We’ve all seen politicians debate over the economy: job creation, trade, etc. But where do these theories come from? There are two major theories of capitalism that have affected the 20th and 21st century. They are the Keynesian and the Classicals. These two theories are embodied mostly by John Maynard Keynes for the Keynesian, and Friedrich Hayek for the Classicals.
You can check out this video to know about the rivalry between those two schools of thought in an entertaining way.
As you can see in the video, the major difference between the two schools of thought are that the Keynesian’s want to increase spending when the economy is slowing down, to stimulate the economy. When there is more capital (money) circulating, the economy gets better. Then, when the economy is better, they cut spending to re-balance the budget.
On the opposite side, the Classicals want to decrease spending in government. If the government spends less, people pay less tax and can spend that money in the market or save that money instead.
On a side note, when you save money, it doesn’t stagnate in the bank, it is loaned to other people by the bank, so it helps others as well.
Keynesians critique the Classicals of wanting an unstable system. According to the Keynesians, it is better to control the markets at least a little, to stabilize inflation and to stimulate the economy. The example that is often used to demonstrate the power of keynesian economics is World War 2, in witch the united states emerged as a global economic power house, when just a couple of years earlier it was in the Great Depression.
The Classicals have critiqued the Keynesians for wanting to control a system that is better left uncontrolled. According to the Classicals, intervention does more harm than good, because when there is no intervention, there is the incentive to more profit. Furthermore, the bailouts that the government gives to wealthy companies during recessions only encourages companies that failed to be profitable. In response to the example cited above about World War 2 having lifted the United States out of the Great Depression, Classicals have said that in total, the war has made the world poorer.
There is also another theory, that resembles classical economics more than Keynesian economics, that is called monetarism. The monetarists are mostly associated with Milton Friedman. They also want a free market, but they don’t want to get back to the gold standard.
What are your favorite economic theories? Post them down below!
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