Classical Economics Versus Keynesian Economics—Group Discuss

Classical Economics Versus Keynesian Economics—Group Discussion

During Week 2 or earlier, the instructor assigns students to one of two groups: the classical school (including its later development such as monetarism, Austrian economics, supply-side economics, new classical economics) and the Keynesian school (including its later development, new Keynesian economics). Then, the two groups (or four to include two classical groups and two Keynesian groups, depending on the number of students with about seven or eight students per group) discuss classical economics and Keynesian economics, defending their school and criticizing the other school’s theories and practices.

In your responses, compare and contrast classical economics and Keynesian economics. What are the major differences between them? Which model would you prefer? You may already prefer one because you are defending your school. Thoroughly explain your reasoning. As a classical economist or a Keynesian economist, what would you do for the current U.S. economy?

Paper For Above instruction

Classical economics and Keynesian economics represent two foundational schools of thought in macroeconomic theory, each with distinct perspectives on how economies function and how policymakers should respond to economic fluctuations. These differences are rooted in their underlying assumptions about market behavior, the role of government, and the causes of economic cycles. This paper aims to compare and contrast these two schools, discuss their major differences, state a preferred model based on current economic conditions, and outline potential policy actions that a classical or Keynesian economist might recommend for the present U.S. economy.

Classical economics, dating back to the 18th and 19th centuries and associated with Adam Smith, David Ricardo, and later economists like Milton Friedman, emphasizes the self-correcting nature of markets through the implicit belief in flexible prices, wages, and interest rates. Classical theorists argue that economies are inherently stable in the long run; any deviations from full employment are temporary and self-correcting through shifts in supply and demand. They advocate minimal government intervention, believing that free markets efficiently allocate resources. Monetarism, an evolution within classical economics championed by Friedman, underscores the importance of controlling the money supply to maintain price stability without direct active interventions in the economy.

Conversely, Keynesian economics originated in John Maynard Keynes' 1936 seminal work, "The General Theory," which challenged classical thought, especially in the context of the Great Depression. Keynesian economists focus on aggregate demand as the primary driver of economic activity. They argue that markets can remain disequilibrated for extended periods, leading to prolonged unemployment and unused capacity. Keynesians advocate active government intervention through fiscal policies, such as government spending and taxation, to manage economic cycles and stimulate demand during downturns. They contend that prices and wages are sticky in the short run, preventing automatic adjustments to shocks and justifying government action to stabilize output and employment.

The major differences between classical and Keynesian economics lie in their views on market flexibility, government intervention, and the causes of unemployment. Classical theory assumes that markets clear through flexible prices, leading to full employment in the long run. Keynesian theory, however, highlights sticky prices and wages that hinder market adjustments, necessitating policy measures to achieve full employment. Furthermore, whereas classical economists are confident in the self-correcting ability of markets, Keynesians emphasize that insufficient aggregate demand can lead to persistent short-term unemployment and economic stagnation.

When considering which model to prefer in today's U.S. economy, many contemporary economists lean toward a Keynesian approach, especially given the recent economic challenges such as recession risks, high unemployment rates, and fiscal stimuli implemented during crises like the COVID-19 pandemic. The Keynesian framework supports active government policies to boost demand and support recovery, which aligns with the measures taken during recent economic downturns. The presence of sticky wages and prices, along with underutilized resources, suggests that market self-correction alone may be insufficient for timely economic stabilization.

If I were a classical economist examining the current U.S. economy, I might advocate for a more laissez-faire approach, emphasizing the importance of maintaining monetary stability, reducing unnecessary government spending, and trusting in market mechanisms to restore equilibrium over the long term. However, given the empirical realities of sticky prices, high unemployment, and the economic shocks experienced recently, a Keynesian perspective appears more pragmatic for immediate intervention. This involves deploying fiscal stimulus packages, investing in infrastructure, and providing targeted support to sectors and workers most affected by downturns to stimulate demand and expedite recovery.

In conclusion, while classical economics provides valuable insights into the long-term self-correcting nature of markets and the importance of monetary stability, Keynesian economics offers practical tools for managing short-term fluctuations and addressing unemployment. The choice between the two depends on the current economic context and the policy objectives prioritized. Presently, an integrated approach, recognizing the strengths of both schools, might be best suited to effectively manage and sustain economic growth in the United States.

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