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Classical Economic theory got popular during industrialization phase when there was economic growth. For economic growth market needed least interference from the government (like no license raj) so that industries canboom.While Keynesian theory evolved after the Great Depression of 1930’s when government intervention was required to re-start the economy.The major differences are as-Classical economistsbelieved in the perfect market and “the invisible hand” managing the market equilibrium. The term ‘invisible hand’ was usedby Adam Smith to denote un-observable market force that helps the demandand supply to reach equilibrium automatically. The theory rightly says that individuals out of their self interests will indulge in productive work that will create economic growth. Classical economics says that government intervention in the market can be detrimental as it will discourage private sector. It says that for long run growth of the economy the growth should come from the market forces.Keynesian theoryrecommendation of government’s intervention to stimulate growth got wide attention and was followed by major economies to bring them out of the great depression of 1930’s. They recommended that government intervention is required to stimulate growth in the economy and short-run survival/growth is must for performing in the long-run.In present scenario the idea of “less government more governance” is to encourage private sector to lead the economic growth while government creates an environment to grow. This is similar to classical theory. At the same time creating fiscal deficit and managing (lower) interest rates to spurthe economic growth is similar to Keynesian theory.The major difference is the role government plays in each. Classical economics is essentially free-market economics, which maintains that government involvement in managing the economy should be limited as much as possible. Keynesian economics espouses the view that government should take an active role in managing the economy, particularly in depression/recession like periods.Adam Smith is widely acknowledged as the founder of the classical school ofthought whilethe founder of the Keynesian school is of course John Maynard Keynes.This difference leads to different conclusions about economic phenomena, some of the more important ones are:
Unemployment: The causes of unemployment are viewed differently. Classicists believe unemployment is caused by supply-side factors (the level of investment, the level of capital, the productivity of labour etc). Keynesians place greater emphasis on falling demand as a cause of unemployment.Wages and Prices: Classicists believe wages and prices are flexible and so inthe long term, the economy will maintain full employment, full employment meaning anybody looking for a job can find one. Keynesians maintain that wages and prices can be sticky and hence an economy can find itself in a