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What Is the Difference Between Classical and Keynesian Economics?

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  • Originally Written By: Ken Black
  • Revised By: C. Mitchell
  • Edited By: Andrew Jones
  • Last Modified Date: 19 June 2014
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There are a number of important differences between classical and Keynesian economics, but in general classic theory teaches that things in the marketplace like economic growth and investment capital are most effectively driven by consumers and free choice, while the Keynesian school of thought spends more time considering government regulation and oversight. “Classical” economics are so-called because this theory was one of the first to ever be widely discussed or formally set out. It traces its roots to the eighteenth century, and is based on a primarily European model. Keynesian economics, by contrast, first took hold in the 1930s following the research of John Maynard Keynes, a British scholar. These teachings have a more global view and generally take the stance that a free market won’t always lead to a stable economy.

The differences are broad and far-reaching, though getting a grip on them is often easier in context. Looking at the theories’ stances on monetary policy, inflation, and pricing can help paint a broader picture. Understanding how each model handles future predictions and economic forecasting can be instructive, too.

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Monetary Policy

When it comes to monetary policy, classical economists typically hold to a belief that governments should play a strictly "hands-off" role, often referred to by the French term laissez-faire. In practical terms this means that private actors should be able to make their own decisions when it comes to interest rates and fiscal control, and society should be able to decide for itself what is oppressive, what is acceptable, and how the policy should be ordered in a broad sense.

Keynesians, on the other hand, more often believe that demand is very much influenced by government decisions, both nationally and locally. In other words, Keynesians believe governments do and in many cases should influence the business cycle in order to keep it functional and fair.

Inflation and Unemployment

With few exceptions, Keynesian economic theory tends to be more concerned with unemployment than inflation. Under this model, workers and their ability to contribute to society matter more than the relative cost of goods and a given currency’s purchasing power. Classical economists, while concerned about unemployment to a certain extent, tend to be more focused on inflationary pressures. A classical theorist typically argues that inflation is the bigger danger to the economy over the long term.

Pricing

Looking at pricing policies and ideals is another way to see some of the differences more clearly. Keynesians generally believe that pricing is an essentially rigid enterprise. As such, they do not usually feel that the people, entities, and corporations responsible for setting prices actually have much of a range from which to choose. The shortages and surpluses that result when consumers change habits in the wake of rigid prices are just a normal part of the market on this understanding.

Classical economists tend to take a more flexible approach. They believe that pricing is more plastic, and that shortages and surpluses can be easily corrected by letting actors have the time and space to respond naturally. This sort of re-equilibrating often takes time, but the theory teaches that things will even out on their own if left in the hands of the people.

Handling the Future

One of the most important parts of any economic theory is its treatment of the future, and how predictions of market growth and general strength can be ascertained months, years, and even decades out. This is another key area of difference between classical and Keynesian economics. Classicalists tend to be more focused on long-term results, while Keynesians look more to shorter-term problems that they believe may need immediate attention. Those subscribing to the Keynesian philosophy tend to believe that short-term problems are some of the best ways to influence the long-term outlook.

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Discuss this Article

anon935751
Post 4

Big business and big government have a symbiotic relationship. Each feeds the other.

It is big government that is the more corrupt of the two. Government produces nothing but more rules and regulations to justify its own existence. It bloats itself on the workers' (taxpayers') earnings. The more govt. tries to manipulate the economy, the less it achieves.

clintflint
Post 3

@Ana1234 - Actually, I think Keynesian theory is still considered fairly conservative although I'm not an expert in it. I've never really been able to get my head around economic theory.

I do know that people tend to turn to Keynesian logic when something happens to the economy, like a depression, probably because it involves the government trying to solve problems in the economy and people don't trust the economy to recover on its own.

Ana1234
Post 2

I guess this is kind of like the difference between conservatives and liberals (or it would be, if they both didn't have so many layers of other stuff clouding the issues). Conservatives believe in reducing government, whereas liberals believe in increasing government.

I guess I tend to just be moderate about it. I don't believe that leaving business to it is a good idea, mostly because big businesses seem to become corrupt more often than not.

But I also don't like the idea of everything being controlled down to the last penny. I don't think that works either.

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