Classical economics vs.

Neoclassical Economics View: – As a coherent theoretical body, the classical

school of economic thought starts with Smith’s writings, continues with the work of the British
economists Thomas Robert Malthus and David Ricardo, and culminates with the synthesis of Jonhn
Stuart Mill, disciple of Ricardo.

Classical Approach of Economics

The classics took from Ricardo the concept of diminishing returns, which affirms that q increases labor
force and capital q is used to tillage the land, decreases yields or, as Ricardo said, overcome some stage
not very advanced, the process Of agriculture is gradually declining.

The scope of economics science is greatly expanded when Smith emphasizes the role of consumption
over production. He hoped that it was possible to raise the overall standard of living of the community as
a whole. He argued that it was essential to allow individuals to try to achieve their own welfare as a
means to increase the prosperity of the whole society.

On the other hand Malthus in his essay on the principle of the population (1798) raised the pessimistic
note of the classical school, stating that the hopes of greater prosperity would rest against the rock of
excessive population growth. He argued that natural control was positive: the power of the population is
so superior to the power of the earth to allow man’s subsistence that premature death must restrain
human growth to some extent.

Mill’s political economy principles were the center of this science until the late nineteenth century.
Although he accepted the theories of his classical predecessors, he relied more on educating the working
class to limit its reproduction than did Ricardo and Malthus. In addition, Mill was a reformer who wanted
to forcefully record the inheritance, and even allow the government to assume its major role in
protecting children and workers.

Neoclassic Approach of Economics

Classical economics was based on the principle of scarcity, as shown by the law of diminishing returns
and the Malthusian doctrine of production, from the 1870s, neoclassical economists such as William
Stanley in Great Britain, Leon Walras in France, and Karl Menger in Austria, shifted the economy,
abandoned supply constraints to focus on the interpretation of consumer preferences in psychological
terms.

The neoclassical explained the formation of prices, not in terms of the quantity of labor needed to
produce the goods, but in terms of the intensity of consumers’ preference for obtaining an additional
unit of a given product.

In competitive markets, consumer preferences for cheaper goods and producers’ preferences towards
more expensive ones would be adjusted to reach a level of equilibrium, this balance would also be
reached in the money and labor markets.
Neoclassical doctrine is, implicitly, conservative, advocates of this doctrine prefer to operate competitive
markets to find a public intervention. The neoclassicals do not care about the cause of wealth implies
that the unequal distribution of income is due largely to the different degrees of intelligence, talent,
energy and ambition of people. Therefore, the success of each individual depends on their individual
characteristics, not that it benefits their exceptional advantages or are victims of a special disability.

Classical economics vs. Neoclassical Economics View

Throughout history, some countries have placed themselves above others on the world scale. Thus it
was possible to determine who the first power was, and who, his followers. However, this classification
has never made reference to the fact that economies are very different between countries and even
between large continents.

There are two studies, two schools of economics, which are fully applicable to these differences. They
are none other than the studies of classical economics, and the Keynesian economy, based on
completely contrary principles.

1 – The classical school could refer to the American economy. It can be said that it follows its principles,
since this is completely capitalist. These principles are:

2 – The Money is only a means of transaction has no impact on the social economy. It is reflected by a
well-known work of Jean-Baptiste Say, who receives its name for the study like “The law of Say”.

With this law, explains that the market is perfect. In it, is all the information of the own market and that
makes possible that the exchange is comparable. Therefore, as companies know what consumers need,
the supply generates demand, and the price at which it is paid is reasonable.

For this reason, money is only used as a means of transaction, it has no other function.

1 – The Market is perfect, there is free competition. All companies are able to enter that market, so it is
impossible to set prices that are not available to consumers. Reference is again made to the fact that
supply determines demand.

2 – The Unemployment is voluntary. Anyone who wants to work will work, so unemployment is frictional
or short-term. The individual is the one who decides if he wants to work more, or he prefers to devote
more of his time to leisure.

3 – The State action is ineffective. As the market is perfect, if there is any failure will be corrected by the
market’s own functioning. Therefore, the state intervene with fiscal policy (changes in spending and
transfers, such as investment or pensions for unemployed, or changes in taxes) is useless.

However, this capitalism has errors. In 1929, with the first crack of the bag, people start to run out of
work, even if they want to work. Not only that, poverty increases, social differences, and the most
disadvantaged multiply. The classic school was born when there is economic boom, when everyone has
work and everyone who wants to have one can get it, but sometimes (crack 29, the current financial
crisis these market mistakes cannot be solved in the short term , But are lengthened.

For that reason, in 1929, the other figure appears that marks a major change in the economy,
especially in the European: John Maynard Keynes. By the influence of his work, it is generated what
we know today as Keynesian economics. And its basic pillars are completely contrary to the previous
structure.

1 – The Market is not perfect. There is no perfect information, and the inefficiencies are structural (they
end up being corrected in the long run). There is no equality between social classes, and those who want
to find work cannot access it.

2 – The money can be used for various reasons, not just to buy consumer goods. Thus, when we have
money, we use one part to consume, another to speculate (stock market, real estate market and
another, for the sake of caution (we save in case something happens that we do not expect and,
therefore, we need the money).

3 – The demand generates the supply. It comes into play that if consumers do not buy, companies have
too many products that they are not able to sell, therefore, they stop producing until they finish the
stock of their stores. If the opposite happens, people want to buy more than they have made, companies
see that their products are depleted, so they want to manufacture more to meet the needs of their
consumers.

4 – The Intervention of the State is necessary. The country’s economy focuses on social welfare. If the
difference between social classes is enlarged, and the most disadvantaged cannot survive, the state must
do something. It can use its power to influence the economy, giving transfers (by unemployment,
retirement, orphanhood, widowhood increasing the expense (roads, public schools, social security or
with taxes.

Thus, a new term appears: fiscal policy, which will be expansive when taxes are lowered, and transfers
and / or expenditure increase; and will be contractive when taxes rise and expenditure and / or transfers
decrease.