Keynesian Economics Vs. Classical Economics - Essay Example

Keynesian Economics versus ical Economics Keynesian and ical economics are among the dominant schools ofthought that have shaped the development and understanding of macroeconomics. Classical economics was the main theory of macroeconomics before the 1930s and the great depression (Tucker 483). The classical aggregate demand-aggregate supply model centers on the relationship between price and wage levels and output levels. This theory concludes that a free market economy’s output level always self-corrects to full employment and that prices and wages increase and decrease with transformations in aggregate demand.

Increases in aggregate demand causes a rise in prices and wages, and decreases in aggregate demand causes a fall in prices and wages. Keynesians, unlike the classical economists, hypothesized the economy as not automatically returning to full employment once unemployment occurred. Keynesian economics became dominant during the 1930s when John Keynes introduced the ideas that a macro economy can move toward an equilibrium output level that is less than full employment (Tucker 483). He concentrated on the role of aggregate spending in the economy, indicating that the equilibrium output level of an economy is a direct result of the level of total spending in the economy.

Macro equilibrium occurs in the Keynesian economics when the aggregate spending is equal to total current output, or when equivalence is achieved in the spending stream between the leakages out and injections in. When spending is above the current level of output, because the leakages exceed injections, the economy contracts. Keynes advocated government intervention, or economic policy to shift the economy from equilibrium at low levels of output to equilibrium at a higher full employment level of output.

The Keynesian and Classical economics also differ on their understandings of the behavior of prices. Whereas classical economics view prices and wages as flexible, Keynesians view them as inflexible or sticky downwards. For this reason, Keynesians do not think prices can be relied on to quickly drop and pawn the adverse effects on employment that can result from a decline in total demand. Since prices do not drop, there is no mechanism to ensure that full employment will automatically be restored.

The Classical and Keynesian economics also differ in the desirability of an active role by government in maintaining the economy as close as possible to a non-inflationary, complete employment level of output. The Classical economics holds that the government should assume a less active role in stabilizing the economy. They believe that the economy if left alone will incline to run at its full (or natural) employment output (Tucker 484). Overall price and employment levels are the greatest concern in the economy.

If government views its primary responsibility as keeping markets as free as possible, the resulting movement of wages and prices should lead to the adjustments necessary to ensure natural or full employment levels. Conversely, Keynesians believe the government should play a more lively function in stabilizing the economy. According to the Keynesian model, there is no reason to expect an economy, left alone, to reach a full employment level of output automatically (Tucker 484). According to Keynes, unemployment, or a recession, occurs due to lack of spending.

In conclusion, classical and Keynesian economics are among the dominant schools of economic thought. The classical economics is a widely accepted model introduced before the Great Depression of the 1930s and holds that the economy will automatically self-adjust to full employment. Keynesian economics emphasizes the role aggregate spending in the economy. The theory rejects the classical belief of an automatic self-adjustment to full employment, stating that an economy’s output and employment would improve from less than full employment only if aggregate spending increased.

Work Cited Tucker, Irvin. Economics for today. Mason, OH: South-Western Cengage Learning, 2010. Print