy should be used to stabilize the outcome of the business cycle. Keynes theory was first presented in 1936 and was utilized during the end portion of the Great Depression, during World War II, and during post-WWII expansion. Keynes preferred the idea of a mixed economy, in which the private sector was dominant, but the government and public sector playing a major role as well. A resurgence in the utilization of Keynesian economics occurred as a result of the global financial crisis in 2007.

Classical economics was principally developed by David Ricardo and his followers. It is primarily based on Say’s Law which states that “supply creates its own demand”. It also contends that the total value of output equals the sum of the income earned. It also stated that “costs of output are always covered in the aggregate by the sale-proceeds resulting from demand.” The first statement is unquestionable because it is based on a national income accounting identity. The second statement depends on how consumption and savings are associated with the production and investment.

The classical economics theory concerning wages is that economic collapse occurs as a result of a loss of motivation to produce and that mass unemployment is a result of rigid, high real wages. Keynes believed that it was not real wages that were negotiated between employers and employees, but nominal wages. He also felt that nominal wages would be hard to cut due to laws and wages contracts. On this point, Keynesian and classical economists agreed. Classical economists felt that in order to cut the nominal wages, minimum...