Keynesian vs. Classical Economics: A Comprehensive Comparison

This essay provides a detailed comparison of Keynesian and Classical schools of economic thought. It begins by outlining the core assumptions and principles of each school, highlighting the Keynesian focus on short-term problems, government intervention, and demand-driven economics, contrasting it with the Classical emphasis on long-term growth, self-regulating markets, and monetary policy. The essay discusses the historical context of both theories, noting Keynes's response to the Great Depression and the Classical roots in Adam Smith's work. It further elaborates on the differing views on employment, fiscal policy, and the role of government in managing the economy. The assignment concludes that while both schools offer valuable perspectives, their approaches to economic management and policy prescriptions diverge significantly, reflecting different priorities and assumptions about how economies function.

Assignment A

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Comparison of the two different schools of economic thoughts-................................................3
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Assignment is something which acts as the task. These are the tasks given to the students by their
teachers as well as the tutors for completing in the particular time. The main purpose of the
assignment as it provides the opportunities to the students in learning, practising and
demonstrating as how they have achieved goals of learning. This assignment will discuss the two
different schools for the comparison of the theories such as the Keynesian as well as the classical
theories as how these theories work by the perspective of the two different schools of the
economics thought.
Comparison of the two different schools of economic thoughts-
The Keynesian economic theory has been developed by the British economists John
Maynard Keynes during the period 1930s. This theory was developed to understand the great
depression in the economy. The Keynesian school of economic thought has come up with the
two assumptions such as firstly, the people as well as the companies has the ability to behave
rationally and with the rational expectations (Skidelsky, 2018). Second assumptions is that, there
are wide range of the market inefficiencies such as the sticky wages and the imperfect
competition in the market. The Keynesian school of thought mainly focuses on the short term
problems as they consider the issues as the immediate problems which the government must
ensure to deal with these issues immediately for the assurance of the long term growth of the
economy. These schools argued that the economy can be under the full capacity as they are
considered for the specific time because of the imperfect markets.
The Keynesian school of thought, the business cycle occurs by the variations in rate of
investment which has been caused by the fluctuations in marginal efficiency of the capital.
Marginal efficiency of capital can be defined as the profits which are expected by the new
investments (Prates, 2020). This school of thought was much successful as this has lowered the
public debt, unemployment as well as the reduction of inequality. The great depression has
motivated the Keynes for thinking differently for the nature of the economy and from this theory
they were able to establish the real world implications which could impact the implications for
the society as well in the economic crisis. The economic school of the Keynesian argues that the
demand has the ability to drive the supply as well as by this the Heathy economy spends much
and invest more instead of saving the money (Whalen, 2020).

The outline of this school of the economy can be expressed as when the employment
increases, the aggregate real income also increased. The psychology behind this is that when the
aggregate real income increases, the aggregate consumption increased simultaneously but with
this, the income is not increased much (Blatt, 2019). The Keynesian economists has put the
views upon the aggregate demand is considered as the measurement of the all the goods and the
services which are produced in the economy.
Keynesians theory states that the government must increase the demand for boosting the
growth of the economy (Tarasov and Tarasova, 2019). The Keynesians believes that the demand
of the consumers is the primary driving force in the economy and this theory supports
expansionary fiscal policy. This theory allows to increase the government spending during the
period of recession. This helps in preventing the increase in the demand which spurs the
inflation. This has the force on the government for reducing the deficits and saving it for the next
down cycle of the economy. This school of the thought was much meaningful as well as
purposeful for that time as Keynes has pushed the economic theory for the policymaking, world
wars, worldwide depression, increasing the complications.
Chicago's school of economic thought is the neoclassical economic school which was
originated in the Chicago during the year 1930s. The main purpose of this school is that free
markets helps in allocating the best resources in the economy (Ghosh and Ghosh, 2019). This
school is the much significant as this has much impact on the establishments of the 20th century.
This school has the belief of the monetarist about the economy which states that the money
supply must be kept in the equilibrium with the demand for the money. The theory of this school
is also applied to the disciplines which includes finance as well as the law. There is an
assumption of the Chicago school is the concept of the rational expectations. This school is also
known for contributing ot the finance theory.
Adam smith as the Scottish economists is the progenitor of the classical theory. This
school was the dominant school of the economic though in the 18th and 19th centuries. The main
fundamental principle of these economists is that economy is the self-regulating (Madra, 2021).
This theory states that the economy has the capability of achieving the level of the real GDP
naturally. This is the real GDP which has been obtained when the resource of the economy is
fully employed. The main idea of the classical economists is that they focus on the growth of the
economy and the economic freedom (Witztum, 2019).

Classical economics has little focus on the use of the fiscal policy for managing the
aggregate demand in economy. The classical theory is based on the monetarism as this only
focuses on managing the supply of money through the monetary policy. On the other hand,
Keynesian economics states that the governments must ensure about using the fiscal policy
during the recession period. The classical theories is the monetarists economics which means the
control of the money in the economy whereas, the Keynesian economics emphasis on the
increasing the government expenditures. These are both schools of thought, but they are different
in defining the economics. The classical theory was founded by the famous economists Adam
Smith as well as the Keynesian economics was founded by the John Maynard Keynes (Hansen,
2018).
In the classical theory, the long term perspective is considered for the inflation,
unemployment, regulation, tax and other related factors. And on the other hand, the Keynesian
economic theory, considers the short term perspective as for bringing the immediate results
during the period of great recession in the economy. The Keynesians states that the government
intervention is much necessary in succeeding the economy (Skidelsky, 2018). They also think
that the demand is much influenced by the decisions of the government both at the domestic and
the national level. The classical theory believes that the full employment is the level at which the
economy returns. And the Keynesians believes that the unemployment is the normal state of the
economy and government is much essential for achieving the target goals.
CONCLUSION
From the above assignment it can be concluded that the schools of the economic thoughts are all
different from each other, and they follow the different economic theories. This assignment has
discussed the two economists as well as the two different schools for comparing between the two
economic theories such as the Keynesian theory and classical theory. These are much different
from each other and these have been originated by two different economists.

REFERENCES
Books and journals
Blatt, J.M., 2019. Dynamic economic systems: a post Keynesian approach. Routledge.
Ghosh, C. and Ghosh, A.N., 2019. An Introduction to Economics. Springer Singapore.
Hansen, A.H., 2018. Monetary theory and fiscal policy. Pickle Partners Publishing.
Madra, Y.M., 2021. Late Neoclassical Economics and Its Modes of Negation: A Response to
Chakrabarti, Glynos, and Primrose. Rethinking Marxism, 33(4), pp.595-610.
Prates, D., 2020. Beyond Modern Money Theory: a Post-Keynesian approach to the currency
hierarchy, monetary sovereignty, and policy space. Review of Keynesian Economics,
8(4), pp.494-511.
Skidelsky, R., 2018. How economics survived the economic crisis. Project Syndicate.
Skidelsky, R., 2018. Money and government: The past and future of economics. Yale University
Press.
Tarasov, V.E. and Tarasova, V.V., 2019. Dynamic Keynesian model of economic growth with
memory and lag. Mathematics, 7(2), p.178.
Whalen, C.J., 2020. Post-Keynesian institutionalism: past, present, and future. Evolutionary and
Institutional Economics Review, 17(1), pp.71-92.
Witztum, A., 2019. The Classical Alternative. In The Betrayal of Liberal Economics (pp. 575-
696). Palgrave Macmillan, Cham.
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