Classical economics believes that free markets are self-regulating and that government intervention harms the economy. In contrast, Keynesian economics emerged after the Great Depression to argue that markets are imperfect, unemployment and low growth can occur in equilibrium, and the government should intervene to stimulate demand when the economy is lacking growth. Keynes argued for government policies to boost consumer income and demand to promote economic growth, unlike classical economists who felt the economy would automatically adjust on its own.

1. Classical Economics David Ricardo Say’s Law: Supply Creates its own demand. The economy is stimulated when more goods are produced. The market is perfect and self-sustaining Government intervention can only be a detriment to the economy The market automatically adjusts to “booms” and busts Supply = Demand Historical Perspective: Classical economics came of age during and after industrialization.

2. Keynesian Economics John Maynard Keynes Historical Background: The Great Depression The market is imperfect and not self-sustaining Equilibrium may include unemployment, negative growth Consumer income stimulates demand, which causes economic growth. When economic growth is lacking, the government should stimulate demand.