Basic Accounting

Macroeconomic History
Keynesian and classical economic theories, which paved the way for new theories in the 1980s,
can be used to solve macroeconomic challenges.
Adam Smith introduced Classical economics in the 18th century. Classical theories were
prevalent in economic education in the United Kingdom until the 1870s. Many people lost faith
in the classical economic paradigm after the Great Depression. In the postwar period, Keynesian
economics dominated the mainstream of economic theory, forming the mainstream of
macroeconomic thought in the 1950s, 1960s, and 1970s (Rittenberg et al., 2012).
Keynesian and Classical economics have significant similarities. The idea of government
expenditure is shared by these two models. Based on the classical economic model, it embraces
the premise that the government should spend on corporate investment to assist the public sector,
which is suffering from a lack of personal expenditure. This is comparable to the Keynesian
model's premise, which claims that government spending is the only way to increase
employment because it can assist improve output (The Freeman Online, n.d.). Both theories
assume that people should save a portion of their income for later use. Furthermore, both of these
models consider the money supply and demand for money as possible influences on the
economy's interest rate.
Keynesian and Classical economics differ in various ways. The fundamental distinction between
them is the extent to which the government is involved in the market. Classical Economics
advocates for minimal government intervention in economic concerns, whereas Keynesian
Economics advocates for maximal government involvement. When it comes to unemployment
and wages, classical economics concentrates on the long-term increase of the economy's
potential production, hence inflation is the greatest threat to the economy. Keynesian economics,
on the other hand, claims that wages are sticky in the short run and that this stickiness has
hampered full employment adjustment. The next difference is in how they forecast economic
growth in the future. Classical economics emphasized long-term results by enabling the free
market to correct short-term economic issues. Keynesians, on the other hand, are more likely to
find a solution to short-term financial problems because they believe that allowing the
government to deal with these problems as quickly as possible will help the economy thrive in
the long run.
To address the problem of unemployment, Keynesians claimed that the government should be
held accountable for it and that favorable conditions should be created to eradicate it. They also
believed that individual economic stability would benefit the economy as a whole. Classical
economics is more concerned with inflation than with unemployment, believing that inflation is
the most serious hindrance to economic growth and that government intervention is unnecessary.
New Keynesian economics, a new macroeconomic theory encompassing monetarism and new
classical economics, emerged in the 1980s (Rittenberg et al., 2012). It analyzes macroeconomic
optimization in the long and short-run and focuses on both supply and demand to ensure
economic stability. Another notable aspect is the increased use of microeconomic analysis to
determine whether sticky pricing and salaries are in line with consumer and corporate
preferences. Economists could effectively solve budget deficits and unemployment by applying
these theories to macroeconomics.
To conclude, while there are substantial differences between how classical economic theory and
Keynesian economics approach economics, it is crucial to remember that these economics
generated modern macroeconomics. It might be stated that the key point is to validate the
market-government interaction to successfully assess and improve the budget while lowering
unemployment for a better future.
Word count: 570
Reference
Keynesian Economics Vs. Classical Economics: Similarities and Differences. (n.d.). The
Freeman Online. https://www.thefreemanonline.org/keynesian-economics-vs-classical-
economics/
Rittenberg, L. and Tregarthen, T. (2012). Macroeconomics Principles V. 2.0. Licensed under
Creative Commons by-nc-sa 3.0 https://creativecommons.org/licenses/by-nc-sa/3.0/

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Macroeconomic History

can be used to solve macroeconomic challenges.

economics dominated the mainstream of economic theory, forming the mainstream of

economy's interest rate.

advocates for minimal government intervention in economic concerns, whereas Keynesian

Economics advocates for maximal government involvement. When it comes to unemployment

the long run.

these theories to macroeconomics.

Keynesian economics approach economics, it is crucial to remember that these economics

unemployment for a better future.

Word count: 570

Freeman Online. https://www.thefreemanonline.org/keynesian-economics-vs-classical-

Rittenberg, L. and Tregarthen, T. (2012). Macroeconomics Principles V. 2.0. Licensed under

Creative Commons by-nc-sa 3.0 https://creativecommons.org/licenses/by-nc-sa/3.0/

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