Economics is the quantitative and qualitative study on the allocation, distribution and production of economic resources. Economics often studies the monetary policy of a government and other information using mathematical or statistical calculations. Qualitative analysis is made by making judgments and inferences from fiscal information. Two economic schools of thought are classical and Keynesian. Each school takes a different approach to the economic study of monetary policy, consumer behavior and government spending. A few basic distinctions separate these two schools.
Classical economic theory is rooted in the concept of a laissez-faire economic market. A laissez-faire-also known as free-market requires little to no government intervention. It also allows individuals to act according to their own self interest regarding economic decisions. This ensures economic resources are allocated according to the desires of individuals and businesses in the marketplace. Classical economics uses the value theory to determine prices in the economic market. An item’s value is determined based on production output, technology and wages paid to produce the item.
Keynesian economic theory relies on spending and aggregate demand to define the economic marketplace. Keynesian economists believe the aggregate demand is often influenced by public and private decisions. Public decisions represent government agencies and municipalities. Private decisions include individuals and businesses in the economic marketplace. Keynesian economic theory relies heavily on the fact that a nation’s monetary policy can affect a company’s economy.
Government spending is not a major force in a classical economic theory. Classical economists believe that consumer spending and business investment represents the more important parts of a nation’s economic growth. Too much government spending takes away valuable economic resources needed by individuals and businesses. To classical economists, government spending and involvement can retard a nation’s economic growth by increasing the public sector and decreasing the private sector.
Keynesian economics relies on government spending to jumpstart a nation’s economic growth during sluggish economic downturns. Similar to classical economists, Keynesians believe the nation’s economy is made up of consumer spending, business investment and government spending. However, Keynesian theory dictates that government spending can improve or take the place of economic growth in the absence of consumer spending or business investment.
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Short Vs. Long-term Affects
Classical economics focuses on creating long-term solutions for economic problems. The effects of inflation, government regulation and taxes can all play an important part in developing classical economic theories. Classical economists also take into account the effects of other current policies and how new economic theory will improve or distort the free market environment.
Keynesian economics often focuses on immediate results in economic theories. Policies focus on the short-term needs and how economic policies can make instant corrections to a nation’s economy. This is why government spending is such a key cog of Keynesian economics. During economic recessions and depressions, individuals and businesses do not usually have the resources for creating immediate results through consumer spending or business investment. The government is seen as the only force to end these downturns through monetary or fiscal policies providing instant economic results.