New Right Policies and the Keynesian Approach to the Economy - Essay Example

Neoclassical/New Right policies and the Keynesian/welfare state approach to the economy Student’s Name: Instructor’s Name: Course Code: Date of Submission: Differences between the neoclassical/New Right policies and those of the Keynesian/welfare state approach to the economy In the world of economy, different theories have been put forward to explain the situation that has led into the kind of market that we are witnessing today. Despite the arguments that the market should be left to operate freely, this has not been the case as different governments have continued to enact different policies which tend to interfere with this state. Neoclassical and Keynesian economics, are among the many theories that can be used to explain the scenario we are witnessing in the world of business. The two economic theories tend to give different and very contrasting views about the state of the economy and market operations. It is in this regard, that this discussion is interested in discussing the fundamental differences that are existing in these two theories. To start with, the major fundamental difference between the two economic theories, is founded on market operation and intervention by different forces. For instance, in the case of the neoclassical policies, the economists are of the view that supply and demand relates to a person’s rationality and the opportunity to maximize benefits and profits (John 2013). In other words, with the case of the neoclassical policies, different firms, have the opportunity to buy and even rent a production facility which they can operate in such a way that they can be able to full maximize on their profits. However, something considered unique with neoclassical economics, is that consumers can maximize their utility if and when the existing ratio contained in the marginal utility in respect to buying price is considered to be the same for all goods and services that are available for consumption (Clark et al 2000). What this means therefore is that, in a scenario where the benefit that can be obtained from a given product from the other is lower, then the product will not be bought. In actual terms, in the case of Neoclassical or New Right policies, the whole market processes are subject to forces of demand and supply and that no external force expected to be part. However, this is totally a different case with the Keynesian theory also known as the Welfare State Approach to the economy, where the total spending that occurs in an economy, influences both the output and the inflation level. This fact is what leads to government intervention in this case. This is to mean that under the Keynesian economics, the government plays a very significant role in controlling the economy by use of different fiscal-stimulus packages (Clark et al 2000). The Keynesian economic policies also identify that in the case of regular economics, the incentives are normally overwhelmed and thus raising the question of the state of the economy and the ability of the less privileged to access vital goods and also help boost the country’s Gross Domestic Product (GDP). It therefore becomes absolutely very necessary to have to provide more subsidies, stamps and transfers in to increase the consumption level. The end result of this policy, is that the demand for different goods and services are likely to increase something that will be reflected in the businesses through increased production levels and employment (Eckhard et al 2011). The effect of additional wage and profit earned according to this policy, is to stimulate the demand further and hence accelerate productions processes and employment levels. The Keynesian policy, on government intervention, is informed by the fact that the government can play a very important role in growing the economy. This is after it had been established that different economies have both their high and low seasons as different models and theories can reveal. It is understood that economic downfall does occur and will always be taking place and the respective authorities must take control by putting more money into the market, to stabilize it (Akbar et al 2011). One other major difference that has also been spotted between two economic policies, is about how prices and wages at the market place do adjust. The wage and the price of commodities in the market, are two important factors that can be used to say about the performance of a given market. This is because when the wage is relatively high, it means that the consumer is happy because he has money to spend and purchase different commodities. The same case when the price of a commodity is relatively low, the buyer will be able to make a purchase. However, the two economies policies have totally different views about the wages and prices. The neoclassical economic policy, tend to build its theory on the fact that both wages and prices are flexible (Akbar et al 2011). In other words, it is to the believe of the neoclassic that the prices of commodities build the market by ensuring balance between supply and demand. On the contrary, the Keynesian economic policies, argue that it is always difficult to explain economic fluctuations in the short-run and therefore the need to have steady prices and wages. The idea of steadiness on wages and prices, is also used by the advocates of Keynesian theory to explain how involuntary unemployment comes into being and how the monetary policy can be used to influence economic activities (Mark 2012). Illustration of differences in relation to education as a policy area The two economic theories provides different scenarios on how they are applied in various sectors of the economy like in education, healthcare and welfare. In a society, people are not equal and there are always some disparities especially when it comes to economical power something that influences the purchasing power of individuals. To illustrate this, the discussion will look into how the differences that have been identified in the two theories relate to education as one of the policy areas for any government. As a reminder, in the case of the neoclassical economic policy, tends to confirm that the market is controlled by the supply and demand for any product and service and that the market takes care of itself without the interference of anybody. It is the supply and demand that also affects the price that the consumer is expected to pay for a particular commodity or service consumed. Education being one of the very essential services for any community, the question that can be asked here is, what is the chance that the price will be maintained at a level that each and every individual will be able to access (Akbar et al 2011). The neoclassical theory does not seem to propose the policy direction that many people might wish to see. This is because of the fact the everything is left to a market in which its operations are fully determined by the supply and access of a given commodity (Blanchard, 2003). What this means is that all educational services are left in the market and that the establishment of various institutions of learning to meet the emerging demands is fully controlled by the consumers and the suppliers. Further, with the idea of neoclassical economics, the education system is freely left in the hands of the private investors without any kind of interference and that the price to be charged, is depended on the supply and the demand that is available at any given moment. Important infrastructure like schools, colleges and universities are owned and run by private investors and organizations who are allowed to compete favorably with the rest. The assumption of this theory is that if the perceived benefit and individual is going to get from any purchase he makes is low, the scenario that will follow is declined demand for the said product (Mark 2012). This is to imply that any institution that will not be able to deliver as per the demand expectation, is likely to lose its market. According to the neoclassical theory, the wages and prices are assumed to be flexible and can adjust accordingly given the market situation. In the educational policy what this means is that wages for the instructors working in different institutions will be paid based on the prevailing market conditions at that particular (Brian 2011). The same case applies the amount charged as school fees for the learners. This is to mean that the demand and supply of both the human labor and students who in this care are students, will have a direct bearing on the price and the amount of wages paid to the workers. However, in the case Keynesian which is also known as a Welfare state, the educational policy. To start with, the most important factor that is related to Keynesian theory and that is fundamental in formulating the educational policy, is the spending of the market. While education remains key to any economy, it is expected that if the Neoclassical concept is applied in formulating educational policy, many individuals are likely to miss out (Akbar et al 2011). This because not all individuals are equal economically. For instance, the growing economies, while the need for education may be very high, the spending power is not their and therefore education can be compromised so easily. It is in this regard that the Keynesian approach to policy formulation in the educational sector stands a chance (Brennan & Hamlin 2000). According to this theory, it is the ability to spend among the potential consumers that triggers the production and output level. This therefore explains the reason as to why the government intervention is required as part of the education policy (Brian 2011). The Keynesian theory is also characterized by the government to use different approaches to stimulate the economy so as to increase spending which will go a long way in enhancing production and output. The use of this economic policy in education, will therefore imply that irrespective economic status of the majority of the citizens, individuals have to access this very important service. While education remains a basic service to the society, its continuous supply is very important. The important characteristic of this theory is that the concerned authorities recognize that fluctuation do occur and which if not well managed can disrupt the process of providing important services (Alan 2003). This in educational policy formulation, is used in ensuring that there is a continuous flow of important services irrespective of the challenges the members of the society might be facing. In this case therefore, the educational policy might be created to allow for the government to take control of the education program so as to make sure that each and every person has equal opportunity to accessing it unlike when its left to the hands of a few individuals. The educational policy in this case empowers the government to be responsible in developing the necessary infrastructure and at the same time there is one policy with regard to human capital to ensure some consistence in supply and demand (World Bank 2001). Strengths and weaknesses of the two economic approaches The two economic approaches discussed above have different views to policy formulating and something that is subject to debate. To start with, the neoclassic economics, is founded on profit maximization and marginal utility that affects the market operation. According to the neoclassical economics mainly points out major economic issues which include price, output and income distribution which are all affected by the supply and demand of various commodities. Further, the neoclassic economics depicts that demand is determined by the incomes of the individuals and that production activities are determined by issues related to the cost of production (Brian 2011). Strengths and weaknesses of neoclassical economics Strengths First and foremost to point out with the case of the Neoclassical economics is that it seeks in such a way to liberalize the way how individuals should be operated and what are their interests and how to go about meeting them. As identified in the theory, marginal utility and profit maximization are among the factors that affect the demand and supply respectively. In service delivery, this view seeks show that if the education policy is to make use of it, the key players who in this case are the owners of the institutions and the students, will have the chance to determine what level of services they want and how much they are willing to pay for (Besley and Robin 2003). Important in this case, is that both the consumer and the producer and the buyers will have the freedom to choose based on the benefits to be accrued and the profits to be realized from making available that important service. Further, in relation to Neoclassical approach , there is an assumption that people are allowed to make free and independent decisions based on the information they have. This is particularly important in formulating educational policy where the suppliers will be willing doing anything to provide quality services in order to attract relatively large demand. In other words the choices on what the consumer wants solely lies on his shoulders. This is very vital in it comes to determining what should be paid for and the valuable service that is available to consume (Arie et al 2011). This in the education sector, will create an environment where the competitors will be trying to excel and doing so they will be obliged to deliver quality services to the consumers and consequently enhancing the quality of education in a country as a basic service for all (Richard et al 2007). Finally, another important strength of the Neoclassical economics in making an educational policy, is that irrespective of the fact that all people live in the same environment preferences are different. One important assumption of the Neoclassical economics, is that in the market, people have preferences that can be termed rational and that are determined by the values that are identified and attached to a particular outcome. This goes a long way in helping the consumers in determining what education is rightful for the consumers. On the same line, the producers and the consumers determine the human capital to employee and the services to purchase. In a nutshell, the this policy gives individuals the right to choose and where to choose from (Bigsten et al 2000). Weaknesses First and most important with this theory is that it seems to incline towards freedom of choice. This being a fact, the critics of this theory are arguing that this approach will be opening ways for what termed as Karl Max’s theory which can be interpreted to what is to be known as capitalism. Now, the major issue with this theory is that in the society of inequality and education being a very essential service to the community, is likely to compromise the level of education individuals are going to get and this is affected by the disparities in the levels of income (Mark 2012). Further, Neoclassic economics assumes that decisions being made by both the investors and the consumers is based on information and all facts that are available. However, the challenge remains on how information should be dispatched and accessed by different individuals (Arie et al 2011). Finally, it is clear that the theory recognizes that maximization of profits and maximization of profits, are key factors in determining the market consumptions and production levels, it remains to be known about how the motives of different players in realizing certain profits and utilities can be determined and the approaches being used to realize higher profits and utilities (King 2003). Strengths and weaknesses of Keynesian economics Strengths First and foremost, the Keynesian economics recognizes that some of the services are very critical to the society and that the growth of the economy is depended on the spending ability of the consumers. This is to mean that even though individuals are allowed to operate freely, the government intervention is always warranted especially when it is felt that demand is slowing down, prices and employment as well as wages continue to fluctuate (King 2003). In the process of formulating the educational policy, the Keynesian view holds that prices and wages have to be controlled for each and every person to manage. Since education remains one of the basic services that government should ensure is made available to the society, provision of subsidies and other incentives to the consumers increases their spending and thus increase in production . Actually this fact is founded on the assumption of existence of effective demand where the amount of money spent on consumption is a factor of the disposable income (Buchanan & Tullock 2004). This is to imply that people only spend what they have as income. In those circumstances where the income is likely to change, the consumption pattern is expected to follow suit. It is in this regard that this theory is important in ensuring that the provision of education as a basic commodity is not interrupted even with the decline in income. Weakness While government intervention is important in ensuring that education is made available for all by ensuring balance equilibrium between demand and supply, it remains a challenge to predict when there is likely to be a gap between demand and supply. Further, it becomes very difficult to inject the appropriate income into income and the likely effect of this, is increased inflation. Conclusion This essay has extensively discussed the two economic theories of Neoclassical and Keynesian and given the differences that exist between. Majorly, the primary difference between the two, is what determines the demand and supply of services in the market. While in the Neoclassical economics hold that profit maximization and marginal utility determine supply and demand respectively, in the case of the Keynesian economics, it’s the available income that determines that demand and hence the production levels. In general, the two theories provide an overview of how the market should be left to operate. While the two theories look favorable in different situations their effectiveness depends on the context and the area of policy making. In other words, the two economic theories can both applied to manage different market situations. References Akbar, N., Kwesi, B., Howard, S and Joseph, E. (2011). Good Growth and Governance in Africa: Rethinking Development Strategies. Oxford: Oxford University Press. Alan, C. (2003). Keynesian Economics: The Search for First Principles. London: Routledge. Arie, A., Jimmy, W. and Warren, Y. (2011). Perspectives on Keynesian Economics. New York: Springer. Bigsten, A. and Levin, J. (2000). 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