Divergent Paths: Classical vs. Neoclassical Economics

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The neo-classical economics movement has been touted as the replacement to classical economics movement as it appeared to have been presented as an improvement to the beliefs and ideologies of that of the classical economics movement. Not many people agree with this fact as it stands though.

While some think that the neo-classical movement represents an evolution of economic theory from the early and probably flawed version which was the classical economic theory to a more advanced, sophisticated and improved theory, others believe that the neo-classical movement represents the birth of an entirely new discipline that had decided to abandon a lot of the questions and issues that the classical economic movement had been riddled with instead of trying to find a better approach to arriving at reasonable solutions for those issues.

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As a result of these contrasting views, it is necessary to delve into the origins of both movements, carry out a thorough analysis of the modus operandi and arrive at a reasonable conclusion by taking a subjective stance on the matter.

In doing this, some of the issues that will be addressed include: the specific issues that the neo-classical economic movement and the classical economic movement really address, how much overlap there is between the named set of issues, the kinds of analytical methods used in both economic movements, and whether the neo-classical analytical method is more effective at accomplishing its own goals as well as that of the classical economic methods (even better than the classical economists themselves).

Classical Economics

The birth of the classical economics movement is largely attributed to Adam Smith as a result of his 1776 publication titled The Wealth of Nations, although Jean-Baptiste Say, David Ricardo, Robert Thomas Malthus and John Stuart Mill (over a period of about hundred years) are all seen as the major contributors to the development of the movement (Evans & Phillips, 2006). Adam Smith laid emphasis on the fact that a perfect economy is self-regulatory in the sense that the needs of the population present in that economy are automatically satisfied.

He coined the term 'invisible hand' as a mechanism that is responsible for the propelling of the populace to pursue their individual self-interests which indirectly promotes the general improvement of the society (Evans & Phillips, 2006). This emphasis served as the basic foundation of the classical economic movement. David Ricardo on the other hand, stressed that profits and wages were drastically affected by increase in the price of rent. The increase in rent according to Ricardo was as a result of the increasing population which is a consequence of the fixed availability of land (Evans & Phillips, 2006).

Reverend Robert Thomas Malthus in his suggestion averred that unemployment in a market economy is caused by the economy being frugal with spending. However, he was more famous for his population theory that explains that food production increased at an arithmetical progression while population increased at a geometrical progression (Evans & Phillips, 2006). This implies that with time, the population will soon outgrow food supply and the limited amount of available which will result in diminishing returns to labor (Evans & Phillips, 2006).

The diminishing returns to labor in turn leads to a radical reduction in the standard of living as a result of the low wages that workers are paid. John Stuart Mill's proposition took into consideration, the fact that resource allocation and income distribution, which happened to be the two major roles of the market system were distinctive from each other and that the market may not be efficient enough to perform both roles therefore, the involvement of the society is required to compliment the inefficiencies (Evans & Phillips, 2006).

The term ‘classical economists’, was first used by the father of communism, Karl Marx to describe the group of economists that shared the same beliefs regarding the labor theories of value. At a time when capitalism was gaining grounds at the expense of feudalism, and when the industrial revolution was rapidly restructuring the society, it was necessary to re-examine and re-define the status quo by ensuring that the nation's economic interests as a whole lies in and is determined by market forces instead of the autocratic and individualistic determinants that were formerly widespread (Evans & Phillips, 2006).

Since then, various classical economists, such as Samuelson Paul, Hollander Samuel, John Hicks, Kaldor Nicholas, and Luigi Pasinetti, have thoroughly studied how the wealth of a nation grows and how policies need to be implemented so that the nation's wealth continually grows. In doing this, the aforementioned economists (Samuelson et al. ) basically presented various recognized models so as to define their own analysis of classical economics.

A major contribution of the classical economists was the development of the labor theories of value whereby the market values of commodities are associated to the various labor efforts that is needed to produce them. These theories of value were largely attributed to William Petty, Adam Smith, and David Ricardo who were acclaimed to have developed them so as to suitably look into economic dynamics.

In order to properly make the representation of the regularities found in prices easy, the classical economists brought about a basic distinction between market price which is largely affected by many short-lived influences which are not easily put forward at the theoretical level and natural prices of commodities which are responsible for taking into consideration, the continual forces that are operating at a given point in time (Evans & Phillips, 2006).

As far as the labor theories of value are concerned (as seen especially by Adam Smith), when an individual purchases a commodity, the real value of that commodity as far as the individual is concerned, is the practical sum total of the exertion that the individual underwent in purchasing the commodity. In other words, the actual value of a commodity (from the consumer's angle) lies in the labor that is expended in the acquisition process of the commodity.

Also, the value of a commodity from a producer's angle is the total stress or trouble that has been experienced in order to arrive at the finished product. This also implies that the actual value of a commodity (from the manufacturer's perspective) lies in the labor that is expended in the production process of the commodity. The labor described above depicts that which does not involve a pleasurable experience in the sense that the individual (consumer or producer) does not conveniently or pleasantly go through the experience of acquiring or manufacturing the commodity.

In this case, labor is seen as opposing to utility. As a result of this, the natural price of a commodity is determined by the summation of profits, wages and interests (from Adam Smith's proposition), although this view differs between the classical economic thinkers’ community because David Ricardo, John Stuart Mill, and Robert Thomas Malthus all had varying concepts (though similar to an extent) about labor value of theory. The classical economic movement also addressed the issue of comparative advantage, especially David Ricardo.

The principle of comparative advantage suggests that each nation should specialize in the production of the particular commodities that it can efficiently produce (Evans & Phillips, 2006). It should then seek to import every other commodity it needs. The implication of this is that the total output of the nations of the world would be more than if the nations decided to be more self-sufficient. This theory served as the foundation of the theory of international trade and immensely influenced the free-trade doctrine aspect of classical economic thought (Evans & Phillips, 2006).

Classical economists also addressed the issue of the theory of distribution which proposed that the national product is divided between laborers, capital owners, and landlords. These three social classes share national products in the form of wages, profits, and rents, i. e. wages in the case of laborers, profits in the case of capital owners, and rents in the case of landlords (Evans & Phillips, 2006). It is therefore possible for one of the above-mentioned social class to achieve a superior allocation of the national product over the other social classes.

There is hardly any common characteristic between the above mentioned issues that were addressed by the classical economists. The theory of comparative advantage is not related to the theory of distribution as well as the labor theories of value. Therefore, the issues cannot be said to be overlapping. The analytical method utilized by classical economists involves the historical-deductive method (Evans & Phillips, 2006). The economists that belong to the classical economic movement actually observe real life situations and then from their observations, they propose solutions to economic problems.

The solutions arrive largely as a result of the fact that the observer has noticed a pattern and can then deduce a likelihood of such pattern occurring again based on the tendency of the pattern to repeat itself as had already been observed. A typical example of the historical-deductive analysis employed by classical economists is the input-output analysis. The technique behind this method involves viewing the raw materials of a production process as an input while the semi-finished or finished product is seen as the output (Evans & Phillips, 2006).

Such semi-finished or finished product may be used as an input to another process which will result in a different output. In other words, the output of one industry is the input if another industry and this happens over and again when the economy is concerned as a whole. Neoclassical Economics The “Marginalist Revolution” was responsible for the introduction of the neoclassical economic movement. It was as a result of the theories of William Stanley Jevons, Carl Menger and Marie-Esprit-Leon Walras.

Jevons reflected this theory in his 1871 publication titled Theory of Political Economy, Menger in his 1871 publication titled Principles of Economics, and Walras in his 1874 publication titled Elements of Pure Economics (Evans & Phillips, 2006). William Jevons’ concept of utility was largely influenced by the utilitarian principles of John Stuart Mill and that of Jeremy Bentham because of the integration of their hedonic conception in his works (Evans & Phillips, 2006).

However, his view was different from those of Mill and Bentham on the grounds that value depends on utility among other things. He opined that the contentment or satisfaction derived from goods and services will always tend to reduce at the margin. For instance, the more cups ice cream an individual takes, the less pleasure such an individual derives from the last cup of ice cream until finally, the individual stops taking the ice cream. This principle is otherwise explained as the theory of diminishing returns.

He also modeled his theories after mathematical principles found in mechanics thereby incorporating mathematics into economics. Carl Menger on the other hand, failed to agree with Jevons' notion and did not embrace the hedonic conception that Jevons added in his own works. Instead, he tried to explain diminishing marginal utility in terms of an individual prioritization of the possible usefulness or uses of a commodity (Evans & Phillips, 2006).

In other words, Menger posits that consumers will always act in a way that ensures that their satisfaction is maximized in all inclinations. In other words, consumers will always apportion their money in such a way that the last component of a good or service that they purchased generates no more satisfaction than the last component of another good or service that they purchased (Evans & Phillips, 2006). He also failed to embrace the incorporation of mathematics into economics as observed in the case of Jevons.

Walras conversely was more focused on the market interactions within an economy and also had similar views with Menger on the concept of diminishing marginal returns. He was of the opinion that as small as the change in a consumer's preference for a particular commodity might be, it would always affect the producer's predilection to adjust production of such a commodity. For instance, a shift in the consumer's preference from land phones to mobile phones results in the reduction in the price of land phones and a corresponding increase in the price of mobile phones.

The producer or manufacturer as the case may be would shift production to mobile phones which will lead to increase in market supply thereby setting a new price equilibrium between both commodities. Although the trio of Jevons, Menger, and Walras were responsible for the originating the Marginalist concept of economics which birthed neoclassical economics, their works were not so popular until it they were popularized by Francis Edgeworth, Alfred Marshall, Philip Henry Wicksteed and Lionel Robbins (Evans & Phillips, 2006).

These set of economists were called the consolidators while Jevons, Menger, and Walras were known as the revolutionaries. Although not very common, a few economists have been referred to as the main proto-marginalists. These less-notable economists include Antoine Augustin Cournot (1838), Jules Dupuit (1844), Johann von Thunen (1850) and Heinrich Gossen (1854) (Evans & Phillips, 2006). Their era preceded that of the revolutionaries, but it was not until when Jevons, Menger and Walras published their own works that the Marginalist concept came into the economics public enlightenment.

Also, the popularity of the Marginalist theory did not end with the consolidators; there was this group of economists known as the Revivalists who further incorporated the Marginalist theories into their own work, thereby leading to further popularization of the concept (Evans & Phillips, 2006). The economists that belong to the 'Revivalist movement' include: John Hicks (1939, 1934), Harold Hotelling (1938), Oskar Lange (1942), Maurice Allais (1943), and Paul Samuelson (1947) (Evans & Phillips, 2006). In one way or the other, all the above mentioned economists had a major role to play in the origin of the neoclassical economic movement.

Another peculiarity of the neoclassical community of economics is that there appears to be factions or different 'schools of thought'. This was as a result of the independent nature of the pioneers. That is, Jevons was writing in England, Menger from Austria, and Walras from France. They were not aware of each other as at that time and as a result; different schools of thought developed thereby presenting the neoclassical economic movement as an embodiment of different schools. These schools include the Lausanne School, Vienna School, Paretian School, Cambridge School, to mention but a few (Evans & Phillips, 2006).

The neoclassical movement as a whole tends to address the issue of marginal utility. Marginal utility refers to the 'utility' that is derived from an increase in the consumption of a particular good or service. It could also refer to the 'utility' lost from a decrease in the consumption of a particular good or service. It results in the concept of diminishing marginal utility previously described, that is, more utility is obtained during the first consumption of the unit of a particular commodity than is obtained during the second consumption and this occurs in subsequent consumptions.

It is basically what the Marginalist revolution was about. While consumers of a commodity strive to maximize the utility derived from the commodity, the producers or manufacturers of the community also tend to maximize profit in the process. Apart from maximizing utility and profits, the neoclassical economic movement also addressed the issue of rational preferences. Every human behavior is guided by a rational reasoning. This implies that an individual will always tend to select that which appears to be appropriate as far as satisfying his or her needs is concerned.

As a result, such an individual develops a preference for that good or service that would suitably be of benefit to them by comparing the costs and benefits of their actions. Another issue that was addressed by the neoclassical economists was the question of how people act on the "basis of full and relevant information" (Evans & Phillips, 2006). It was proposed that an individual acted independently on this basis because the more relevant information such an individual had on a particular product, the better the chances of maximizing utility.

From the mentioned issues, it is evident that there is a kind of overlap between them. For instance, an individual that has a relevant information on a particular good or service is then provided with the choice of comparing the costs and benefits of acquiring such product or service. After comparing the costs and benefits, the individual chooses to either develop a preference for that product or some other favorable product in order to maximize utility.

The analytical method utilized by neoclassical economists involves the hypothetical-deductive methods (Evans & Phillips, 2006). This method is more mathematical in nature thus leading to the neoclassical economists being accused of "mathematicalizing" economics. In order to observe the economic system for the sake of analysis, neoclassical economists strive to develop various tools that will aid them in analyzing the system. These tools are developed with from mathematical models and are then used to hypothetically deduce an explanation or solution to the defined problem.

A typical example of this method of analysis is the marginal revenue that is usually used to calculate the extra income that will be gained from selling an additional unit of a particular commodity. Mathematically, it is described as the rate of change of total revenue per change in the number of units sold and can be expressed as From the relation above, TR is the total revenue, P is the price of the commodity and Q is the quantity demanded. When the price does not change with quantity, then meaning that the marginal revenue is equal to the price of the commodity (Evans & Phillips, 2006).

To address the main purpose of this essay, which is to know whether neoclassical economics represents an evolution of economic theory from an early, flawed version (Classical Economics) to a more advanced, improved theory or rather represents the birth of a new discipline that decided to abandon many of the questions and issues that had troubled Classical Economics instead of trying to offer a better way to address them, it can be inferred from the above discussion of both economic theories that contrary to the popular views of people that neoclassical economic theory evolved from classical economic theory so as to amend its flaws, the opposite (not reverse) is the case, that is, the neoclassical economic theory actually evolved from the classical economic theory but it addressed a complete set of totally different issues. The reason for this assumption is evident. The classical economic theories as earlier discussed mainly addressed the issues concerning the labor theories of value, theories of distribution, and that of comparative advantage while the neoclassical economic theories essentially address the issue of marginal utility, rational preferences, and the predilection of individuals to act on the basis of full and relevant information.

Placing these issues side-by-side, one would observe that they are quite different and do not seem to overlap. This means that as much as it is that the neoclassical economists evolved from the classical economists, their views are entirely different and do not seem to correlate. For instance, the theories of distribution which emphasize that national the national product is divided between the laborer, capital owner and the landlord, is not in any way applicable to any of the issues attended to by the neoclassical economists. Similarly, the theory of marginal utility as an issue addressed by the neoclassical economists is not applicable in either the labor theory of value, comparative advantage principle or the theory of distribution.

What this spells out is that the neoclassical economic movement represents the birth of an entirely new discipline that has decided to abandon many of the questions and issues that had troubled classical economics instead of trying to offer a better way to address them. Instead of improving on the issue of labor theory of value, it chose to adopt a totally new issue which it termed theory of marginal utility thereby creating difficulties when it comes to finding a correlation between both economic movements. Also, when considering the analytical tools employed by both economic movements, it is apparent that there are conflicting issues as well which further buttress the point that is being made here. While the neoclassical economists are hypothetically or mathematically inclined, the classical economists are historically inclined.

Generally speaking, most scholars who have studied both methods of analyzing the economy would stick with the classical because it is believed that economics as a social science is more accurately gauged by the historical approach than mere mathematical models which failed to address the issues surrounding the great depression in the 1920s when it occurred. Subjectively speaking therefore, the neoclassical economic movement does not improve on classical economics as claimed by many but instead, it addressed a brand new project. Finally, given the methods of economic analysis employed by both, it is evident that the neoclassical analytical method is not as effective at addressing its goals as much as the classical analytical method is at addressing its own goals which still points out the point that has been made by this essay. References Evans, B. , & Phillips, S. (2006). Comprehensive History of Economics (4th ed. ). Pretoria: Brayton Publishers.