Economics
The classical and Keynesian economists have different views concerning the economy and inflation. Classical economists believe that inflation is largely caused by an increase in money supply. Increase in money supply causes the prices to go up. The Keynesian economists, on the other hand, believe that inflation causes an increase in money supply since the government has to print more money to deal with the increasing prices, which are in turn caused by an increase in wages. The classical economists believe that the free market economies are always stable. They propose the concept of full employment and full production. The Keynesian economics on the other hand believe that the free economies are unstable. Although they believe in achieving a full equilibrium, they do not believe that this is supported by full employment and full production. These are some of the differences between the classical and Keynesian economists. They have different perspectives on the economy, and they will use different approaches when dealing with inflation.
Under the Keynesian system, the government has a mandate of ensuring that the economic situation is at a stable rate. Although they believe in a free market, they expect the government to step in when the situation demands. They will therefore, expect the government to put up measures to deal with inflation. Some of the ways of doing this include reduce demand by increasing taxes and interest rates and reducing government spending. When the government increases the taxes and the interest rates, the demand for commodities will decrease. During the recession, the government can take measures such as lowering the interest rates and taxes. This will in turn increase the aggregate demand. Lower taxes lead to increased consumption and reduced savings. Higher taxes will, on the other hand, discourage consumer spending and will encourage people to save more. The increased demand will encourage increased supply, and this will in turn lead the market to attain equilibrium.
Those who support the classical system do not believe that the government has a role to play when dealing with economic problems. They believe that the market will find ways of dealing with inflation, by moving towards a natural equilibrium, without involving the government. They believe that the situation is temporary, and it will soon achieve a natural equilibrium on its own. They do not support the idea of government spending since they believe that it slows down economic growth by decreasing the private sector. They believe that fiscal policies such as government borrowing and increase in taxes will harm the economy by reducing the amount of money available for private businesses. They do not support the idea of the government decreasing the interest rates to deal with recession or increasing the rates to manage inflation. They believe that if the savings available are more than the investments, then the interest rates will fall, and this will lead to equilibrium. If the savings are less than the investment, then the interest rates will increase until the market reaches equilibrium.
Classical theorists believe that it is possible to achieve full employment through supply and demand. They believe that the problem of unemployment can be solved by reducing the wages of the workers, since this will increase the number of jobs available in the market. This view of decreasing wages to guarantee full employment was challenged during the great depression. Keynesian theorists argue that unemployment occurred because of deficient aggregate demand. Therefore, if the aggregate demand can increase, the number of jobs available would increase, and this would ensure employment. Those who support the classical economic system propose long-term solutions to deal with inflation problems. Keynesian economists on the other hand are more concerned with the short-term solutions.
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