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Keynesian (John Keynes) economics is all about using monetary and fiscal (Government) policies to help direct the market towards equilibrium. Keynes didn't believe that the market was self-correcting, and thus required government involvement. Keynesian economics also uses the view that prices are constant in the short term and only adjust in the long term (sticky price theorem). This delay in price adjustment pulls the market away from equilibrium.
Classical Economics (Adam Smith) is based on the idea that an "invisible hand" controls the market place and government involvement just creates an inefficient market place. Adam Smith believed that basic supply and demand is capable of maintaining a marketplace equilibrium. Prices are self adjusting and the market reacts immediately to changes thus maintaining equilibrium in the long run and short run. Government policies such as taxes lead to price distortion that can skew consumer rationality, thus leading to disequilibrium (is that even a word?!...unequilibrium??).
Both these views have faults: Classical failed during the Great Depression - this wouldn't happen if there really was an 'invisible hand' to smooth out the economy.
Keynesian was ineffective during the stagflation (high inflation and low employment) of the 1970s, there isn't a policy that can effectively combat both these variables.
AnswerKeynesian (John Keynes) economics is all about using monetary and fiscal (Government) policies to help direct the market towards equilibrium. Keynes didn't believe that the market was self-correcting, and thus required government involvement. Keynesian economics also uses the view that prices are constant in the short term and only adjust in the long term (sticky price theorem). This delay in price adjustment pulls the market away from equilibrium.Classical Economics (Adam Smith) is based on the idea that an "invisible hand" controls the market place and government involvement just creates an inefficient market place. Adam Smith believed that basic supply and demand is capable of maintaining a marketplace equilibrium. Prices are self adjusting and the market reacts immediately to changes thus maintaining equilibrium in the long run and short run. Government policies such as taxes lead to price distortion that can skew consumer rationality, thus leading to disequilibrium (is that even a word?!...unequilibrium??).
Both these views have faults: Classical failed during the Great Depression - this wouldn't happen if there really was an 'invisible hand' to smooth out the economy.
Keynesian was ineffective during the stagflation (high inflation and low employment) of the 1970s, there isn't a policy that can effectively combat both these variables.
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This answer is that the governments role is very little
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