Difference between classical neoclassical and modern theory of economics
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Difference Between Classical & Neoclassical 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.
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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.
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Classical liberalism was the political philosophy of the Founding Fathers. It permeates the Constitution, the Federalist Papers and many other documents produced by the people who created the American system of government. Many emancipationists who opposed slavery were essentially classical liberals, as were the suffragettes, who fought for equal rights for women.
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One of the difficulties in describing political ideas is that the people who hold them are invariably more varied and complex than the ideas themselves. Take Southern Democrats, for example. For most of the 20th century, right up through the 1960s and even into the 1970s, virtually every Democratic politician in the South was an advocate of segregation and Jim Crow laws. This group included Arkansas Sen. J. William Fulbright (a favorite of the liberal media because of his opposition to the Vietnam War); North Carolina’s Sen. Sam Ervin (an ardent constitutionalist and another liberal favorite because his Senate hearings led to the downfall of Richard Nixon); Lyndon Johnson (who as president changed his public views on race and pushed through the Civil Rights Act of 1964); such economic populists as Louisiana Gov. Huey Long and Alabama Gov. George Wallace; West Virginia Sen. Robert Byrd, one-time Ku Klux Klan member and king of pork on Capitol Hill; and small government types, such as South Carolina’s Sen. Strom Thurmond (who changed his views on race, began hiring black staffers and then switched parties and became a Republican).
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