Discuss how the following schools of thought: The classical school Utilitarian S

Question

Discuss how the following schools of thought:

The classical school
Utilitarian
Socialist
Marxism
Neoclassical
Capitalism
Keynesian

Would handle the following situation:

The economy has experienced a sudden collapse of asset prices, with the stock, real estate, and commodity market experiencing declines of over 50 percent relative to last year. Data show a loss of nearly 1 million jobs since last month, which brings to year-to-date loss of jobs to nearly 5 million. And, bank lending has slowed sharply, and initial data on investment suggests a sharp decline in new projects. The central bank reports that that bank balance sheets have deteriorated significantly, and it is contemplating emergency monetary actions. The country's Prime Minister claims to be "on top of the situation," but polls suggest her popularity is falling fast as confidence in the government's economic leadership diminishes. This appears to be the start of a serious recession, with the rate of decline in production rivaling the rapid declines in 2008 and 2009.

Describe each one clearly, or use diagrams, or other specified models to describe how they would handle the situation.

Explanation / Answer

The classical school:

The classical school of economics which is regarded as the first school of economics originated in the late 18th to mid-19th century. Its major contributors include Adam smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill. Adam smith’s book ‘The Wealth of Nations’ in 1776 is considered a fundamental work in classical economics which discussed free markets & the idea of national income.

Classical economist were of view that free markets regulate themselves, when free of any intervention Though nearly all of them were against government interference with market exchanges, they acknowledged that in some areas government can play a better role. They developed theories of value, prices, demand, supply & distribution. Though classical school focused on macroeconomic issues & growth, but it failed to explain the extraordinary decline in economic activity and increase in unemployment. The classical school economists were unable to explain the importance of the short-run changes. Adam smith was of opinion that wealth of nation is determined by national income & not by the king's treasury.

Utilitarian:

The Utilitarian school of economists think that moral value of an action is based upon its ‘utility’. The best action is one which maximizes ‘utility’. Jeremy Bentham is considered as the founder of ‘utilitarianism’. He defined utility as the sum of all pleasures or happiness that comes from an action excluding the suffering of anyone involved in action. The concept of ‘utilitarianism’ is applied to social welfare economics & crisis of global poverty.

Socialist:

The social group of economists hold a view that capitalist model of economics is flawed as it only focuses on profit & loss creating clear winners & losers. Since in capitalist economy means of production are held by private parties they can suppress the rights of labor & accumulate disproportionate share of wealth. They proposed the idea of ‘social ownership’ & public ‘ownership’ wherein means of production are hold by people. The socialist school finds its root in ‘Marxian economics’. The main characteristics of socialism are public ownership of means of production, central planning of the economy, income equality & ending class differentiations.

Marxism:

‘Marxism’ named after great thinker ‘Karl Marx’ remains one of the most controversial theories in the world. Marxism is a social, political and economic philosophy that describes the ill effect of capitalism on labor, productivity and economic development. Marx believed that capitalism exploits laborers by paying them low wages & uncertain work conditions, whose only aim is to acquire more & more money. The labor theory of value is a major contribution of Marxian economics. It states that value of a commodity can be measured by average number of hours required to produce that commodity.

Neoclassical: Neoclassical economists think that supply & demand is related to an individual’s rationality & ability to maximize profit. They have three assumptions to explain the theory.

a) Individuals have rational preferences among identified and valued outcomes.

b) Individuals maximize utility and firms maximize profits.

c) People act independently on the basis of relevant & full information.

They believe that market equilibrium is achieved when both the customer and the firm achieve their respective goals.

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