Both groups agree that aggregate demand and aggregate supply affect the course of the macro economy. Classical economists believe that the commodities markets will also always be in equilibrium, due to flexible prices. Classical & Austrian Economics: Intro to Macroeconomics The Repo Market. They believe that household savings and investments are based on disposable incomes and the desire to save for the future and commercial capital investments are solely based on the expected profitability of the endeavor. One potential problem with the classical theories is that Say’s law may not be true. Contrast Between Classical and Keynesian Economics: 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. Keynesian economics suggests governments need to use fiscal policy, especially in a recession. According to Say’s law, supply creates its own demand. “The biggest problem is not to let people accept new ideas, but to let them forget the old ones.” – John Maynard Keynes. The Keynesian economists actually explain the determinants of saving, consumption, investment, and production differently than the Classical. Classical economics was founded by famous economist Adam Smith, and Keynesian economics was founded by economist John Maynard Keynes. In the Keynesian economic model, the government has the very important job of smoothing out the business cycle bumps. The solution to all the economic problems lies in the manipulation of some key indicators, say the Keynesian economists. Classical and Keynesian economics are both accepted schools of thought in economics, but each had a different approach to defining economics. Keynesian economics also recognizes that only a fraction of the household income will be used for consumption expenditure purposes. Keynes argues that this can only hold true if the individual savings exactly equal the aggregate investment. Get in touch with us and we'll talk... • 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. Now it takes no genius to know, that this is rarely the case. Keynes believed that under certain circumstances a recessionary economy would only not naturally rebound, b… Out of these cookies, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. Economists who believe in either of the types of thoughts are at loggerheads about various aspects about the way the economy influences people and vice-versa. Classical VS Modern Economics Point Classical Modern Founder Many Economicstnamely Adam Smith and others John Maynard Keynes Defination According to Say’s law, supply creates its own demand. Keynesian economists believe that the macroeconomic economy is more than just an aggregate of markets. • Savings – Investment Equality: This assumption requires the household savings to equal the capital investment expenditures. • Classical economists believe that the best monetary policy during a crisis is no monetary policy. By investment, classical economists mean capital generation, so I doubt it! Many such beliefs form the difference between the two major schools of thought in economics: Classical and Keynesian economics. believe otherwise. • In an unregulated, classical economy, where wages are perfectly flexible, the wage rates fall, eliminating the excess labor available and reducing the unemployment back to equilibrium levels. Classicalists tend to be more focused on long-term results, while Keynesians look more to shorter-term problems that they believe may need immediate attention. Copyright © Wealth How & Buzzle.com, Inc.