Classical Theory
·
Classical economics focuses on the
growth in the wealth of nations and promotes policies that create national
economic expansion.
·
Classical theory assumptions include the beliefs that
markets self-regulate, prices are flexible for goods and
wages, supply creates its own demand, and there is equality between
savings and investments.
Classical theory was developed
according to specific economic assumptions:
·
Self-regulating markets: classical theorists
believed that free markets regulate themselves when they are free of any intervention. Adam Smith referred to the
market's ability to self-regulate as the "invisible hand" because
markets move towards their natural equilibrium without outside intervention.
·
Flexible prices: classical economics
assumes that prices are flexible for goods and wages. They also assumed that
money only affects price and wage levels.
·
Supply creates its own demand: based
on Say's Law, classical theorists believed that supply creates its own demand.
Production will generate an income enough to purchase all of the output produced. Classical economics
assumes that there will be a net saving or spending of cash or
financial instruments.
·
Equality of savings and investment:
classical theory assumes that flexible interest rates will always maintain
equilibrium.
·
Calculating real GDP: classical theorists determined
that the real GDP can be calculated without knowing the money supply or inflation rate.
·
Real and Nominal Variables: classical economists stated that
real and nominal variables can be analyzed separately.
Source: Boundless. "Classical
Theory." Boundless Economics Boundless, 27 May.
2016. Retrieved 21 Aug. 2017 from https://www.boundless.com/economics/textbooks/boundless-economics-textbook/aggregate-demand-and-supply-24/introducing-aggregate-demand-and-aggregate-supply-107/classical-theory-411-12508/
Limitation of Classical Model
The classical model fails to incorporate all those complicated factors
which influence the economic development of poor countries. In underdeveloped
countries, there is a big shortage of capital. In addition to capital
accumulation, the economic development is also influenced by the culture,
civilization, traditions and institutional setup of the people. Such all has
not been examined in classical model.
Source:
http://economicsconcepts.com/classical_model_of_economic_growth.htm
NEOLIBERAL
·
Liberalization.
No restrictions to foreign investment. Rule of the Market. Free Trade.
Globalization.
·
Deregulation.
Reduce rules. Eliminate protectionism; remove tariffs. Do not shield local
industries from global competition. ‘Sink or Swim’ to determine efficiency of
firms. ‘Safety nets’ are crap.
·
Privatization.
Corporatize government services. Sell public assets to private sector.
·
Keep
government small. Cut public expenditure for social services; reduce the
safety-nets for the poor, thus Cut Taxes.
·
Eliminate
the concept of "the public good" and replace it with "individual
responsibility.”
*Milton Friedmann and Friedrich von Hayek,
Thatcherism and Reagonomics
Limitations
- Those glaringly obvious
negative externalities of an ascendent corporatocracy’s agenda are
real…and getting worse…and the inevitable economic train wreck intrinsic
to growth-dependent capitalism has already hinted at its impending
arrival.
- Exploitation, war profiteering,
structural adjustments, wealth disparity, etc. lead to resentment, alienation,
desperation, and quite often rebellion, societal disintegration and
terrorism among growing populations in the developing world.
- The consumer-electorate is
becoming increasingly stupefied by their infantilized dependency, and thus
are increasingly unable to recognize the hoodwinking spectacle that
prevents them from seeing the destructive arc of neoliberal agendas, and
medicates them from caring about that destruction even when, for a
fleeting instant, they see through the carefully orchestrated deceptions.
- Pretty much all of the “pros”
listed above are a “con” when viewed from the perspective of anyone but
wealthy shareholders.
Source:
https://www.quora.com/What-are-the-pros-and-cons-of-neoliberalism
NEOCLASSICAL
·
Profit
Maximization
·
Utility
Maximization
·
Perfect
Competition
·
Efficient
Markets: Price and Income Determination by Market
·
Agent
Sovereignty / Consumer Choice
·
Rule of
Marginal Productivity
·
Agglomeration
Economies
·
Small
Government: Thrift in Public Spending, Annually Balanced Budgets
·
Big Government
means More Taxes and Small Government means Less Taxes
·
Less Taxes
means Capital has more resources for investment
-
1987 Nobel Laureate Robert M. Solow sums up
Neoclassical Theory in "Growth Theory: An Exposition" (1970).
Limitations
1.
Narrow in Scope
The neo-classical approach of the
theory of economic development is narrow and inadequate.
They assume the existence of such
factors as political stability, the “will to develop”, strong habits of thrift,
given tastes, adequate supply of trained labour and managerial skill, a high
degree of factor mobility and free flow of knowledge between different
countries.
Such assumptions have narrowed down
the scope of their analysis. According to them, the main determinants of
economic development are changes in the size of population, capital stock,
natural resources and technology.
They have minimised the significance
of non-economic factors as the degree of political stability, the attitude of
population, legal and social institutions etc. Marshall himself recognises the
limited nature of his theoretical analysis.
2.
Economic Development is not Continuous Process:
The neo-classicists believe that
economic development is a gradual, continuous and harmonious process and hence
they could not correctly analyse the possibilities of cyclical fluctuations in
the process of development. Historically, economic development has been a
discontinuous process.
This fact should have been recognised
by them. They also could not visualise the possibility of disharmony of
interest at least in the initial stages of development.
3. Unrealistic
Assumptions
Another drawback of the neo-classical
analysis is its assumption of full employment which is very unrealistic.
Because of this assumption they could not analyse how an economy can be
maintained at the full employment level. In the field of capital formation they
tend to over-emphasise the importance of interest rate and minimise that of
institutional factors.
4. No
Importance to the Role of Govt.
The neo-classical could not recognise
the important role which government can play in creating conditions for
economic development. In the present era intervention of Govt., is must to
solve various problems of the UDC’s.
5. Study
of Developed Countries Only
Their analysis also suffers from the
drawback that they were mainly concerned with their own developed economies and
hence their ideas and policies have little relevance for under-developed
countries. For instance, their policy of free trade and international
specialisation can hardly solve the problems of under-developed countries.
MARXISM
1.
It tends to create a system of true equality.
Although Marxism’s system of government is considered as communism, it places
an emphasis on human rights, with its foundation encompassing equal gender
roles, health care and access to education. As Marx believed, there should be
equality before the law and societal services, where everyone has an equal
stance and opportunity with no dominant gender. This means that every person
would be able to get access to the most important things he needs regardless of
whatever he does, wherever he lives or how much he makes to provide a better
living for those depending on him.
2.
It offers benefits to the society.
If you look at the Marxist theory, it considers society as a whole, which means
that it acknowledges all the social forces involved, including the power
interests of different groups. Stressing the role of class struggle or conflict
within society between the bourgeoisie and the proletariat, it is effective in
explaining change in society. In essence, it organizes society under
capitalism, where the bourgeoisie tends to maximize profit with the proletariat.
3.
It helps with capitalism.
Ironically, when huge multi-nationals dominate the entire world economy,
capital advocates would tell us that the future lies with small businesses or
always state that “Small is beautiful”. However, we can consider that the
youthful phase of capitalism is gone beyond recall. But as far as Marxism is
concerned, free competition inevitably begets monopoly, where the struggle
between big and small capitals always yields to the same result. In modern
times, the vast power of multi-nationals and monopolies seems to exercise a
total stranglehold on the world, holding access to economies of scale,
staggering sums of money, ability to manipulate commodity prices and even the
influence of government policies. Now, Marxism was able to predict the
inevitable tendency towards monopolization, where free competition was a
standard.
4.
It reduces the tendency of debt.
Under the Marxist philosophy, communities will be working together to achieve
success, where all people would come together to provide for each other, with
the help of the government distributing resources as required.
5.
It protects the rights of unions.
Rather than exploiting managers, Marxism encourages unions to stand up for
personal rights, creating a system of checks and balances for a maximum
production level to be achieved. As it is believed that this philosophy never
exploits workers by management, followers believe that unions are definitely a
great idea.
NEO-MARXISM
Neo-Marxism theory is an economic
theory that the current world economic structure has been systematically
implemented by use of a global class division with developing countries being
exploited by industrialized nations. Neo-Marxism is often used to describe
opposition to inequalities experienced by under developed countries in the
global world.
Limitations of Marxism/Neo-Marxism
1.
It tries to abolish religion.
Under Marxism, you would have the freedom to have your own faith, but you would
not have the freedom to practice it in a way that is organized. As you can see,
religion would ultimately place one group in a superior role over the others,
which goes against the equality principle of Marxism. This means that there would
be no organized religion, which would affect prominent beliefs followed around
the world, including Christianity and Judaism. As Marx felt that religion was
used to control people, Marxism would not allow people to be free of choosing
their spirituality.
2.
It negatively affects the educational system.
It is important to note that Marxist education implements one that is
absolutely state- controlled, which means that it regards too much importance
to the role of the state in education, which means that the methodology of
teaching, curriculum construction and examination system would be determined by
the state and it does not allow other agencies in education—local or
regional—to have their say. Marxist philosophy on education sees economics
lying at the root of every human activity, though this is not absolutely
factual on scientific point of view, as economics occupies the pivotal position
in the curriculum is one of the main objectives to acquire productive skills,
which would result to creative faculties of children being neglected.
3.
It does not value the concept of private ownership.
While you are given a place to live as part of a community and contribute to
the common good, you will have no private property ownership, which means that
you might not have much control over your residence and your contributions. In
Marxism, there will be the idea that private properties and businesses should
be abolished, which makes it impossible for anyone to take business advantage
of someone else, giving him no reward for working.
4.
It limits opportunities for entrepreneurs.
If you are in doing business under Marxism, then basically, you would be
working for the government, which means that are not going to work as an
entrepreneur, freelancer or sole business owner because everything would run
through the government.
5.
It can lead to communism.
Communism is a possible occurrence in Marxism, as this philosophy is believed
to lead to dictatorship. As you can see, it would not allow anyone to be an
individual, which is believed to lead to a dangerous society without anybody
being motivated.
Source: https://flowpsychology.com/10-marxism-strengths-and-weaknesses/
ECONOMIC BASE THEORY
Economic-base models focus on the demand side
of the economy. They ignore the supply side, or the productive nature of
investment, and are thus shortrun in approach. This model focuses on regional
export activity as the primary determinant of local-area growth
Limitations
While he agreed that this model might do well
to explain economic growth in small or highly specialized economies, he argued
that it was inadequate to explain the growth of complex urban economies.
Blumenfeld was also critical of the policy implications of the model; these
focused almost exclusively on supporting existing export industries at the
expense of other reasonable alternatives, such as fostering the establishment
and development of industries that would compete with imported goods and
services. Many regional scientists have concluded that economic base theory
lacks the complexity to provide a useful framework for analyzing many regional
economic issues and policies.
It should be clear that the economic base
model, because it fails to account for some of the fundamental determinants of
the regional growth process, should not be adopted for long-range planning and
policy analysis. These are the results that led to Richardson's call (cited
earlier) for burying economic base models "without prospects for
resurrection" (1985, 646).
Source:
httpwww.rri.wvu.eduWebBookSchafferChapter%203%20S11%20for%20WVA2.pdf
COMPARATIVE ADVANTAGE
Concept in economics that a country
should specialize in producing and exporting only those goods and services
which it can produce more efficiently (at lower opportunity cost) than other
goods and services (which it should import). Comparative advantage results from
different endowments of the factors of production (capital, land, labor)
entrepreneurial skill, power resources, technology, etc. It therefore follows
that free trade is beneficial to all countries, because each can gain if it
specializes according to its comparative advantage. Basic concept of
international trade theory, it is founded on the work of the UK economist David
Ricardo (1772-1823) on comparative cost.
Limitations
The fact is that, as well as being compatible with one of
neoclassical economist’s pet theories, extensive evidence supports the protectionism for development idea.
Comparative advantage also has numerous other
flaws in its applicability to free trade (one of which, the mobility of
capital, was actually noted by Ricardo himself).
Overall, it is not clear why it retains its status as some sort of irrefutable
truth of the benefits of free trade, given that it actually has little to say
about what trade policy should or shouldn’t be.
Those
advocating protectionist policies are often met with the stock response of ‘you
don’t understand the principle of Comparative Advantage’. But it seems to me
that economists haven’t put much thought into it themselves, as Comparative
Advantage does not necessarily support free trade, particularly in developing
countries. In fact, if you accept the ‘infant industry’ argument, it turns out
Comparative Advantage has very little to say for developing countries or
industry – it is irrelevant.
Perhaps
a statement of Comparative Advantage is due. The idea is that every country
should produce what it is most efficient at producing, regardless of what other
countries produce – that is, each country should allocate its time as
efficiently as possible based on its own strengths, resulting in maximum
overall production. Trade barriers create extra costs and therefore
inefficiency, which is undesirable.
Furthermore,
a brief qualification of the ‘infant industry’ argument: as tariffs direct
business to new industries by making them comparatively cheaper, they can
develop brand loyalty, benefit from economies of scale and lower costs, gain
expertise, establish contacts and trust with suppliers and distributors, and
benefit from long term investments due to higher short term profits.
The
problem is this: if by producing something, an industry can improve its
long term ability to carry on producing it, Comparative Advantage becomes
irrelevant in the short term. As with much of neoclassical economics, it is a
static snapshot and does not capture dynamics like this. For example, if
country A produces coke at 100 gallons a year and milk at 150 gallons a year,
while country B produces coke at 50 gallons a year and milk at 25 gallons
a year, Comparative Advantage is clear – A should produce milk and B should
produce coke, even though A has an absolute advantage in both. This results in
the highest net production possible.
However,
what if country A’s coke industry and country B’s milk industry are new
industries? And by producing milk, B can eventually up its milk yields to 200
gallons a year, whilst A could up its coke production to the same? Suddenly
Comparative Advantage has nothing to say, and protecting these industries from
competition as they develop seems like a good idea in the long run, both for
individual countries and for net production as a whole.
Competitive
Advantage
In the
elaboration of his theory, Porter starts from the following premises (Porter
Michael, 1990):
- the
nature of the competition and the sources of competitive advantage are very
different among industries and even among the segments of the same industry,
and a certain country can influence the obtaining of the competitive advantage
within a certain sector of industry;
- the globalisation of the competition
and the appearance of the trans-national
companies do not eliminate the
influence of a certain country for getting the
competitive
advantage ; a country can offer different competitive advantages for a company,
depending if it is an origin country or a host country;
- the
competitivity has a dynamic character (Schumpeter); the innovations have a role
of leading force in this permanent change and determine the companies to invest
on order not to be eliminated from the market (Negriţoiu Mişu, 1997 ).
Starting
from these premises, Porter identifies a system of determinants which is the
basis for getting competitive advantages by the nations.
Table 1.1 Meanings of
development over time
Period
|
Perspectives
|
Meanings of development
|
1800s
|
Classical
political economy
|
Remedy for
progress, catching up
|
1870
|
Latecomers
|
Industrialization,
catching-up
|
1850
|
Colonial
economics
|
Resource
management, trusteeship
|
1940
|
Development
economics
|
Economic
growth – industrialization
|
1950
|
Modernization
theory
|
Growth,
political and social modernization
|
1960
|
Dependency
theory
|
Accumulation –
national, autocentric
|
1970
|
Alternative
development
|
Human
flourishing
|
1980
|
Human
development
|
Capacitation,
enlargement of people’s choices
|
1980
|
Neoliberalism
|
Economic
growth – structural reform,
deregulation,
liberalization,
privatization
|
1990
|
Post-development
|
Authoritarian
engineering, disaster
|
2000
|
Millennium
Development Goals
|
Structural
reforms
|
Source:
Jan Nederveen Pieterse ,Development Theories Second Edition, SAGE Publication,
London 2010 page 7
