Neoclassical Versus Radical Schools of Thought

Question: Write an essay comparing the key arguments made by neoclassical and radical economists, respectively. The essay should point out similarities and differences between these two approaches to economic analysis. Answer: The history of economics is ancient an by its very nature economics is ever changing. Now more than ever with globalisation there is need for economic theory to accommodate change and challenge (Wolff, Richard D and Stephen A Resnick) Neoclassical Economics: The neoclassical school of economics is the modern adaptation of the classical school. It is based on three central assumptions. They are that individuals have rational expectations, they maximise their utility while firms maximize profit and people work on the basis of complete information. These form the basis of the most prevalent microeconomic theories in present day and they further recognize that macroeconomics require a microeconomic foundation. The idea that the demand for each factor of production actually depends on the marginal productivity of that factor is called the neoclassical theory of distribution and is accepted by most economists today (Mankiw, N. Gregory). Their general worldview is that individuals make rational decisions and firms are always into maximising the profits and the only thing which can shock the system are real effects, like the change in the price of a factor of production that could not be anticipated by an individual and thus does not form a part of her rational expectations. This school of economics came into prominence in the 1970s when the prevalent Keynesian theories failed to explain the Philips Curve. They generally take a laissez faire approach to policy (Roche, Cullen). They are also usually politically conservative, even though they might not affiliate with any party. Radical Economics: Radical economics is used to denote the theories and ideas of the political economist who take a left wing perspective in their economic discussions (Gonick, Cy). What they properly entail shifts from generation to generation as new problems arise in the economy which are to be combated. It is Marxism in different form and in different generations and is above all a critique of the capitalist order in a socialist approach. It is almost a rebuke to the orthodoxy of the neoclassical economists but this field continues to develop and grow perhaps by contrasting with the orthodox branch of economics and borrowing from its intellectual ideas and by responding and criticising its policies and interpretations. It is not rigidly defined as to what constitutes radical economics and is thus also a part of economics that takes into account the political and social side of economics (Samuels, Warren G et al.). But vaguely it can be thought to be referring to Marxism and most radical economists a lso be thought of belonging to the same political ideology and thus having similar political support. They are typically supportive of socialism in some firm and condemn capitalism and its effects on the society at large including in academics, households etc. These economists prefer social and economic advancement by removing structures that perpetuate exclusion and oppression. Similarities and Differences: Both of the two schools use for their need the conservation of the value of exchange. For the radical economists value is made by labour productivity, and for the neoclassical economists the value in production or the price was the marginal productivity of factor inputs. For neoclassical economists thought to be in a Walrasian economy there is endowments given according tto which wealth is distributed in the economy. Radicals on the other hand use the very famous labour theory of value to determine wages and productivity and income distribution. Their type of income distribution is one where the markup over input costs specially wages helps determine labour and capital distribution. This is again something they have in common with neoclassical economists who bring the profit share analysis of distribution most notably to arrive at an aggregate demand curve (AD curve). According to Marx how the aggregate demand is distributed in the economy is largely guided by how the surplus in the economy is distributed between the workers and the capitalists. The neoclassical economists generally are not fond of using the AD curve in their analysis. As according to them supply and demand always equilibrates so as to clear the market at full employment such a school of thought hardly has any use of the aggregate demand curve. For a Marxian analysis a crisis in a capitalistic society might be brought about by problems in the aggregate demand of the economy mainly due to the difference in the micro approaches of the worker and the capitalist class to income that they are being able to generate. At a macro level such needs would cause a violation of the Says Law i.e. supply creates its own demand which is taken to be true by the classical economists (Blanchard, Olivier and David R Johnson). According to the radical economists over-accumulation of capital and the continuously growing use of labour leads the economy to such a state where the profit is falling as compared to before and there is a very large labour force all of which might not be employed in that sector thus leading to unemployment (Dornbusch, Rudiger et al.). Thus for them, excess labour is due to capital accumulation and technological progress. On the other hand, neoclassical economists relate labour supply to factor rigidities i.e. prices are hardly able to adjust in the short term thus leading to faulty signalling and thus creating unemployment. Neoclassical economists think it is the savings rate which determines the amount of investment in an economy and therefore the growth in the economy. According to Marx, growth was a product of the amount of reinvestment of surplus back into the economy with a account of the exploitation. Radical economists view capitalism as unsustainable. They would want to do away with labour and property rights so as to have a fair distribution of surplus among all the participants of society. However, property rights form the basis on the neoclassical school and are crucial in making sure that the markets run efficiently and that resources are optimally allocated (Pindyck, Robert S and Daniel L Rubinfeld). Finally both these schools share the thought of a normal rate of profit in the economy which the market tends towards. Thus we can say that even though these two schools share some similar topics broadly, in their truest sense they are mostly vary from one another. Reference List: Blanchard, Olivier and David R Johnson.Macroeconomics. 6th ed., Pearson, 2013,. Dornbusch, Rudiger et al.Macroeconomics. 12th ed., Mcgraw-Hill, 2014,. Gonick, Cy. "Radical Economics".The Canadian Encyclopedia, 2017, https://www.thecanadianencyclopedia.ca/en/article/radical-economics/. Mankiw, N. Gregory.Macroeconomics. 6th ed., New York, Worth Publishers, 2008,. Pindyck, Robert S and Daniel L Rubinfeld. Microeconomics. Upper Saddle River, N.J., Pearson, 2013,. Roche, Cullen. "A Cheat Sheet For Understanding The Different Schools Of Economics | Pragmatic Capitalism".Pragcap.Com, 2017, https://www.pragcap.com/a-cheat-sheet-for-understanding-the-different-schools-of-economics/. Samuels, Warren G et al.Radical Economics. 1st ed., Dordrecht, Springer Netherlands, 2012,. Wolff, Richard D and Stephen A Resnick.Contending Economic Theories. 1st ed., Cambridge, Mass., MIT Press, 2012,.