Keynes_vs_Classical

Classical vs. Keynes The Classical and Keynesian approaches are similar because they are both theories which try to explain the economy and try to decide the best strategy to take during a time of recession and inflation. While they are alike because they are both economic theories, the content of both of these theories is very different. Either one has been deemed as the “perfect” solution, but we can learn a lot from these models, and try to come up with a “perfect” model that we can use in our world today. First, we should look at some characteristics of both the Classical and the Keynesian models. The classical model assumes that everything goes into the economy. Classical economist believed that all money flows into the economy in some way shape or form. They say that money that is invested in banks, or stocks flows back in the economy through investments. Even when you have your money in the bank, it is being loaned to other people and the bank is making revenue from it. The Classical economist also believed in Say’s law which said people supply things to the economy so they have income to demand things of the value that they supplied.(Wikipedia) Unlike the classical model the Keynes model takes a separate look at supply and demand. The Keynes model states that supply generates income, and that the value of supply is always equal to the value of income. John Keynes also believed that the market was imperfect and could not self-sustain itself. He believed that the government should stimulate demand when the market was failing to do so itself. The classical model on the other hand has more of a laissez-fare approach, and thinks the government should be less involved. They believe that the government can only be a detriment to the economy. Next, let’s take a look at each theory, and what they believe the best thing to do in a recession. The classical approach to a recession is to let market forces shift the short-run aggregate supply curve rightward and restore the economy to full employment. On the other had The Keynesian approach is to use discretionary fiscal and monetary policy to increase aggregate and achieve full-employment and the real GDP. (Tucker, 425) Unlike the classical model, the Keynesian model supports more government regulation in the economy to help bring it back. Keynesians support expansionary fiscal and monetary policy to increase the aggregate demand and return the economy to its natural unemployment rate. Unlike the classical approach the Keynesian doesn’t believe that wages are flexible, and will fail causing the short-run aggregate supply curve to shift downward, and restore full employment. Both of these models also have different ideas when it comes to inflation also. Unlike the Classical model that states that all wages are flexible and eventually will rise to restore full employment GDP. The Keynesian theory says that fiscal and monetary policies are needed to decrease aggregate demand and achieve full employment equilibrium. (Tucker, 426) “The classical approach to an inflation gap is to let the market forces shift the short-run aggregate supply curve leftward and restore the economy to full employment.” (Tucker, 426) In conclusion both the classical and the Keynes model, have good ideas that we still even use today in our economy. No matter which side you believe is more right than the other, both models bring up pretty good points and ideas. Neither one of these models is a perfect answer for our economy today, but we can used the basis of some of their ideas to help turn around the economy today. So no matter which model you believe in, we can learn a lot from both models, and take their ideas and try to build a better model, than the ones we have had placed before us already. Works Cited 1. "Keynesian Economics." Wikipedia, the Free Encyclopedia. Web. 18 Apr. 2011. . 2. Tucker, Irwin B. "Chapter 16." Macroeconomics Today. 6th ed. Canada: South Western. 425-26.