Question

As a classical economist or a Keynesian economist, what would you do for the current U.S. economy?

Answer 1

Keynesian Economist:

1. Clearly, he would advise the federal government to invest in infrastructure, building roads and bridges, improving the electric grid, reinvigorating the space program, and developing alternative energy.

2. Keynes introduced the concept of price stickiness, which means that workers resist lowering their wages in the face of falling demand for labor. Keynes was undeniably liberal, yet he would certainly comprehend the current fiscal problems of cities and states, burdened with past promises of unaffordable pay packages for their workers. He would probably not support the draconian measures of officials like Wisconsin Governor Scott Walker to take away worker rights. But he probably would support less drastic cutbacks taking place in states like New York and California, where politicians are pushing to balance budgets in the face of lower economic conditions.

3. Keynes said if money saved exceeds the amount being invested, then unemployment will rise. Think of all the money hoarded on corporate balance sheets. Google alone is sitting on almost $50 billion in cash. Microsoft has almost $60 billion. He might well be in favor of lowering taxes on funds that American businesses hold overseas so they would bring the money home. And he would certainly support tax breaks and other incentives for corporations to build new factories and ramp up research and development.

4. Keynes felt that countries should not run large trade surpluses or deficits. He would likely be in favor of lowering the value of the dollar to boost American exports, give our multinational corporations a competitive edge, and reduce the U.S. trade deficit.

Classical Economist:

Classical Economics and the Free Markets

The theory of classical economics is that free markets will regulate themselves if they are left alone. Markets will find their own level of equilibrium without interference by people or the government.

In a classical economy, everyone is free to pursue their own self-interests in a market that is free and open to all competition. When people work at jobs making things, they get paid and use these wages to buy other products. In essence, workers create their own demand for goods and services.

Role of Government in the Economy

Classical economists do not like government spending, and they especially detest more government debt. They would prefer a balanced budget because they do not believe the economy benefits from higher government spending. Keynesians are okay with government borrowing, because they are convinced that government spending increases aggregate demand in the economy.

A key difference between Keynesians and classicists is how to predict and treat the future growth of the economy. Keynesians focus on short-term problems. They see these issues as immediate concerns that government must deal with to assure the long-term growth of the economy.

Classicists focus more on getting long-term results by letting the free market adjust to short-term problems. They believe short-term problems are just bumps in the road that the free market will eventually solve for itself.

Whether Keynesian or classical economists are correct in their views cannot be determined with certainty. Business owners have to use the actions of politicians and business leaders as signposts to help them make their own decisions about the growth of their companies.