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Neoclassical Economics | Here’s the Truth
Why do economists argue so much about things like government economic policy?
Well, economics isn’t an exact science to tell you the truth. There are many schools of thought. This is simply because how an economy functions is inherently complex and quite difficult to model.
Let’s look at some of the more influential schools of economic thought.
The Neoclassical School - first came into light in the 1870s. It’s the preferred theory for most economists today. It shines the spotlight on individual economic agents and it supports intervention only when markets fail
Draws ideas from the classical school (from Adam Smith’s era)
Economic agents act in their own self-interests. Everybody is assumed to be a welfare maximiser
Economic activity creates competition. This generates the best outcome for everyone
If every smartphone company competes for sales of the same model of phone, what will happen? Increased competition will drive down the price, increase sales for merchants and consumers will walk away with better deals
Markets are thought to be self-equilibrating - this means markets will reorganise themselves after any external shocks, be it an oil crisis or a natural disaster. In most cases, markets will take care of themselves and there is no need for heavy government intervention
Where does it differ from the Classical School?
The value of a product is dependent on both production cost and the valuation solely held by consumers
An example of this is a solid gold aeroplane. Sounds expensive, right? However, a solid gold plane cannot fly; so, what good is it and what purpose does it serve?
According to the Classical School, the plane would be worth alot due to its high production costs
According to the Neoclassical School, the plane would probably not be worth much more than its weight in gold. No airline would want to buy a plane it cannot use to transport people!
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