Write and explain Neo classical and Keynesian economics policy.

NEO CLASSICAL ECONOMICS

Is a term used in various approaches in economics that focuses on the determination of prices,
outputs, and income distributions in markets through supply and demand to an individual’s
rationality and his ability to maximize utility or profit.

Neo classical approaches argue that governments should not intervene in the economy; in other
words, these policies are claiming that an unobstructed free market is the best means of inducing
rapid and successful development.

Three basic economic policies of the neo classical theory are the following;

Neo classical economic policy

Free market policy

 The economy will correct itself over time, thus the governments should not intervene in
the economy; thus the policy contends that the market should be totally free, meaning
that any intervention by the government is necessarily bad.
 The large part of the business cycle we observe are due to flawed government policy

Public choice policy

 is arguably the more radical policy with its view, closely associated with libertarianism
that governments themselves are rarely good and therefore should be as minimal as
possible.

Market-friendly policy

 unlike the other two policies, the market-friendly policy is more developed and is often
associated with the world bank. This policy still advocates free markets but recognizes
that there are many imperfections in the markets of many developing nations and thus
argues that some government intervention is an effective means of fixing such
imperfections.

KEYNESIAN ECONOMICS
Also as in Keynesian economic theory, is an economic theory based on the ideas of twentieth-
century British economist John Maynard Keynes.

Keynesian economics promotes a mixed economy where both the state and private sector have
important roles. Keynesian economics seeks to provide solutions to what some consider failures
of laissez-faire economic liberalism, which advocates that markets and the private sector operate
best without state intervention.

Keynes asserted the importance of aggregate demand as the driving factor for the economy,
especially in periods of downturn. From this he argued that government policies could be used to
promote demand at macro level, to fight high unemployment and deflation of the sort seen
during the 1930s. Keynes argued that the solution to depression was to stimulate the economy
(“inducement to invest”) through some combination of policies;

Keynesian economic policy

Fiscal policy:

Expenditure multiplier

 Increase in the level of investment create a bigger expansion in income than initial
change in expenditures.
 Government investment in infrastructure – the injection of income results in more
spending in the general economy, which in turn stimulates more production and
investment involving still more income and spending and so forth. The initial stimulation
starts a cascade of events, whose total increase in economic activity is a multiplier of the
original investment.

Deficit spending

 During economic crisis state stimulates demand by spending more than the collected
taxes, after recovery of economy reduction of state demand and increase of taxes.
 Pay back the debts accumulated during the crisis while economy is doing well.
 Reduction in interest rates so as to stimulate the increase in investments and also
consumer spending.
REFERENCE;

Alfred Marshall, (1961), “principles of economics”, Ninth Edition, Macmillan London.

Hennings, Klaus and Samuels, Warren J. (1989). “Neoclassical Economic Theory”, Boston.

Adam Smith, (1852), “The Wealth of Nations”, Books III-V, Harvard University, T. Nelson.

John Maynard Keynes. (2016). “The General Theory of Employment, interest, and Money”.
Youcanprint.

William J. Barber, (1967). “A History of Economic Thought”, Penguin Books.