classical economics.
Economic history is marked by many
revolutions and paradigm shifts. In the early 20th century, the shift from
classical to neoclassical economics brought about numerous changes in the way
people thought about wealth. The main intellectual shift ushered in by
neoclassical economics was the idea of value as a function of perception, a
sharp departure from the classical theory of value as cost of production. Many
of the differences between classical and neoclassical economics can be
attributed to this shift.
Other
People Are Reading
1.
Utility
o
The main difference between
classical and neoclassical economics lies in the concept of utility. In
classical economics, utility is conspicuously absent in theories of value,
labor and growth. In the classical school, equilibrium was a function of wages
and interest wages rather than supply and demand. By contrast, utility is given
a very high priority in the neoclassical school. Also in the neoclassical
school, economic equilibrium is a function of supply and demand across all
markets, with the supply and demand of all goods functions of their utility and
scarcity.
Value
o
The classical and neoclassical
theories of value are very different. In the classical school, the value of a
good is equivalent to the cost of producing it. In the neoclassical school, the
value of a good is a function of the demand for it and the supply of it.
Therefore, in classical economics, value is an inherent property; in
neoclassical economics, value is a perceived property. In classical economics,
value is cost; in neoclassical economics, value is utility.
Profit
o
The classical and neoclassical
schools of economics both place value on profit but in distinctly different
ways. In classical economics, profit is a payment to a capitalist for performing
a socially useful function. This definition circumvents the apparent problem of
classical value theory: If value equals cost, then where do profits come from?
Neoclassical economists define profit in a much simpler way. To neoclassical
economists, profit is simply a surplus of earnings over expenses. If the supply
and demand for a good results in a higher price than that of the labor and
capital that went into producing the good, then the good and its components
simply have different equilibrium prices.
Rationality
o
Rationality is emphasized in
neoclassical economics but not in classical economics. In neoclassical
economics, individual agents have rational preferences that guide their
purchasing and selling behavior: Individuals seek to maximize utility, and
firms seek to maximize profits. In classical economics, no distinction is made
between firm and individual according to the principle of "rationality. In
classical economics, the profits that accrue to firms are the same as wages
that accrue to workers, economic benefits brought on by the invisible hand of
the free market.
Equilibrium
o
Classical and neoclassical
definitions of equilibrium are fundamentally different. In classical economics,
equilibrium occurs when savings are equal to investment. In neoclassical
economics, equilibrium occurs at the intersection point of the supply and
demand curves or, in macroeconomics, aggregate supply and aggregate demand
curves. This is one of the most fundamental differences between classical and
neoclassical economics because the two concepts of equilibrium are based on
entirely different components.
v
Nicely expose the difference. Thank you very much
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteVery Helpful
ReplyDeleteNice job, but what about the modern economic principle? No refferences
ReplyDeleteThank you so much....Understood well.
ReplyDeleteThanks, germane points.
ReplyDeleteUseful, thanks.
ReplyDeleteextremely clear
ReplyDeleteNever felt better with these revelations.
ReplyDeleteTq very much!!!! From Nepa!!!
ReplyDeletedoesn't supply=demand thery boil down to savings=investment? how are they fundamentally different then?
ReplyDeleteThese theories are fundamentally different because in classical economics consumer Had no role. Saving was done by capitalists and landlords. In neoclassical theory, consumers had a role to play (DEMAND) which is equated to supply
DeleteExcellently replied
Deletewow
ReplyDeletewow
ReplyDeletewow
ReplyDeleteThis piece clearly highlights the difference.
ReplyDeleteGratitude to the author
Thanks a lot
ReplyDeleteHi, a quick question: Markets such as monopoly, perfect competition, oligopoly etc. are considered neoclassical theory (market) categories?
ReplyDeleteI'm trying to settle an argument for my assignment, but I have very little economics theory knowledge
Thanks much unknown
ReplyDeleteWell done
Thank you very much... It was very helpful and enlightening.
ReplyDeleteThanks you so much sir for this wonderful article.
ReplyDeleteThanks a lot
ReplyDelete