Introduction
Classical model emerged as an opposition to Mercantilism. Two beliefs defined mercantilism; Bullionism held that a nation’s wealth is defined by its stock of precious metals and that the government should intervene in the economy. Adam smith inspired the classical model. Classical economists consider full employment usual. There is no overproduction or unemployment in this model. If there’s overproduction or unemployment, automatic processes of demand and supply, called the ‘invisible hand,’ restore full employment. Classical model influenced Britain’s economy from 1770 up to the period of the great depression (Dome 1767-1873). Then John Maynard Keynes developed his Keynesian model. Keynesians believed classical theory was true in parts. When the economy varies or changes, the unseen forces break down and don’t rectify market failures. Without government action, the economy would be uncontrolled. Both Keynesian and classical economics are popular today, despite their 20th century dominance. In this essay, I’ll compare and contrast their relative qualities.
Adam Smith, a moral philosopher, developed classical economics. His beliefs, based on 18th-century natural law, claimed that everyone has an inherent right to pursue their own interests while respecting others’ rights. Adam Smith’s “invisible hand” hypothesis holds that when people act selfishly, the market’s “invisible hand” will intervene and benefit society. This strategy enables cooperation without coercion(Lu, and Jackson., et al. 465-475). Keynesian economics emphasized consumption and total demand to analyze the economy. John Maynard Keynes held that corporate and government actions drive aggregate demand. He considered government monetary policy should affect private firms. This balances them.
Another difference is the short-term vs. long-term focus; Traditional economics emphasizes long-term planning. They prefer a sustainable economy. They also look at current regulations and how new ones can affect the free market. Government spending is a key part of Keynesianism, which emphasizes short-term and immediate economic policy. In 1924, Keynes held that, “in long-term, we’re all dead’’ (Scott 101). In a slump, only the government can invest in the economy and boost growth through monetary and fiscal policy. Customers and businesses lack confidence and resources to act alone.
Classical economics believe consumer and private investment, not government spending, drives economic growth. If the government intervenes, we may see “crowding out.” Excessive engagement may also hamper economic growth if consumer and company spending fall. Keynesian economists rely on government spending to pick up after a recession. Both agree with classical economics that government spending, business investment, and consumer spending drive the economy.
Keynesians believe government spending fosters economic growth in the absence of company and consumer spending. J. B. Say’s Law is the basis for many classical economics’ laissez-faire worldview. Say promoted the Keynesian maxim “supply creates its own demand.” Say (1855) said it’s harder to give the means than to develop the desire for consumption, thus good governments attempt to enhance production and bad governments seek to promote consumption (Milberg 239). Businesses don’t just produce stuff, he said; they make money, ensuring sales. It’s often suggested that consumers’ marginal tendency to save contradicts this hypothesis. Classical economists argue that consumers save money for business ventures. Keynes holds that demand drives supply, not the other way around. Keynes believed suppliers’ and manufacturers’ motivation to create was impacted by consumer and corporate spending.
According to classical economists full employment should be the goal, if market forces are left undisturbed, full employment will be reached. They based it on Says’ law and said full employment would occur when the economy had enough revenue and output. Wage and price changes, according to classical economists, would compensate for any decline in spending because a drop in aggregate demand would lower prices but keep total output the same. If clients hoard money, the market would be distorted and full employment won’t be achievable. Great Depression of the 1920s however hurt it. Keynes held that full employment is unachievable with insufficient economic spending(Patinkin 543-564). Classical economists believed they could avoid full unemployment by managing interest rates and wages. Keynes’ General Theory promoted deficit spending to preserve full employment during economic downturns.
Conclusion
Both theories conflict in terms of political and economic priorities, although they have some similarities. Both argue that, since customers lack perfect information, their judgments are illogical. Consumer rationality, says Mehta, “implies that customers will price seek to minimize ambiguity” (2003). This is important because their economic theories assume that if individuals had money to spend or the right number of products, they would buy them. In sum, classical and Keynesian economists have competing views and practices. Today’s economy blends the two as we privatize and deregulate enterprises while engaging in the market to boost growth. This mixes a laissez-faire and interventionist outlook.
Work Cited
Dome, Takuo. Political Economy of Public Finance in Britain, 1767-1873. Routledge, 2004. https://doi.org/10.4324/9780203413944
Lu, Jackson G., et al. “On the distinction between unethical and selfish behavior.” Atlas of moral psychology (2017): 465-475.
Milberg, William. “14. Say’s Law in the open economy: Keynes’s rejection of the theory of comparative advantage.” Keynes, uncertainty and the global economy (2002): 239.
Patinkin, Don. “Price flexibility and full employment.” The American Economic Review 38.4 (1948): 543-564.
Scott, Walter. “Promoting the Quality of Life.” Wrestling with the Angel: Literary Writings and Reflections on Death, Dying and Bereavement (2017): 101.
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