Classical Economics vs Neoclassical Economics

Classical Economics vs Neoclassical Economics Classical economics and neoclassical economics are both schools of thoughts that have different approaches to defining economics. Classical economics was founded by famous economists including Adam Smith, David Ricardo, and John Stuart Mill. Neoclassical economics was said to be developed by authors and scholars such as William Stanley Jevons, Carl Menger, and Leon Walras. The two schools of thought are quite different to each other in that classical economics was developed historically, and neo classical economics encompasses the kinds of economic principles and concepts followed and accepted today. The following article provides a clear outline of what each school of thought is, and how they differ to each other. Classical Economics Classical economic theory is the belief that a self-regulating economy is the most efficient and effective because as needs arise people will adjust to serving each other’s requirements. According to classical economic theory there is no government intervention and the people of the economy will allocate scare resources in the most efficient manner to meet the needs to individuals and businesses. Prices in a classical economy are decided based on the raw materials used to produce, wages, electricity and other expenses that have gone into deriving a finished product. In classical economics, government spending is minimum, whereas spending on goods and services by the general public and business investments are considered as the most important to stimulate economic activity. Neoclassical Economics Neo classical economics are the economic theories and concepts that are practiced in the modern world. One of the major underlying principles of neo classical economics is that prices are determined by the forces of demand and supply. There are three fundamentals assumptions that govern neo classical economics. Neo classical economics assumes that individuals are rational in that they act in a manner that brings forth the best personal advantage; individuals have limited income and, therefore, strive to maximize utility and organizations have constraints with regard to cost and, therefore, use the available resources to maximize profits. Finally, neo classical economics assumes that individuals act independently of one another and have full access to the information required for decision making. Despite its acceptability in the modern world, neo classical economics has invited some criticism. Some critiques question whether neo classical economics is a true representation of reality. Classical vs Neoclassical Economics Neo classical economics and classical economics are two very distinct schools of thought that define the economic concepts quite differently. Classical economics was used in the 18th and 19th century, and neo classical economics, which was developed towards the early 20th century, is followed till today. Classical economics believes in a self-regulating economy with no government intervention, with the expectation that resources will be used in the most efficient manner to meet needs of individuals. Neo classical economics operates with the underlying theory that individuals will strive to maximize utility and business will maximize profits in a market place where individuals are rational beings who have full access to all information. Summary: • Neo classical economics and classical economics are two very distinct schools of thought that define the economic concepts quite differently. • Classical economic theory is the belief that a self-regulating economy is the most efficient and effective because as needs arise people will adjust to serving each other’s requirements. • Neo classical economics operates with the underlying theory that individuals will strive to maximize utility and business will maximize profits in a market place where individuals are rational beings who have full access to all information Classical approach to management is a set of homogeneous ideas on the management of organizations that evolved in the late 19th century and early 20th century. This perspective emerges from the industrial revolution and centers on theories of efficiency. As at the end of the 19th century, when factory production became pervasive and large scale organizations raised, people have been looking for ways to motivate employees and improve productivity. A need for management ideas came to pass which directed to classical contributors such as Frederick Taylor Henri Fayol and Max generating management theories such as Taylor‟ Scientific Management, Fayol‟s Administrative Management and Weber‟s Bureaucratic management(George,1948). As a reaction to approaches of classical theory which over-emphasized the mechanical and physiological characters of management, came up the schools of neoclassical theory with a more human-oriented approach and emphasis on time needs, drives, behaviors and attitudes of individuals (Singh,1983). Two important groups, namely, human relations school and behavioral schools emerged during 1920s and 1930s under the neoclassical theory. As in the late 1920‟s and early 1930‟s the Hawthorne experiments were conducted by Elton Mayo and his associate leaded to the Behavioral viewpoint. This brought about a Human Relations Movement which included Douglas McGregor‟s Theory X and Theory Y approach.