Keynesian vs. Neoclassical Economics
Keynesian Economics AD/AS Model
From a descriptive point of view, Keynesian Economics would describe the measures adopted in an economy to maximize aggregate demand to a given output. This economic perspective explains how individual organizations (constituting an economy) structure their supply when it comes to dealing with market demand during a recession. Some organizations prefer enhancing economic output during recession periods by halting production rates to sustainable levels in order to avoid losses from different angles. For instance, car manufacturing firms such as Toyota and Volkswagen reduced their production rates to sustainable levels during the 2008 Great Economic Recession.
The Keynesian Economics would be applied to aggregate supply when determining economic output of a given country. According to this economic practice, profit-making institutions tend to release products to the market in a regulated structure to ensure that profit is realized at a constant level for a predetermined period. For instance, the Nuclear Deal that forced economic sanctions on Iran would see its oil mining competitors such as UAE and Saudi Arabia halt their mining services until the prices hike to extreme levels in order to optimize on the new market situation.
From an analytic point of view, Keynesian economists argue that the uncertainty created by political and social activities across the globe are entirely attributed to the nature of the current economic status. Hence, the current economic status highly depends on political activities and social security in markets when it comes to effecting Keynesian-Based Economic principles. For instance, investors are taking longer periods of market feasibility time in assessing the security status of potential markets from both the political and social angle. The Keynesian approach is mostly applicable to existing FDIs in most economies. For instance, Chinese companies are more cautious in American investments due to the strenuous trade sanctions arising from social mistrust by the current U.S. administration.
Fig 1: A Typical Keynesian Economics AD/AS Model Graphical Illustration
Neoclassical Economics AD/AS Model
Neoclassical Economics refers to an economy whose market equilibrium is primarily determined by prevailing forces. It describes a demand-supply situation which is solely determined by the prevailing demand in the market. Neoclassical Economists would have various arguments regarding the prevailing economic status being experienced across the globe.
Regarding technology, neoclassical economists would argue that the Android and device market are shaping up most economies in most developing nations. For instance, the market popularity of Android devices has seen various economies shying away from Windows and Apple-affiliated operating systems devices such as Nokia and iPhones respectively. This acknowledges the fact that market forces play a critical role in determining the nature of success in GDP levels, as well as per capita income in a given economy.
When addressed from a supply point of view, neoclassical economic–driven countries which try to impose conflicting principles end up failing horribly. For instance, the lack of market for Apple Inc. products in most developing nations led to iPhones being over-sold in the Australian market. This led to conflicting commercial laws which were conflicting from all angles. For instance, failure to provide repair and maintenance services to manufacturer damages on these phones led to a fine on the firm from the Australian authorities. Market-driven forces in an economy are only determined by neoclassical economics principles. Figure 2 describes how the Neoclassical Economics depict current economic times among most countries.
Fig 2: A Neoclassical Economics AD/AS Model Graphical Illustration
Richard D. W. & Stephen A. R. (2012). Contending Economic Theories: Neoclassical, Keynesian and Marxian. The MIT Press, Cambridge.