Reading commentaries (( economics )) - Assignment Example

Download file to see previous pages... The chapter brings readers to attention of the failure of neoclassical theorists to recognize the upheavals that capitalism was going through, which culminated into emergence of new schools of thought by such economists as Bastiat. Capitalism was subverted by a tinge of imperialism, coupled by a severe depression that ultimately resulted in the Great Depression (Hunt and Lautzenheiser 372). Neoclassical economists assumed normal periods of boom and depression. They also assumed that the economy had self-correcting mechanisms which would automatically fall in action whenever the economy underwent depression. Social unrests such as the World War 1, emergence of fascism and Soviet Revolution had a pervasive effect on the stability of capitalism. The chapter reveals that this instability marked the departure of such economists as Keynes from the classical school of thought. Keynes felt the need to reassess his thinking or ideas which were hedged on classical school of thought. In explaining the failures of the classical economists, the chapter brings to light two untenable issues that dominated the classical theories. The first issue relates to the concept of utility. ...
Classical economists assumed that in equilibrium, the entrepreneur did not make profits. They also failed to analyze the negative features associated with the production process under capitalism. The concept of utility and maximizing profits is clearly elaborated in the chapter. Consumers seek to maximize utility out of a given bundle of good while firms seek to maximize profits. The chapter notes that classical economists came up with abstract ideas to explain the concept of utility maximization. For example, classical economists used indifference curves in their explanation of utility concept and diminishing marginal utility. Classical economists assumed an ordinal approach to consumer preference. The authors have dismissed this as “conceptually impossible” (Hunt and Lautzenheiser 374). A graphical approach has enabled readers to understand the concept of maximizing utility. The assumption here is that there is consistency in the choice made by consumers and that there are only two commodities involved (Hunt and Lautzenheiser 376). The level of consumers’ income acts as the budget constraint. The concept of indifference curves enabled marginal utility of goods to be measured through analysis of the slope of indifference curves. The concept was also important in determining the equilibrium point at which a firm should produce through the use of isoquants. The chapter also explains how a production possibility frontier was used to arrive at combinations of goods that could possibly be produced in a situation whereby there was efficient utilization of capital and labor in the society (Hunt and Lautzenheiser 375). The chapter has devoted to highlighting key criticisms of the neoclassical economics in order to enable students construct balanced opinions. The ...Download file to see next pagesRead More