Keynesian Theory Vs. Classical Theory

Kyle Smith

Macro Econ

Professor G

2/22/17

Classical Theory vs. Keynesian Theory

Classical theory and Keynesian theory are have both been used by the United States government as a way of overseeing the economy. In general the Classical theory is used by the Republican Party and the Keynesian theory is used by the Democratic Party.

The Classical Theory was created in 1776, by Adam Smith and other notable classical economists including Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus, and John Stuart Mill. Classical theory entails a Laissez Faire system, which means that the government has little or no role in the economy. Classical theorists believed that free markets regulate themselves when they are free of any intervention. Adam Smith referred to the market's ability to self-regulate as the "invisible hand" because markets move towards their natural equilibrium without outside intervention (Boundless.com). Along with Laissez Faire Classical, Government spending is not a major force in a classical economic theory. Classical economists believe that consumer spending and business investment represents the greatest chunk of the nation’s economic growth. Too much government spending can take away valuable economic resources needed by individuals and businesses. Government spending can lead to a decreased economic growth by increasing the public sector and decreasing the private sector. Classical theory looks more at long term effects than short term effects. The effects of inflation, government regulation and taxes can all play an important part in developing classical economic theories (Chron.com). Classical theory tends to lean towards lower taxes and less government regulations.

The Keynesian theory was developed in the 1930s by John Maynard Keynes as a way of understanding the Great Depression. Keynesian economics is a theory