Neoclassical and Keynesian Models in Health Sector - Thesis Example

Running head: Neoclassical and Keynesian Models in Health Sector Name Xxxxxxxxxxx Course Xxxxxxxxxxx Lecturer Xxxxxxxxxxxx Date xxxxxxxxxxxx Classical-Keynesian Political economy and neoclassical economies Introduction In contemporary economies, there have been numerous challenges. Quite recently, there was the global economic slump whose effects were spread all over the globe. Worse still, globalization trends imply the challenges in one national economy are transferred to others or have major ripple effects on other economies. In addition to this, there still remain deeply entrenched disparities in economies, though the situations are specific to national situations. As such, the question of what economic approach to take is vital (Bortis, 1997). The question of going the liberal path or otherwise the humanist approach is important due to the pursuant repercussions on economic performance and citizen service delivery. In basic terms, neoclassical theory emphasizes upon humanist approaches whereas Keynesian approach is emphatic on political liberalism. This paper presents a brief comparison of the neoclassical equilibrium economic approaches with those informed by Keynesian political economy. In the comparison, the nature and significance of both policy approaches will be demonstrated relative to planning and implementation of health care services. Fundamental differences and relative implications will be delineated. It will shed light into the questions revolving economic theory such as role of money, distribution of value, employment and market relations, both macro and international environments. Differences between neoclassical economic and classical-Keynesian political economic approaches In political economy and economic science, their relationship is much informed by economic theories which influence any approaches taken in the approach thereof. Since the 1950s there has been a paradigmatic competition between the Keynesian paradigm and its rival the neoclassical theory (Reati, 2009). This has been manifested in literature as well as practice more so in political spheres. Whereas classical and Keynesian economists view political economy and economic science as showing no differences with regard theory and principles as well as in political economy, neoclassical theorists perceive a great incongruence between them especially with regard to issues of equilibrium (Bortis, 2010). Neoclassical theories have a humanistic focus detailing on equilibrium and disequilibrium in societies. Whereas these theories had a main stay in static equilibrium, their authors also gave a focus on disequilibrium cases specifically as they extended their analysis to dynamics (Cingolani, 2009). With regard to equilibrium, the models entrench the need to maintain static equilibrium for all in economies. As such, there should a non-declining quality of life and human welfare. Thus, economies and governments should develop programs and interventions ensuring sustainable growth that is founded on technical progress and substitution of intervention possibilities (Rao, 1999). The policies should also optimize environmental externalities as well as ensure there is an aggregate amount of natural and economic capital stocks. This is done with reference to market factors. Rao further indicates that the policy gives an approach which is to ensure there is predominance of individual role and decision in income generation, consumption and environmental implications (1999). In a nutshell, definition of neoclassical economics should incorporate two key principles: market equilibrium and constrained maximization (Champlin & Knoedler, 2004). In analysis, neoclassical economic principles are universal, without the consideration of time, place and activity. As such, these principles proceed on economic science in which the policies directed by the science influencing a definite course in economies which further negatively define the related non-economic parts such as social and public service (Arestis & Sawyer, 2004). As a basis, the economic is viewed as being synonymous with market relations. Thus, policies are formulated in line with complex equilibrium models which range from supply-demand relationship in a unit market to general equilibrium which considers all markets. Classical-Keynesian approach develops a political economy in which the economy is production based. In a classical political economy, production process has a very pivotal position Production is considered as a social process by political economies. As such, there is a common social aim to produce a social product by merging production means (Bortis, 2010). Production sectors and firms merge and cooperate. In this key aspect of the economy Bortis (2010) furthers on by branching off to Marxism’s entrenchment that the social production process is as a result of the interaction between labor and land: man and nature. This is interaction is highly liberal unlike neoclassical constructs whose focus is ensuring that there is an equilibrium. Within the social production process, there are relative normal prices whose relativity is a factor of the conditions of production and those of distribution. The interaction of labor as the economy and market prices indicate that economic policies either focus on real wage rate or profit rate. For classical-Keynesian fundamentalists, distribution in markets is also related to the social process of production. This implies that wage bargaining, be it collective or individual will influence the shape of the wage structure and that in determining normal prices, one must as principle consider targeted profit rates from the production process. This interaction does affect distributional outcomes prompting state intervention in fixing minimum wage cut points. Such an approach to distribution in economies enhances the influence of political economy practices in economies and policies pursued. From the political economy perspective, distribution is an issue driven by interaction of sociological and political issues, and not a market factor. By the social perspective, “distribution emerges most forcefully in part-whole relationships between individuals and groups on the one hand and society as a whole on the other” (Bortis, 2010). These part-whole relationships have implications on income structures and in disparities in an economy driven by affective demand. Keynesians are of the belief that demand results from a combination of public and private economic decisions. These decisions are mostly either and/or monetary and fiscal. A combination of these is aggregate in defining demand. With reference to employment and real output, they experience their greatest short-term impact if there are any changes in aggregate demand. These short-term effects are said to live long enough to matter. This was the scenario of the recent economic slump. The implications of either policy approaches may be well understood when they are explored in relation to specifics of non-economic sectors of an economy such as health care and other social services that are the responsibilities of an economy to its citizenry. With such an exploration, one can thus delineate the pros and cons relative to the impacts. Health and health care have been given various perspectives in definition and practice. How one views and perceives health care is determinant in the type of planning and intervention given in policy, planning and implementation. These translate into healthcare organization and outcomes. Health has been perceiver either as right, or as an investment (Green, 2006). As a right, it is perceived beyond egalitarian and utilitarian orientations as a fundamental right of every human being irrespective of any boundaries of inclusion. This is according to the World Health Organization. As an investment, it is perceived in relation to affecting workforce productive ability. With regard to health care, it can also be viewed as a right or as an individual consumption good (Green, 2006). From these perspectives, state economies have various roles, which they undertake simultaneously but with intensities that are relative to economy theory informing policy development. These are roles of policy formulator, health-care financier, and health care service provider and as a regulator. Spearheading the pubic choice theory, its proponents furthered the neoclassical economic approach in political realm. The public choice theory enables a deeper of policy politics. As posited in this theory, politicians often demonstrate ‘rent-seeking behavior’ (Ameringer, 2008). This refers to the politicians’ efforts of seeking reelection by passing laws that are favorable at the time, while being inconsiderate of the future. Such laws demonstrate the tendency to serve well-organized interests and manifest either as regulation or deregulation benefiting a cohort of groups and individuals in the society. Delineating this concern, Ameringer (2008) discussed the deregulation in the HMO Act of 1973. It resulted from rent-seeking and was driven along neo-classical lines. From the theorists, deregulation of the health sector would enhance service delivery by engendering competition. In the Carter administration, health care was deregulated as other industries such as transport and communication. This deregulation was however problematic, unlike in the other industries (Ameringer, 2008). It was characterized by establishment of a competitive health care environment and also overthrew professional regime. As such, it put HMOs in stiff competition against other health insurers. Hodgson (2007) is categorical that the application of neoclassical theories in modern health care economic is misplaced. This is in spite of their dominance in the subject. Referring to the core principles of the theories on role of individuals in utility maximization and the Pareto criterion, his article presents the misfit. Evidence is provided that the unsuitability of these principles is so immense that ’health economists are inclined to adopt alternative normative criteria’ (Hodgson, 2007). These economists have a focus on health care measures as compared to utility. Health care should not be treated as a want. An understanding and recognition of it as need surpasses the utilitarian tenets of neoclassical foundations. That health care is an objective universal need is a statement ignored by neoclassical theorists. Additionally, these needs are not static, defying neoclassical interventions that build on maintaining equilibrium. There are new illnesses and ever changing scenarios requiring equally changing approaches. Depending on the utilitarian and subjective tendency of the mainstream economic school of thought, it would be expected of them to have a focus on subjective utility and wants, as compared with objectivity (Hodgson, 2007). However, they demonstrate a consideration of the relationship between need and ability to access. In practice, most medical goods and services are fully borne by consumers. This is however also done for the consumer by third parties such as the government and insurers. Such is important in defining the out-of-pocket expenses paid in by the consumers. As such, it is vital for health policy developers to impose regulations on cost sharing requirements on health care consumers so that there is control of moral hazard. In a bid to maximize on constraints neoclassical models may point to the need to have low-benefit services. This is in a bid to maintain equilibrium in health care in spite of difficulties in the economy. However, literature indicates that adoptions of low-benefit services have the tendency to increase public finance burden yet there is no clear justification for the extra cost (Cowen & Kattan, 2009). On the contrary, policies that entrench imposing out-of-pocket obligations onto consumers have a benefit of trading risk spreading for the preservation of partial incentive. In addition to this Cowen and Kattan (2009) indicate the role of economic policy in determining out-of pocket prices. The difference between OOP and the total billable amount for services offered is a function of what policies provide for. This is relative to provisions on the obligations of the consumer, health service provider and health insurer. The long-term focuses of Keynesian economic models, though criticized for oblivion to short-term occurrences are vital in such health policies. The focus of competition and market liberalism is vital ensuring that consumers receive the best care and at the most competitive prices. Even the public health care services, often marred with relative slow pace and slackness in most economies, are forced to style up. Additionally, liberalization is the force behind and a result of globalization. However, liberalism in the sector at extremes may at worst influence the view and organization of health-care as an individual consumption good. This details a scenario in which there is limited state-intervention. The state has no special responsibilities and abdicates the duty to market forces. This may entrench an egalitarian status of health and health care, often leading to disparities (Green, 2006). In view of allowing health care and access to be informed by the production process, Green (2006) posits that such a delicate sector should not be left to the process. The sector is not only delicate but also unique. It is unique for the following purposes: the nature of its demand, externalities, uncertainty relative to need or demand and effectiveness as well as asymmetries of information between consumers and providers (Hodgson, 2007). Under the process, there is competition which is seen as a way of beating the price down as quality goes up hence ensuring maximum welfare. This is by following the demand-supply mechanism. However, demand increases are translated in supply increases to meet the market need. In tandem, the prices for the subject good may rise to choke off the demand rise until there is supply to meet the need. As such, individuals who cannot pay are unable to access the service. Additionally, such a model approach would mean that health care is purely paid-for from independent practitioners and health institutions whose interest is profit making (Green, 2006). Perhaps this is what was envisioned in national health care plans such as Medicaid and Australians Medicare. An extreme libertarian policy may have additional impacts on health care provision, apart from total abdication to market forces. It may have the government see its role only as regulator having limited interests and investments in health care provision. This is demonstrated by the extent of public spending. Reduced or cuts in health care public budget leaves the weight to private providers. The other healthcare approach is similar to this of extreme libertarian, only that the government provides abundant funding through a central organization, but is not involved in direct service provision. The central body is the regulative eye of the economy. This is what (Hammer, 2007) alludes to in the indication that states that govern best, govern least. This entails a state taking a backstage position and assuming an implicit cop function. Better still; the state may be involved at both levels. This is the most recommended by practice and literature (Green, 2006; Hammer, 2007). Faulting neoclassical economies, Hammer (2007) demonstrates their failure to define an express role of the state in health care. By defining markets as free-standing entities, these models overlook the need for intertwined public and private participation in a critical and distinct sector that heath care has been aforementioned as. Conclusion This thesis has attempted to delineate the difference between neoclassical economic models and classical-Keynesian approaches. The models have been presented in various literatures as being conflicting since the 1950. They differ majorly in principle. Neoclassical models are built on two basic principles: equilibrium maintenance and maximization of constraints. There also neoclassical authors who have also focused on disequilibrium. As such states will strive to ensure that they maintain static equilibrium across all situations. Neoclassical theories have a humanistic focus. On the other hand, reference to classical-Keynesian models demonstrates a more liberalist approach in which there is no universal consideration of situations. Time and place are also dynamic. There is a focus on the production process and market forces as being pivotal social processes in a political economy. Clarity of differences between the two economical approaches is enhanced by discussing economic and non-economic sectors of an economy. Using health care provision, this paper has demonstrated that both approaches have pros and cons with respect to organization and outcomes. There seems to be a continuum with a range of how much of each approach a state can take. Along the range, the respective impacts are related. The paper posits that states may benefit from each of these approaches by formulating policies that are considerate of each. References Ameringer, C. (2008). The health care revolution : from medical monopoly to market competition. Berkerley: University of California . Arestis, P., & Sawyer, M. (2004). The rise of the market : critical essays on the political economy of neo-liberalism. Cheltenham: Edward Elgar. Bortis, H. (1997). Institutions, behaviour and economic theory : a contribution to classical Keynesian political economy. Cambridge: Cambridge University Press. Bortis, H. (2010). Political economy and economic science: the work of Phyllis Dean . The Journal of Economic Analysis, 1(1), 49-77. Champlin, D., & Knoedler, J. (2004). The institutionalist tradition in labor economics. London: M.E Sharpe. Cingolani, M. (2009). 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