By Agbesi BCIL
31st August, 2021

INTRODUCTION

The Classical School of Thought was dominant in the 18th and early 19th centuries. The concepts of the “invisible hands” and “supply creates its own demand” were few among many ideas of the classicalists. Neo-Classicalism is an economic school of thought that focused on the determination of goods, outputs and income distributions through an income-constraint maximization of utility and profit maximization of firms. Though Neo-classicalists primarily built on the ideas of classicalists and hence share some similarities with the classicalists, there are some variances in the ideas of the two schools of thought. This write-up seeks to highlight the similarities of the two schools of thought and also expound the differences between them.
SIMILARITIES
1. Auto-correction Mechanism of markets: this is a laissez-faire approach to the economic policy agreed on by both schools of thought where the forces of demand and supply are left to operate with no intervention. It is a process in which the aggregate market eliminates a recessionary or inflationary gap created by a short-run equilibrium that is less/greater than full employment. This is done when wages and prices of other resources are reduced when there is a deflationary gap. This same process closes the inflationary gap through an increase in wages and prices of other resources. The self-correction mechanism is triggered by short-run resource market imbalances which are closed by long-run price flexibility.
2. “The invisible hand”: the “invisible hand” aggregates individual decisions driven by rational self-interest into socially optimal outcomes. Adam Smith argued that the best economic benefit can be achieved when individuals act in their own interest. The invisible hand theory suggests that when entities make economic decisions based on their own self and rational interest, it amasses unintended, positive benefits for the economy at large. The neo-classicalist asserted that self-interest manifests in firms maximizing profit and consumers maximizing utility.

DIFFERENCES
1. Theory of Value: The classicalists argued that the economic value of a good or service is determined by the total amount of “socially necessary labour” required to produce it. Ricardo states that, if only labour is employed in production then the exchangeable value of the goods would be exactly proportionate to the amount of labour employed. The neo-classicalists on the other hand asserted that the utility an individual derived from the consumption of a product is the main factor of the value rather than the cost of production. This concept was suggested by Williams Stanley Jevons et al in their writings in the late 19th century.
2. Economy and production: the neo-classicalists emphasized that the economy can be understood as an exchange economy where rational individuals with exogenously determined resource allocations interact in the market. These actors trade with each other since they generate mutual utility enabling us to obtain Aggregate Demand by aggregating the individual utility functions. On production, Alfred Marshall held that demand conditions matter in the short run and supply conditions would be necessary only in the long run. On the other hand, the classicalists see the economy as a collection of classes rather than individuals. They say the economy should be self-regulating with the supply condition playing a major role in production. Adam Smith asserted that production is vital for the economy to function.
In a nutshell, the two schools of thought pointed and enacted some essential economic theories and ideas that are still relevant in today’s world. Though they converge with some ideas at certain points, they interestingly have some differences which were aforementioned and discussed.

REFERENCES
Lanrdreth H.& Colander D. (2004): History of Economic Thought (4th edition), Houghton Mifrrssfflin Company, Boston.
Vaggi G.& Groenewegen P. (2003): A Concise History of Economic Thought. Palgrave Macmillan Ltd, New York.
Hollander, S. (1987): Classical Economics. Oxford: Blackwell
Peach, T. (1999): Surplus to requirements: Kurz and Salvadori’s The Elgar Companion to
Classical Economics. Journal of the History of Economic Thought
Rutherford, M. 1994: Institutions in Economics: The Old and the New Institutionalism. Cambridge, UK: Cambridge University Press.

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