Contending Economic Theories
Three distinct economic theories guide the general understanding and comprehension of the economics field and its impact on global society. These are the Neoclassical, Keynesian, and Marxism theories. The theories are similar and different given their insights into the primary causes, solutions, and nature of various economic cycles. Focusing on their differences, the Neoclassical and Keynesian theories differ on the understanding of the nature of capitalist cycles. The Neoclassical theory majorly focuses on the idea that the economy is like a machine. This means that if the economy is left to work independently, it will rectify inflation and recession periods that may be experienced in any economic cycle (Wolff & Resnick, 2012). For instance, through regulation of the market transactions by an external intervention such as state, the market system will only be undermined as a result. Thus, this theory is of the view that self-corrective properties will make the market system successful. Conversely, the Keynesian theory argues that a state needs to intervene in the market system to manage market imperfections and failure that often generate cycles. Keynesians believe that without government intervention, prolonged inflation and recession could adversely affect the economy causing the suffering of citizens.
Contrarily, the Marxism theory links capitalism’s cycles to the economy’s components. This theory argues that to deal with capitalist crises effectively, the economy’s components need to be changed (Wolff & Resnick, 2012). As such, unchanged economic elements do not require any government interventions or self-corrective properties for the cycles to be overcome. For instance, for the past seventy-five years, various political leaders have made policies to prevent crises in the capitalist economies although their promises have not been fulfilled. The 2008 global financial crisis experienced in the U.S. was the consequence of the creation of massive fictitious financial wealth believed to have begun in the 1980s (Bresser-Pereira, 2010). Based on these aspects, the neoclassical theory has made a significant breakthrough in addressing the economic crisis of 2008. It has achieved this by regulating the financial innovations that were seen as substantial risks in U.S. markets.
Capitalism is defined as a socio-political and an economic system usually based upon the principles of free market and private property. In the real sense, the price mechanism often acts as the coordinating force in a capitalist economy. The capitalist economy’s components have self-corrective and regenerative powers that enable the system to evolve with time. For the effective governance of the capitalist economy, the government needs to directly or indirectly intervene to provide an institutional foundation to the system. This means that political authorities can regulate economic transactions by imposing taxes and enacting regulations (Naz, 2014). Thus, the market, institutional foundation, and political authority prove to be vital components of the regulatory framework of the capitalist system. The concept of capitalism has changed over the years. Advancements in technology and specialization in products and tasks have established a new way of organizing the economy. The technological advancements have increased the amount of output produced in a day’s work. As a result of the change in capitalism, populations in specific countries such as Italy and England had better livelihoods as compared to those in countries such as Japan and India. The difference between the 18th and 21st century can easily be established by exploring the difference in the livelihoods of people in countries such as India. The livelihoods of Indians are currently better than they were three centuries ago.
Bresser-Pereira, L. C. (2010). The 2008 financial crisis and neoclassical economics. Brazilian Journal of Political Economy, 30(1), 03-26. Retrieved from http://www.scielo.br/scielo.php?pid=S0101-31572010000100001&script=sci_arttext
Naz, F. (2014). Adam Smith’s Model of Capitalism and its Relevance Today. Filosofía de la Economía, 3(1), 71-85. Retrieved from http://ppct.caicyt.gov.ar/index.php/filoecon/article/view/4728/6483
Wolff, R. D., & Resnick, S. A. (2012). Contending economic theories: neoclassical, Keynesian, and Marxian. MIT Press. Retrieved from https://economiapoliticapr.files.wordpress.com/2015/08/richard-d-wolff-stephen-a-resnick-contending-economic-theories-neoclassical-keynesian-and-marxian-2012.pdf