Classical Economics vs Keynesian Economics:
Comparison and Contrast
The following are some of the basic comparisons for Keynesian economics vs Classical economics.
•Keynes refuted Classical economics' claim that the Say's law holds. The strong form of the Say's law stated that the "costs of output are always covered in the aggregate by the sale-proceeds resulting from demand". Keynes argues that this can only hold true if the individual savings exactly equal the aggregate investment.
•While Classical economics believes in the theory of the invisible hand, where any imperfections in the economy get corrected automatically, Keynesian economics rubbishes the idea. Keynesian economics does not believe that price adjustments are possible easily and so the self-correcting market mechanism based on flexible prices also obviously doesn't. The Keynesian economists actually explain the determinants of saving, consumption, investment and production differently than the classical economists.
•Classical economists believe that the best monetary policy during is a crisis is no monetary policy. The Keynesian theorist on the other hand, believe that Government intervention in the form of monetary and fiscal policies is an absolute must to keep the economy running smoothly.
•Classical economists believed in the long run and aimed to provide long run solutions at short run losses. Keynes was completely opposed to this, and believed that it is the short run that should be targeted first.
•Keynes thought of savings beyond planned investments as a problem, but Classicalists didn't think so because they believed that interest rate changes would sort this surplus of loanable funds and bring the economy back to an equilibrium. Keynes argued that interest rates do not usually fall or rise perfectly in proportion to the demand and supply of loanable funds. They are known to overshoot or undershoot at times as well.
•Both Keynes and the Classical theorists however, believed as fact, that the future economic expectations affect the economy. But while, Keynes argued for corrective Government intervention, Classical theorists relied on people's selfish motives to sort the system out.