The Use of Qualitative and Quantitative Methods of Data Collection - Coursework Example

Name: Professor: Title: Date: Differences between Keynesian theory and neoclassical theory Introduction This research aims at explaining two types of theories and policies that economists use to describe economic situations and offer solutions to the economy. The two theories and policies include the neoclassical or New Right and the Keynesian or welfare policy. The report analyzes the two policies by looking at their differences in reference to one policy area in the economy. It also analyzes the strengths and weaknesses of the two policies in reference to the policy area (Cencini 2012). The research focuses on the policy area of welfare. Both theories address welfare area in different ways through their approaches. They address the issue of welfare among consumers by analyzing the aspect of wages and salaries. They also address the issue of unemployment with a bid of improving the welfare of people. Keynesian or welfare policy is a policy that economies use to describe various situations in the economy. Under this policy, economists explain that in the short run, aggregate demand influences productivity in an economy, more so during recessions. John Keynes is the economist behind this theory. Keynes came up with this theory during the great depression in Britain as a way of providing solutions to improve the economy of the country at that time. Aggregate demand shows the total spending that an economy marks in a certain period of time. However, it is not always that aggregate demand equates to productivity during a given period of time. There are various factors that influence aggregate demand of an economy including inflation. These like employment and factors of production like land and capital factors affect production in various sectors of an economy. Neoclassical or New Right is a policy that relates to new policies in the economy. It came up with the aim of improving the economy after the fall of the Soviet Union in Europe. This policy emphasizes more on communism. This policy constituent several policies all under the same name because economists here believe their policy is the right one. The Neoclassical/New Right explains a movement present in Australia in the year 1970s to 1980s which aimed at advocating for liberation in the economic sector. Gough Whitlam is the economist behind the idea of economic liberation in the economy of Australia (Salvadori & Panico 2006). However, it also applies to other countries like France, Germany, Netherlands and New Zealand among many other countries in the world. Keynesian or welfare policy In this theory, Keynes explains that his theory offers a solution to the economic problem during the Great Depression in the sense that it stimulates the economy. The Keynesian/welfare policy relates to the social and welfare policy area in an economy. This is because it encourages for social collectiveness in an economy. It also addresses other social and welfare issues like inequality, poverty and sickness among many other social matters. This theory also addresses unemployment and labor movements in Britain. Keynes came up with his theory to curb such social and welfare issues after the Great Depression which took place during the Second World War II. In 1920s, the problem of unemployment was so rampant that it needed solutions to it. Keynes emphasized on employment in 1936 by encouraging the government to increase its spending on the economy. Keynes had a great impact on the welfare of workers in Britain. This involves some of the policies brought by this economist like the new labor policy, employment and health policy in Britain (Holt & Pressman 2007). Research shows that this theory had a great impact on the creation of a socialist government in Britain that led to the emergence of a labor government and health service among others. Keynes together with other socialist like Thatcher used their knowledge and theories on economy to relate welfare to economist. He argues that stimulation of the economy through investment. Investment is helpful to an economy because it encourages investors from not only within the country but also outside the country. This will in turn boost the economy because it involves various sectors like banks which lend investors and also create employment opportunities; therefore, eradicating unemployment. It also involves inflation which affects the economy by a greater margin than other minor elements contributing to the Great Depression. This theory combines two approaches in an economy. This includes reduction of interest rates by banks and other financial organizations. The second approach entails involving the government in the investment through infrastructure like roads and buildings (Cencini 2012). The first approach is also known as the monetary policy, while the second is known as Fiscal policy. Keynes argues that a reduction in interest rates by the central bank will definitely encourage commercial banks to follow the move. Reducing interest rates encourages investors to invest because they can borrow money from commercial banks to boost their investment. Keynesian or the welfare policy uses the second approach of government investment in order to encourage investment by other private sectors. It is also important to note that government investment injects money into an economy through several ways. The fiscal policy creates employment opportunities to the unemployed; therefore, creating a balance. Unemployment is one of the factors contributing to economic imbalance and also the Great Depression (Holt & Pressman 2007). Government involvement implies that its expenditure will increase. The implications of this are that the government will increase expenditure by issuing government bonds. Fiscal policy means that a government will increase fiscal deficit because it ends up spending more that it earns through taxation. It is also important to note that this approach associates the Great Depression with low wages that led to unemployment in Britain. This is because low wages and salaries implies that workers errand very little compensation for the kind of work they do; therefore, they quit such jobs in search of better paying opportunities. This factor causes mass unemployment which affects the economy negatively. With this in mind, Keynes encourages good compensation of workers by offering flexible wages and salaries to avoid mass unemployment like in the case of Britain. He also encourages the use of a policy that involves nominal wages rather than real wages. However, other economist argue that it is a difficult policy to implement due to the wage and salaries contacts that workers enter into with their employers as they begin to work. This creates a contradiction between his theory and that of other economists and the aspect of difficulty in implementing his approach (DeMartino 2002). Cutting down of wages is not a solution to prevention of recessions according to Keynes. In his theory, Keynes argues that this creates a spiral downward movement of the economy. This has been the major weakness of this theory as other economists have come up to challenge it and offer solutions. Fort instance, Irving Fisher uses his theory of Debt-Deflation to challenge Keynes’s theory. He argues that falling of prices, better known to him as deflation increase the depth of depression. Another aspect of Keynesian/welfare policy is the aspect of saving. Keynes explains that recession and depression can be caused by saving in excess. This is the case when investors save more than they invest to the economy. For instance, if consumer demands reduce or if there is over-investment and if saving falls then an economy will go into a depression. All that associate with excess saving according to the Keynesian/welfare policy (Salvadori & Panico 2006). This policy also addresses the multiplier effect and interest rates of commercial and central bank. This economist looks at it in the point of view that people receive money and consume much of it while saving the remaining amount. Keynes also looks at the possibility that the remaining amount enables businesses to employ more workers, thus increasing spending by consumer. The IS/LM model also relates to this policy as it seeks to explain the effects of aggregate demand and employment. It makes it possible through analysis of money in circulation in the economy and comparing this to the budget set by the government. One major weakness of this theory is that it only looks at few factors causing recessions. Other economists argue that micro-economic factors also lead to recession. This is a weakness of Keynesian/welfare policy because microeconomic factors are also part of an economy; therefore they should not be ignored in the quench to look for possible solutions to recessions in the economy. One famous economist who came up to criticize this theory was Henry Hazlitt. Henry introduces several theories relating to microeconomic behavior in the economy that contributes to economic recessions. Neoclassical or New Right policy This school of thoughts uses macroeconomic policies to offer solution to the economy. Roy Weintraub of the United States of America is the economist behind this the neoclassical theory. The New Right policy is the new version of the neoclassical theory of economics. It bases its arguments on certain assumptions in an economy (Cencini 2012). The neoclassical theory aims at equal distribution of wealth in an economy to reduce the wide gap between the poor and the rich. Under this their, economist try to discourage exploitation of workers by paying them little wages or salaries, yet they work extra hard. However, there are several other economists who came up with these policies under the Neoclassical or New Right theory. It constitutes several other theories with the same aim. Its emergence came as a result of the failure of the Keynesians theory in the 1970s. It came up to correct the weaknesses of former theories by other economists. Some of these assumptions include maximum utilization of utility and rational expectations (Salvadori & Panico 2006). Neoclassical or New Right policies are a combination of several new policies by some economists after the Great Depression in Britain. Neoclassical or New Right policy addresses welfare and social issues in different ways. For instance, it addresses the issue of criminals, their sentences and states of prisoners in prison. The theory provides certain measures to the kind of sentences that criminals get on the account of some crimes like assaults and rape. Some of these measures include offering rehabilitation to these criminals. This was relevant in the era of after the Second Word War because there were so many criminals. Economists under the Neoclassical or New Right policy were offering these measures with the aim of improving the welfare of people which in the long run improves the economy of a country. People found guilty of some crimes during this war got sentences to serve in prisons. Some of them were innocent and got severe sentences. However, other economists and experts in this filed term this theory as in adequate because it came to challenge prior theories. This theory also involves certain economic agents. They include consumers who are regarded as households and firms who produce goods for use by the households. Firms are responsible for setting prices of their goods to sell them to the households. These households also offer their human capital to the firms as a source of factors of production. The Neoclassical or New Right policy views the issue of prices as a delicate issue in the economy (Holt & Pressman 2007). This is because it acts as an indicator to both the firms and households in the economy of their conflicting desires. This is because households want fair prices on goods while firms want profits for their goods. The Neoclassical or New Right policy applies in the result of theory of demand by households in the economy. This also responds to the supply of factors of factors by households to firms in the economy. With this policy, firms aim at maximizing utility. It emphasizes on this circle where household offer labor to firms willing to employ them at a fair wage. They seek for these opportunities by balancing gains of each service they offer to firms and their wages (Salvadori & Panico 2006). They also balance other factors like disutility of labor with wages and salaries. This margin acts as a base on which households make choices on the job opportunities available and how they offer services to firms. At the same time, a producer in the economy aim at producing goods that will generate him profit. Firms will also use the margin rule to analyze their profit after production. They produce the type of goods that balances marginal unit and revenues that it generates. This means that these firms hire the number of employees who will increase the amount of output. They use the policy of Neoclassical or New Right in such analysis so that they consider marginal increment and output of a certain number of employees. For instance, if an additional employee produces two extra units, then a firm will consider hiring him. This is the same policy that firms use in cases where they want to increase wages and salaries of employees. They analyze the extra cost that comes with increasing wages with the amount of units they produce. It also assumes that an economy should be at equilibrium with some aspects. Under the Neoclassical or New Right policy, an economy assumes a state of equilibrium whereby there is full employment and output of factors of production and other resources (Salvadori & Panico 2006). Economists under this theory also explain that achieving this state of equilibrium is only possible through certain adjustments. These adjustments include wage and price adjustment so that the economy clears. A common model under Neoclassical or New Right policy is known as the real business cycle model. An economist by the name of Edward Prescott was behind the emergence of this model in the economy. This theory also uses policies that aim at reducing the gap between the poor and the rich in not only Britain but also other countries. It achieves this by using certain models that aim at reducing this gap. Economists here argue that a bigger gap between the poor and the rich drags the economy behind because the poor depend on the rich (DeMartino 2002). They explain that this big gap strains the economy; therefore, hindering its development. It is for this reason that economists apply models under this theory to reduce this gap by reducing it. A good example of this model is the law of diminishing returns. This law encourages growth in the economy by increasing human capital in the production process. Neoclassical or New Right policy is also known as met theory because of its set of implicit rules that apply to the economy (Cencini 2012). It produces several policies all under the same policy. It entails certain assumptions by economists that do not give room to discussion. Other economists term this policy as closed rather than an open one where they can discuss it. Some of these assumptions in the economy include taste and preference of consumers. Consumers’ taste and preference on outcomes vary form one person to other. Maximization of utility among individuals is one of those assumptions under the Neoclassical or New Right theory. Firms also aim at maximizing their profits. The third assumption is that people’s behavior on certain aspects depends on their knowledge on issues. This implies that a person will behave in an independent manner basing his behavior on complete and relevant knowledge on the matter. All theories that have their basis on these assumptions fall under the neoclassical theories. This acts as a major weakness of this theory. This is because it does not leave an allowance of other economists to challenge or discuss it. Other weaknesses of the neoclassical theory are that it constitutes more of theories rather than practical. This is because it came up to challenge the Keynesian theory, rather than to offer practical solutions. It also encourages including an extra effort of capital to apply the law of diminishing returns in the Neoclassical or New Right policy. It is important to note that this theory is a new version of the neoclassical policies. The Neoclassical or New Right policy emphasizes more on using human capital in comparison to other policies (Holt & Pressman 2007). It also encourages proper application of human capital and labor in the production process. This is because the two are part of factors of production in an economy; hence, the need to involve them too. This theory also calls for proper measurement of capital and labor as factors of production. Their remuneration ought to be fair. Application of labor as a factor of production also raises the issue of their compensation in terms of wages and salaries. Differences between Neoclassical or New Right policy and Keynesian or welfare policy There are several differences between the two theories arising from analysis by fellow economists and other experts in the same field. One major difference between the two is the rate at which wages adjust (DeMartino 2002). The neoclassical theories have their assumptions on the basis that wage rates are flexible. They also believe that prices follow demand and supply in the market. While the Keynesian theory believes that these market models do not have the ability to determine wages. Rather, they believe that stickiness of wages contributes to involuntary unemployment and the monetary policy. Another difference between the two is their view on income distribution. Keynesian argues on the basis if capitalism as a way of income distribution, while the neoclassical theories emphasize on the theory of factor prices. The Keynesian theory explains its argument on discouraging power differences by encouraging capitalism. Another difference between the two theories is their view on unemployment. The Keynesian theory offers certain policies to curb the issue of unemployment like using determinants of saving, consumption and investment to increase aggregate demand to curb unemployment (Holt & Pressman 2007). On the other hand, the neoclassical theories do not address this issue from that perspective. Rather, they use the theory of factors of production to address the issue. Under the neoclassical theories, the government has little role to do with improvement of the economy, unlike in the Keynesian theory where the government plays a great role in the economy of a country. Conclusion The two theories address issues affecting the economy. They both deal with matters on wealth and social issues. Both neoclassical and Keynesian theory offer solutions to improve the economy in the world, especially after the recession which took place in Britain (Cencini 2012). However, both have weaknesses that they should address to ensure that they apply perfectly to an economy. Despite the fact that they have their weaknesses, they are applicable in most economies in the world today. Therefore, it is good that economists analyze both theories and try applying them in the economy. References Holt, R. P & Pressman, S (2007): Empirical post Keynesian economics: looking at the real world: M.E Sharpe. Cencini, A (2012): Macroeconomics foundations of macroeconomics: Routlegde. Holt, R. P & Pressman, S (2001): New guide to post-Keynesian economics: Routlegde. Lobell, S. E, Rispman, N. N & Taliaferro, J. W (2009): Neoclassical realism, the state and foreign policy: Cambridge University Press. Mason, W. E & Butos, W. 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