The quantitative and qualitative reasoning on the allocation, distribution, distribution, and production of economic resources. This discipline helps financial experts and policymakers to mathematically or statistically predict future economic and market behaviors. There are two concepts that people apply to determine economic policy they will adopt. These economic concepts include the Keynesian theory and the Classical concept. The goal of this essay to expand on the similarities between the Keynesian and the Classical economic ideas.
What is Keynesian Economics?
John Maynard Keynes in which he claimed that the government must intervene in the matters concerning the economy of the country hence ensuring that the output of the nation is raised thus creating employment developed this theory. It is important to note that employment in this scenario means the utilization of the idle resources like land, capital, labor, and entrepreneurship. To do this, the government must and should use expanded fiscal policies like taxes to control the economy.
What is Classical Economics?
This economic concept is highly associated with Adam Smith who claims that the government should not interfere with the affairs of the economy since the economy will support itself back to equilibrium in case of any challenges. This concept argues that each economic agent should try to protect its self-interest with the ultimate aim of protecting the society’s interests.
Similarities Between Keynesian and Classical Economics
- Similarities in “Government Spending” in Keynesian and Classical Economics
One of the similarities is that, despite the classical economics rejecting government spending, they accept that, in the absence of personal spending and business investment the government should spend so that it can help the public sector, which will, in turn, create a conducive environment for private sector to thrive. The argument is similar to the concepts of Keynesian economics, which recommend excessive government spending as the only method of improving and creating employment within the economy hence increasing output.
- Similarities in “State Intervention” in Keynesian and Classical Economics
Although the classical economics reject government intervention by proposing for a long-term solution to the existing economic problems like inflation, they recommend government intervention in situations where both consumers and private business owners are unable to stabilize the economy for a long time. This is similar to the Keynesian economic policies, which recommend government intervention through fiscal and monetary policies to solve existing financial challenges like recessions and depressions hence providing instant results.
- Similarities in “Savings” in Keynesian and Classical Economics
Despite the classical theory, ignoring the fact that saving is a function of income by regarding it as a function of interests rate, the approach acknowledges that people do save for future consumption. This is similar to the Keynesian theory, which has a perception that when interests’ rate goes up, the level of income will be less hence making it difficult for people to save. Moreover, the two theories conclude that people keep a certain proportion of disposable income for future consumption without paying much attention to the decline in the value of money.
- Similarities in “Money Demand” in Keynesian and Classical Economics
Both theories pay significant attention to money supply and demand for money as essential factors that influence the rate of interest within the economy. As classical paid much attention to the borrowing motives like hoarding, the Keynesian theory highlights the role of funds supply and bank credit which can never be ignored as a determinant of the rate of interest. Keynes does pay attention to money as a factor determining the rate of interest. This significant relationship brings both theories together despite them having a different perception of the management of the economy by the government.
- Similarities in “Capitalist Economy” in Keynesian and Classical Economics
Both Keynes and Adam Smith, who is the founder of the classical theory, agree and favor the existence of capitalism economy over other forms of economic systems like socialism and communism. In their agreement, the two financial experts highlight that a free market, where forces of demand and supply determine the price of commodities, is an efficient means of allocating resources.
- Similarities in “Effects of Technology” in Employment in Keynesian and Classical Economics
Both Keynes and Adam Smith agree that technology plays a significant role in influencing the cost of labor, the supply of goods, and the price of commodities in the market. Keynes highlights that technology leads to a gradual decrease in employment while Adam Smith, in his classical model, notes that introduction of technology leads to increase for work done while at the same time reducing the prices of goods due to efficiency and effectiveness brought about in the workplace.
Conclusion of Keynesian and Classical Economics
- It is important to highlight that Keynesian approach is superior to the classical hypothesis of interest since the former is troubled with equilibrium in the physical sector.
- Thus, in the money economy of the present world, the Keynesian theory is more realistic than the classical theory of interest.
Author: Jecinta Morgan
Jecinta is an experienced writer who has been writing for more than three years and she has a degree in Finance and Accounting.