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Comparison Of Neoclassical With Classical, Marxian Or Post-Keynesian Price/Value Theory

Comparison Of Neoclassical With Classical, Marxian Or Post-Keynesian Price/Value Theory

Comparison Of Neoclassical With Classical, Marxian Or Post-Keynesian Price/Value Theory

In the classical model in real economy, output is entirely produced by capital and labor. Households supply labor that is involved in tradeoffs between leisure and consumption making it a function of wage. Firms pay real wage equivalent to labor put in the production of goods and services. In the equilibrium situation, the labor demand and supply are always equal in the labor market while clearing the real wage. The labor force is fully employed in a manner that everyone can find a job at prevailing wages, though many citizens may be unemployed while they are searching for new and well-paying jobs (SO-well 2006, p. 4). The output produced with the available capital, and the labor inputs will define the supply on the goods in the market.

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Consumption for households is contributed by demand for goods, capital investment associated with the firms, the government for taxes, and foreigners for foreign income (Mariolis & Tsoulfidis 2016, p. 12). Because consumers have a choice and preference to consume or save and earn interest by avoiding total consumption; consumption, savings, taxes and capital investment solely depend on the interest rate. Capital investment has to yield some returns more so when there is a delay and must be financed depending on the interest rate. When real interest rates reduce investment in an unbalanced manner, but the contradicting condition on income and consumption plus savings help to remedy the situation. Aggregate demand is dependent on the interest rates accrued; the income is gained from the investment, and it relates the two elements. The relationship can be expressed in the form of Y= {Yd. (r)}. In the equation, r represents interest rate, Y -income and Yd stands for aggregate demand. Alternatively, the slope gives the interest rate. When demand curve is drawn, a negative slope is obtained, which means that demand negatively responds to the interest rate. The supply of goods on output must behave in an opposite manner (Simpson 2013, p. 179). The supplies respond positively to the real interest rate. Higher interest rate always encourages people to supply more labor; hence, they are directly proportional. Sometimes, some uncertainties in the economy are assumed for the function of aggregate supply with interest rate having a slope, which steeps positive or almost vertical slope.

The savings and investment for aggregate demand are closely related to the demand and supply analysis on financial markets (Barber 2009, p. 163).

It is now clear that the economic theories are based on certain few parameters but have significant effects either in the short run or long run. These parameters include savings (supply in the financial markets), demand and many other financial aspects. The economic theories are based on almost the same principle since they were formed during some emergencies to try to salvage the situation at hand.

Neoclassical economics determine the goods, inputs, outputs and income circulation in the markets through forces of demand and supply that result to setting a focus on providing an economical solution (King 2012, p. 420).  This determination is coordinated by maximum utilization of income constraints and profits to solve the crisis facing individuals and firms providing adequate information and the right factors of production in accordance with the rational theory. Neoclassical economics dominates macroeconomics and has gained widespread acceptance by many economists (Beech 2015, p. 179). It is a school of economic thought built on the foundation laid during the 18th century by the economists such as Adam Smith (1723-1790) and David Ricardo (1772-1823) and has been redefined by many other researchers. From the other side, classical economics is based on the belief that competition partially leads to allocation of resources and regulates economic activity that establishes balanced equilibrium between demand and supply through its application (Hollis & Nell 2006, p. 22).

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Therefore, classical and neoclassical economics are schools of thought that have different approaches to describing economics. Classical economics are believed to have been founded by the famous David Ricardo, Adam Smith, and John Stuart Mill. At the same time, classical economics can be regarded from a  historical perspective and is viewed like evolution, and neoclassical economics entails the kinds of economic principles and concepts followed and accepted in a situation. In classical economics, more focus is laid on the production of goods and provision of services while neo-classical economics concentrates on the operation of individuals within an economy (Peil & Staveren 2009, p. 399).

As it has been mentioned above, classical economics was developed as history and reminds evolutionary approach; from the other side, neoclassical economics entails economic principles that follow specific concepts that are accepted in a situation, for example, scientific theories that are mainly practiced in the modern world. In classical economics, the production of goods and provision of services are being the focus. Neo-classical economics had its focus on the operation of individuals within an economy. In this approach, prices are determined by the forces of demand and supply of a commodity. Classical economics is a self-regulating economy, which is most efficient and effective due to the needs of people that arise as a result of requirements from others. In classical economic theory, there is no government intervention, and people would share resources in a manner to meet the needs of individuals and businesses (Gupta 2009, p. 76). Prices are settled based on the raw materials used to produce wages, electricity, and other expenses. In classical economics, the spending on the goods and services by the general public and business investment is considered most crucial to activating the economic activity within minimal government spending. .

Neoclassical economics operates on the assumptions that individuals are rational in the way they act when it comes to investment, consumption, and savings. It also involves the government commitment to controlling the economy and individuals’ income. Classical economy strives to the maximum utilization of available resources to maximize profits. It aims to determine how an economy can grow without the three factors used to allocate sources of income based on capital: wages, rent, and profit. Neoclassical economics concerns the individual, who makes up a part of the economy. The question neo-classical economics asks is how the individual choices influence the economy as a whole, and how do individuals account for a scarcity of resources. It also argues that prices are determined by the cost to produce the goods and focuses on the consumers and firms. It also concerns the interactions of demand and supply in the market during price determination (Negishi 2014, p. 2).

Both classical and neoclassical theories were developed from value and distribution on the long-period positions of an economic system focusing on operating factors to shape the economy of a state. The two theories came into place due to what was being experienced during the early 1900s. At one point, the distinguishing features cropping between the theories were integrated so that standard application could be attained, but based on the ground of formation, having a common operating ground for the two theories proved futile. Integration is done to overcome the capital difficulties since both approaches preserve demand and supply in the income distribution.

In the long and short period analysis, the neoclassical economics is more pronounced than the classical one, as well as many other theories. For example, Keynesian approach put emphasis on individuals while Marxism deals with the general public (Fitzpa-Trick 2010, p. 54). In Keynes’ theory, the economy is functioning in a circular manner such the expenditure of one pary affects the earning of the second one. This theory explains why money keeps on circulating in the economy and standstill. Keynes argued that the economy must be supported by the government to step up an increase in spending to ensure there is enough supply of money for buying goods from the markets. This argument worked during Great Depression, though it was not the best solution. Keynesian economics is critical and downplays too much saving which leads to under-consumption. It supports overconsumption to enhance spending that is crucial in the circular economy. Post- Keynesian price theory is concerned when dealing with a macro economy, which now entails many sectors into play (Dutt & Ros 2008, p. 97).

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Marxism is a social and economic system based on the political and economic theories. It concerns the ownership of the means of production of goods and services plus distribution of goods and services factored by the competition of free markets and activation of profit and minimizing losses. Marxism is a socialist system where public ownership is dominant and influences distribution, production, and trade exchange.

For many years, debate has been going on about the poor economies in the world. A lot of finger pointing and chest thumping has been done in the recent discussion concerning the best economic theory that yields the appropriate results and contributed to faster growth of the economy without conflicting factors. Since 1940, the USA and many countries around the globe have been run by the Keynesian economic theories. Most of these theories are used alternatively depending on the situation of stress in the economy. Due to frequent failure of stimulus depicts the failure Keynesian approach, the senior economists advice some nations to embrace the classical economics, which in the view of veteran economists, has never caused a crisis.

Economists like Paul Krugman and John Cochrane argued that some approaches cannot be applied in an unstable economy while the classical one is best suited since it concerns with the factors of production circulating in an economy. Neo-classical theory is partially used because it is based on individuals who sometimes adversely affect the choice of the economy. They go further by claiming the neo-classical and Keynesian schools cannot function in an economy that is debt-generated since it can create a ground for the debts to eat up the growth of stimulated economy with time. Therefore, the classical theory is the most efficient choice because individuals can survive even if the government becomes imposes an increased burden by raising taxes. In this case, no one notices the current and future taxes or debts that a country. Neo-classical economic theory believes in the general classification of a group (Wolff, Resnick & Wolff 2012, p. 51). For example, if one of the employees in a factory owns a new car; people may argue that the workers are wealthy because it is assumed that the general consumption at the facility is the same. Classical economic theory pegs it at individual consumption, which is somehow independent.

The best economic theory should incorporate citizens, government, and state so the growth can be pulled together to show active participation in all sectors. Classical economic theory balances the political nature of various governments. For the economy to grow, a focused policy must be developed to increase production of goods and services. It can be achieved through looking at the marginal tax rates that determine the share of individuals within the concerned sector. If the government is not corrupt and adopts the classical economic theory, the lower marginal tax rates are obtained by eliminating deductions. Of all the economic theories analyzed (classical, neo-classical, Keynesian, Marxist, and others), it is evident that the most stable and long-lasting one is the classical economic theory since most of its advantages outdo the limitations, and most nations with stable economy continue using it when problems set in.

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