Classical vs Keynesian Economic Theory Essay

Excerpt from Essay :

Even when forced to rework his model to allow for some private investment, he argued that it wasn't as efficient as government spending because private investors would be less likely to undertake/overpay for unnecessary works in hard economic times" (Beattie 2010). For the world to extricate itself from the Great Depression, said Keynes, the government must intervene in the market.

Keynes' rationale is one reason that the current administration's stimulus package in response to the recent economic downturn has been termed Keynesian in nature. Keynes advocated spending money and increasing the deficit during recessions, and avoiding deficits during expansionary periods to stem inflation. Because of his fear of a 'hoarding' effect Keynes also tended to view a higher level of overall employment as a greater necessity than classical economists. Due to Keynes' influence, the federal government increased in size, nearly doubling within a few scant years: "during the 1920s, there were, on average, about 553,000 paid civilian employees of the federal government. By 1939 there were 953,891 paid civilian employees, and there were 1,042,420 in 1940" (Smiley 2008). Keynes also advocated a 'loose' money policy and lowering interest rates to encourage investment during recessions. Rather than an invisible hand, Keynes conceived of a government that was forever tinkering with the economy.

Keynes passionately believed that it was unwise to wait for markets to naturally 'correct' themselves. "Keynesians believe that what is true about the short run cannot necessarily be inferred from what must happen in the long run, and we live in the short run. They often quote Keynes's famous statement, 'In the long run, we are all dead'" (Blinder 2008). Furthermore, in contrast to classical economists, Keynes wrote that prices tended towards rigidity -- hence the 'stickiness' of wages during the great depression: "there is only a limited amount of flexibility in prices and wages" (Blinder 2008).

Since the Great Depression, the acceptance of a laissez-faire attitude towards economic policy has never been as absolute as it was previous to the1929 crash, despite the supply-side response to the economic crisis of the 1970s, which challenged Keynesian assumptions. The combination of high inflation and high unemployment in the 1970s was not supposed to happen according to Keynesian theory. Conservative economists advocated high interest rates and a tight money policy as a solution. Yet while Keynes has been shown to have been far from infallible, even conservative economists advocate economic 'tinkering' to a greater degree than the classical school ever did, thanks to Keynes. Liberals and conservatives may advocate different fiscal and monetary responses to the waxing and waning of the business cycle, but no mainstream economists advocate a purely 'hands off' policy, or a return to the rigid gold standard of the 1920s.

Works Cited

Beattie, Andrew. "Giants of Finance: John Maynard Keynes." Investopedia. 31 March 2010.

Blinder, Alan S. "Keynesian Economics." The Concise Encyclopedia of Economics. 2008.

Library of Economics and Liberty. 31 March 2010.


Smiley, Gene. "Great Depression." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. 31 March 2010.


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