Comparative Interpretation of Classical and Keynesian Fiscal Policies (Assumptions, Principles and Primary Opinions)

Engin Oner
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Engin Oner: Associate Professor,Department of Public Finance, Yuzuncu Yil University

International Journal of Finance & Banking Studies, 2015, vol. 4, issue 2, 11-20

Abstract: Adam Smith being its founder, in the Classical School, which gives prominence to supply and adopts an approach of unbiased finance, the economy is always in a state of full employment equilibrium. In this system of thought, the main philosophy of which is budget balance, that asserts that there is flexibility between prices and wages and regards public debt as an extraordinary instrument, the interference of the state with the economic and social life is frowned upon. In line with the views of the classicalthought, the classical fiscal policy is based on three basic assumptions. These are the "Consumer State Assumption", the assumption accepting that "Public Expenditures are Always Ineffectual" and the assumption concerning the "Impartiality of the Taxes and Expenditure Policies Implemented by the State". On the other hand, the Keynesian School founded by John Maynard Keynes, gives prominence to demand, adopts the approach of functional finance, and asserts that cases of underemployment equilibrium and over-employment equilibrium exist in the economy as well as the full employment equilibrium, that problems cannot be solved through the invisible hand, that prices and wages are strict, the interference of the state is essential and at this point fiscal policies have to be utilized effectively.Keynesian fiscal policy depends on three primary assumptions. These are the assumption of "Filter State", the assumption that "public expenditures are sometimes effective and sometimes ineffective or neutral" and the assumption that "the tax, debt and expenditure policies of the state can never be impartial".

Keywords: Classical Fiscal Policies; Keynesian Fiscal Policies; Primary Assumptions; the full employment equilibrium; underemployment equilibrium and over-employment equilibrium (search for similar items in EconPapers)
Date: 2015
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