20 April 2012
Classical vs. Keynesian Economics
There are several significant factors that differentiate Classical from Keynesian economics. Classical economics stays true to the laissez-faire concept of no government mediation in businesses with the assumption that the economy will work itself out. Keynesian economics, on the other hand, revolves around deficit spending and the belief that essentially “in the long run, we’re all going to die”. Both schools of economics take a different stance on the behavior of consumers, fiscal policy, and government spending. Classical economists, in essence, monitor what is currently transpiring in the economy. They believe that the economy is stable and self-sustaining because in the long run, the market supposedly automatically adjusts to “booms” and “busts”. This principle is heavily influenced by the epoch of industrialization – during and after. In a Classical economic model, economists consent individuals’ actions and desires, thus allowing prices to fluctuate based on that individuals’ needs. Say’s Law explicates this phenomenon by saying that supply creates its own demand and in result, the economy is stimulated when more goods are produced. Furthermore, Classicalists do not act with fiscal policies and strongly believe the notion that government spending impedes a nation’s economic growth Keynesian economists believe that the government is imperfect and is not able to sustain itself so government intervention is not only beneficial, but also crucial to mediate the economy. Their stance on fiscal policy is to either contract or expand the economy with specific tools depending on the gap in the economy. In a Keynesian economic model, economists rely on government spending to jumpstart an economy if it was dragged down into a depression. When there is a lack of growth, the government should stimulate demand. Personally, I would agree with Classical economics, but...