Difference Between Classical Economics and Neoclassical Economics: Classical vs Neoclassical Economics Compared

Classical Economics vs Neoclassical Economics

Classical economics and neoclassical economics are both schools of thoughts that have different approaches to defining economics. Classical economics was founded by famous economists including Adam Smith, David Ricardo, and John Stuart Mill. Neoclassical economics was said to be developed by authors and scholars such as William Stanley Jevons, Carl Menger, and Leon Walras. The two schools of thought are quite different to each other in that classical economics was developed historically, and neo classical economics encompasses the kinds of economic principles and concepts followed and accepted today. The following article provides a clear outline of what each school of thought is, and how they differ to each other.

Classical Economics

Classical economic theory is the belief that a self-regulating economy is the most efficient and effective because as needs arise people will adjust to serving each other’s requirements. According to classical economic theory there is no government intervention and the people of the economy will allocate scare resources in the most efficient manner to meet the needs to individuals and businesses. Prices in a classical economy are decided based on the raw materials used to produce, wages, electricity and other expenses that have gone into deriving a finished product. In classical economics, government spending is minimum, whereas spending on goods and services by the general public and business investments are considered as the most important to stimulate economic activity.

Neoclassical Economics

Neo classical economics are the economic theories and concepts that are practiced in the modern world. One of the major underlying principles of neo classical economics is that prices are determined by the forces of demand and supply. There are three fundamentals assumptions that govern neo classical economics. Neo classical economics assumes that individuals are rational in that they act in a manner that brings forth the best personal advantage; individuals have limited income and, therefore, strive to maximize utility and organizations have constraints with regard to cost and, therefore, use the available resources to maximize profits. Finally, neo classical economics assumes that individuals act independently of one another and have full access to the information required for decision making. Despite its acceptability in the modern world, neo classical economics has invited some criticism. Some critiques question whether neo classical economics is a true representation of reality.

Classical vs Neoclassical Economics

Neo classical economics and classical economics are two very distinct schools of thought that define the economic concepts quite differently. Classical economics was used in the 18th and 19th century, and neo classical economics, which was developed towards the early 20th century, is followed till today.

Classical economics believes in a self-regulating economy with no government intervention, with the expectation that resources will be used in the most efficient manner to meet needs of individuals. Neo classical economics operates with the underlying theory that individuals will strive to maximize utility and business will maximize profits in a market place where individuals are rational beings who have full access to all information.