Difference between Keynesian and neoclassical economics(10marks)
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Keynes: “The General Theory”
The General Theory written by Keynes in the 1930’s lays its importance in a period of financial downturns, with the Great Depression and the prior crash of the Wall Street in 1929. According to the literature, at this point in time and until the General Theory, economists had little advice to provide on economic policies.
Keynes argues that inefficient macroeconomic outcomes are a consequence from the private sector decisions. Thus in order to stabilize output over business cycle, the public sector has to respond through monetary and fiscal policies. Therefore, a mixed economy is supported by Keynes, where private sector is predominant but the government and public sector with a large role.
Keynes not only questioned Classical and Neoclassical assumptions of full employment, but also affirmed that investment depend on rate of interest and saving income in terms of wage units (Keynes, 2008)
Keynes’ work had a few fundamental elements such as the liquidity preference, changes in money wages, the marginal efficiency of capital and the consumption function, which are explained as follows:
The Neoclassical Synthesis
The post war period was marked with a movement in academic economics and the emergence of the Neoclassical Synthesis. As its name suggests, the theory was a combination of Keynes’ and previous economists’ ideas, formalized mathematically, fact avoided by Keynes in the General Theory.
The main differences from Neoclassical to Keynesian theories are that Neoclassical argue the individual`s rationality, and their ability to maximize utility and firms to maximize profit. And, as mentioned above, the wide use of mathematical equations in multifarious aspects of the economy.
Disseminated by Paul Samuelson in his textbook ‘Economics’, the Neoclassical Synthesis’ initial version was the IS-LM model, developed just after the General Theory by John Hicks.