Comparisons of Classical and Keynesian thought.


In the comparison of the two thoughts one must understand that Classical thought is one that has been around longer than Keynessian and it was in all probability the only real school of thought from 1776 to the 1930's.

The Classical thought is one that had its origins in Britain and with British's economists. As early as Adam Smith and until the great depression, most all economists were Classical economics. As a whole they believed that the self-correcting mechanisms of a market economy would continually guide the economy toward full output and full employment. Market prices would adjust to restore the economy to full employment and that if a slow down or recession was to occur that it would most certainly be short lived.

A working economic example of this would be the Great Depression, experienced in the 1930's. The stock market crash, bank failures and a decade of unemployment averaging 20% to a high of 25% (1933) caused sever problems. This was a crisis not only for the US but the world as well.

In keeping with the Classical thought, a government should do nothing and play a non -active and very passive role in the economy, their for the system should work. But, it did not work? Did the Government policy's (those of the congress and the federal reserve) that were in place during this time work? This is a Question that is still debated today.

The opposite approach is the Keynesian thought. This school of thought would believe in a more active approach. That is the Federal Government and the Federal Reserve should play an important role in attempting to stabilize the economy by "fine-tuning", that is look for the problem, find out what is wrong and fix it.

Probably the biggest test of not only our economy but also our economists was the Great Depression. During this time it seamed that the Classical approach was not working as expected and the government as well many economists could not explain why. In an effort to boost the economy the Federal Government (Congress) raised taxes and imposed stiff import tariffs, this was the wrong thing to do as this only spread the depression through out the rest of the world. This was of course a little more than the fine tuning as suggested by Keynesian approach.

In today's economy we will probably not relive a "Great Depression " due to the safe guards now in place with in our Markets by the Federal Government.

Joseph A. Schumpeter probably said it best " Economic progress, in a capitalist society, means turmoil"