Classical vs. Keynesian Economics

Concepts

Free Market
Laissez-faire
Invisible Hand
Self-Correction
Flexible Prices/Wages
Supply-side Economics

Sticky Wages/Prices
Government Intervention
Demand-Side Economics
Multiplier
Deficit Spending

Overview

In this lesson, we take a general look at some of the concepts associated with classical economics. First and foremost, classical economists believe in free markets. They believe in a laissez-fare approach where the government leaves the economy alone and allows the “invisible hand” of markets to do it’s thing without interference. Classical economists also believe in self-correction. This means that if the economy is out of whack the government should leave it alone. Flexible prices and wages will adjust to correct the imbalance and in the long-run bring back full employment. Finally, we’ll discuss a concept called supply-side economics. This is a school of economic thought that believes production creates it’s own demand. If we do everything in our power to nurture production, the rest of the economy should take care of itself.

“In the long-run, we’re all dead.” This is a famous quote by economist John Maynard Keynes in response to classical arguments of self-correction in the long-run. Keynes believed that during times of recession wages and prices were slow to change (sticky) so self-correction could take a long time to occur. He believed that the government should step in during times of economic hardship and increase spending to stimulate economic activity. This is sometimes referred to as demand-side economics because he believes during recession it’s best to target spending as opposed to production. Spending creates multiple rounds of economic activity that we learn all about when we discuss a concept called the multiplier. Keynes was such a firm believer in spending that he advised the government to deficit spend during recessions to help stimulate the economy back to full employment.

Materials

Lecture

Video Coming at Later Date

Quiz

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