Classical Economic and Keynesian Economics
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Economics can be defined as been the qualitative as well as quantitative study of the distribution, allocation as well as the production of various economic resources. Economics is usually engaged with the study of government monetary polices and other forms of information by use of statistical or mathematical calculations. Qualitative study is usually concerned with making inferences as well as inferences from various forms of fiscal information. There are two economic schools of thoughts that have developed various economic models with an aim of explaining economic phenomenon. These two schools of thought in economics include the Keynesian and classical economics. The two schools take different approaches when it comes to economic study of consumer behavior, monetary policy as well as government spending. This essay is concerned with identifying the various differences that makes these two schools of thought distinct in the study of various economics situations.
Classical school of thought developed an economic theory known as the classical economic theory. This theory is usually based on the concept of free market economics or what is popularly known as the laissez-faire principle. This principle usually advocates for no or little government intervention in running of the economics. The principle advocate for an economy which free, whereby the forces of supply and demand are left alone to determine the equilibrium prices as well as quantity of goods in the economy. The principle of laissez faire usually allows various economic agents to acts according to what they believe are best for them when making economic decisions. This principle argues that the concept of free market economy allows allocation of economic resources according to the needs as well as desires of various businesses and individuals in the economy or marketplace. On one hand the classical theorists’ uses what is known as value theory in determination of prices of goods in an economic market. For example, the value of an item is usually determined by basing it technology, production output as well as the wages that is paid in order to produce the product/ item in question.
On the other hand, Keynesian economic theory usually relies on aggregate demand as well as spending to define an economic market place. The advocate of this economic theory argues that the government needs to come up with various intervention measures in order to ensure that economy is at equilibrium. They usually advocates for usage of both fiscal and monetary interventions to bring sanity in the economy for instance increasing lending interest rate by central bank to deal with problem of inflation in an economy. Keynesian theorists’ usually believe that aggregate demand is usually influenced by both private and public decisions. On one part, public decisions are representations of decisions made by government agencies as well as municipalities while on the other hand, the private decisions involves decisions made by businesses and individuals taking part in an economic marketplace. The Keynesian school of thought usually relies mainly on the argument that a country’s monetary policy will usually affect an economic standing of a given company operating in that country.
Government spending when it comes to the classical economics is not of great influence in the economy. The classical usually believe that business investment as well as consumer spending represents the most crucial part of a country’s economic growth. They argue that increased government spending in the economy usually results to alienation of the most important economic resources that are much needed by businesses and individuals in an economy. The classical do argues that government spending as well as involvement in running of the economic marketplace retards a country’s economic growth this results into an increment of public sector while at the same time decreasing the private sector. On the other hand, the Keynesians largely depend on government spending to enhance economic growth of a country during a period of sluggish economic growth. The Keynesians also argue that a country’s output consists of business investment, consumer spending and government spending. The Keynesians are of the view that government spending in an economy can result into economic growth in absence of business investment as well as consumer spending.
On the other hand, the Keynesian theorist’s are mainly concerned with immediate results of their economic theories. Their policies are more concerned with short run needs as well as how various economic policies can be useful in making instant corrections to a country’s output as well as economic growth. That why government intervention through usage of both fiscal and monetary policies is of very important to the Keynesian economists. For instance, during economic depression as well as recession, businesses and individuals do not have the needed resources to create the much needed immediate results by means of business investment or consumer spending. In this hard economic times government is the only force according to the Keynesians that can help get immediate results by using fiscal or monetary policies to reverse the down fall of national out put and economic growth.
The classical economics is the best method to bring economic growth and increase national out put in a modern economy. The usage of classical economic point of view in running of an economy allows free flow of goods and services in the economy. Therefore it provides an environment whereby forces of demand and supply can interact freely to ensure that there is equilibrium in the market. The classical economists are more concerned with long term economic solutions and this is what is much needed to ensure that there is sustainable economic growth in a country in the long run. Therefore, the principle of free market should be allowed to freely operate in any given economy as it has more benefits in comparison with usage of government interventions. The Keynesians advocacy of usage of government interventions in order to influence economic growth and increase national output is not effective in bringing sustainable economic growth in the long run. Government interventions through fiscal as well as monetary policies tend to be a short term solution and these measures in the long run do not bring about sustainable economic growth. As an economist one should be more concerned with providing an economy with sustainable solutions such as stability in the currency market in the long run rather than in the short run.
In conclusion classical economics is more attractive in running of an economy in comparison with the Keynesian economic as it tends to come up with solutions to economic problems that are sustainable in the long run.
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