Keynesian Economics Vs. Classical Economics

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The Classical and Keynesian schools of economics represent two differing approaches to economic thought. The Classical approach, with its view of self-regulating markets that require little government involvement, dominated the 18th and 19th centuries. The Keynesian viewpoint, which saw inefficiency in an economy left to its own devices, became dominant in the era of the Great Depression.

Identification

Leading Classical economic thinkers of the 18th and 19th centuries include Adam Smith, author of “The Wealth of Nations,” David Ricardo and philosopher John Stuart Mill. Keynesian economics is named for English economist John Maynard Keynes.

Features

Classical economic thought views a self-regulating market as the ideal economic system for meeting society’s needs. By pursuing their own interests, people end up serving the interests and needs of others. Adam Smith called this “an invisible hand” that leads people to promote others’ well-being by serving their own. The Keynesian perspective argues that an economy left to its own devices will not use its full capacity. Because of this, Keynes argued that government intervention is necessary to ensure an economy operates at its fullest.

Effects

During an economic recession or depression, Classical economic thought argued that wages and prices would decline, reducing unemployment, according to the Federal Reserve Bank of San Francisco. Keynes contended that falling wages and prices would slow consumer spending by reducing people’s incomes. In such times, Keynes argued that governments should step up their purchases to stimulate the economy. Keynesian economics provided the theoretical argument for government fiscal policy as a tool for stabilizing the economy, according to the Federal Reserve bank.