Topics: Neoclassical economics, Economics, Austrian School Pages: 6 (1584 words) Published: October 12, 2013

What's the difference between Neo-classical and classical economics?

Royal Goddess asked 5 years ago


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Girlie answered 5 years ago

The difference between classical and orthodox theory
Classical and neoclassical theories are distinguished in terms of their themes in analyzing economy, methodology, and value theory. In this section, I will discuss these points.
The question of Economics
Classical economists investigated two central economic questions: what causes an economy to grow? what determines the distribution of income into its three forms of wages, rent and profit? The classical theme is the accumulation and allocation of surplus output, and therefore their emphasis was on production and on the factors that influence the supply of goods.

Neoclassical economics, unlike its classical predecessor, focuses on individual choices,which unavoidably reflect subjective preferences and beliefs, and the allocation of given resources among alternative uses. Indeed, the marginalist revolution is a shift in focus from capital accumulation and growth to utility maximization and production efficiency as the aims of economic policy. This shifted the foundation of economics from production to exchange.

On the other hand, the Classical theory paid comparatively little attention to choices of individuals. The classical economists did not believe that there was much of general interest to be said about the preferences of or choices of individuals. Instead, they divided agents into three major classes: capitalists with their capital or stocks of accumulated goods, landlords with their land, and workers with their ability to work.

The aspect of methodology
Holism vs. Individualism
Methodological holism is a view, according to which properties of individual elements in a complex are taken to be determined by relations they bear to other elements. That is, the whole is more than its parts in the sense that the properties of the whole come from the systematic relational patterns of interaction among its parts and not simply from the aggregation of their atomistic (i.e. non-relational) properties. In other words, the social, aggregative implications of individual choices are often unintended. Methodological individualism, however, is the view that all social events must be explained as consequences of choices made by individuals and allows only individuals to be the decision-makers in explaining social phenomena. Accordingly, methodological individualism does not allow explanations which involve non-individualist decisionmakers such as institutions.

Classical economic theories, in general, explained the social phenomena in terms of methodological holism. Their primary interests are social entities such as capitalist society. Moreover, classical economists develop their theory in terms of class such as landlords, workers and capitalists who contest for a larger share of the pie, instead of abstract individuals. In a classical paradigm, the concept of class is more useful than individual agents in analyzing social phenomena. In this way, classical economy has roots in holism, and accommodates social categories like class. Usually the neoclassical economics is firmly grounded on a research program of methodological individualism, which generally posits that individuals with given preferences and endowments, and firms with given technologies, enter the market process as autonomous entities. Indeed, the adherence to the tradition of methodological individualism has an important bearing on the nature of the neoclassical model. For neoclassical economists, society is the collection of individuals. Individual wants, thoughts, and deeds combine to make society what it is. To understand an economy is then to make sense of the aggregate effects of individual wants and acts. Neoclassical theory does this by demonstrating how individuals maximize their material...
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