Development of Economic Growth - Literature review Example

Competition in the Economy [Name] [Professor Name] [Course] [Date] Abstract: It is the purpose of this paper to contribute to the ongoing discussions on the comparative analysis of the unique position that different schools of economic thought , such as classical and Marxist or neoclassical. This paper explains the differences of these competing conceptions and attempts to assess the one that is in the most unique position to address the question of competition within the economy. In the end, it offers a conclusion on the most suitable theory that can explain competition in the economy. Keywords: neoclassical perspective, classical perspective, market economy, competition, Introduction Competition is a major driver for improved product quality through optimal use of resources to improve economic growth. In economics, competition can be defined as the rivalry among players in the sector in the acquisition of business goals such as increased sales volume, market share and profits. In his book “The Wealth of Nations,” Adam Smith (1776) described competition as the distribution of productive resources towards their most favorable use to encourage efficiency (Waterman 2009). Alongside other classical economists, Smith referred to price and non-price competition between producers who sold their wares on the most favorable terms by bidding customers (Clifton 1977). Later, several theorists proposed micro-economic theory that differentiated perfect and imperfect completion. According to the theory, this rivalry triggers commercial firms to create innovative products that would guarantee greater selection and superior products to the consumers. Thence, several schools of thought, such as neoclassical and classical, have been developed, each maintaining its distinctive position on the idea of competition in the economy. This paper compares the neoclassical and classical theories of competition. Classical theory was developed following analysis of works by J.S. Mill, Ricardo and Smith. This paper concludes that neoclassical conception of competition replaced the classical conception of competition despite its practicality (Boianovsky, Mauro and Hoover 2009). Classical Conception Classical economists maintain that competition is a mechanism of self-centeredness. This occurs where individual players act independently while directing their efforts to achieve equilibrium, or an unceasing elimination process of surplus profits or excess losses and the tendency to establish naturally accepted prices that can be recognized as the centre of gravity of market prices (Hunt 2000). Within this school of thought, even though each individual player pursues the attainment of own self-interest, the process is led by an invisible hand to seek an end that was not initially the intention. According to this conception, competition is perceived as a coordination mechanism that allows for the examination of the economic phenomenon in a systematic way. It is primarily through the principle of competition that the political economy acquires significance. In this way, laws can instituted in the way in which prices, profits, rents and wages are established through competition. The classical perspective assumes that competition is the select regulator, thus principles of scientific accuracy and broad generalization may be set out depending on the way they will be regulated (Negishi 1989). Neoclassical Conception Under the neoclassic theory, evaluation of competition falls within the model of perfect competition, a situation that describes the conditions that must be maintained in the market to cause the existence of perfect competition from the basis of a firm and through extension, the classification of the industry as competitive. The model of perfect competition refers to a market structure that consists of several small firms that deal in homogenous products or services. Within this neoclassical perspective, all participants have information on the costs and prices of the commodities. In addition, there are no inhibitions on the movement of factors of production. Consequently, these conditions render the producers and the consumers unable to influence the product prices. In addition, the firms change their behavior as they become passive with regard to determining the price of the products. In the case of production, the firms select the degree of output in consistency with the optimization of profits attained at the level where the price equates the product’s marginal cost (Shaikh 1995). Comparative Analysis Classical and neoclassical perspective can be compared on the basis of their themes in analysis of methodology, economy or value theory. a) Economics Classical economists tend to examine two core economic issues, including the causes of economic growth and the factors that determine income distribution into profit, rent or wages. The classical theme involves allocating and accumulating surplus output, thus the emphasis is on production as well as on the factors influencing supply of products. On the other hand neoclassic economists tend to focus on the individual options that manifestly indicate beliefs or preferences, as the distribution of certain resources among its alternative applications or uses. In fact, the marginalists revolution is a change in the focus from the growth and accumulation of capital to optimization of utility and efficiency in the production. Conversely, the classical theory has relatively limited focus on the choices that individuals make. Here, the classical economists contend that much general interest do not exists on the choices made by individuals. Rather, they believe that agents should be divided into three, namely capitalists, workers or landlords. b) Methodology In methodological holism, there is no explanation which invokes non-individualist decision-makers. Classical conceptions tend to clarify the social phenomenon with regard to methodological holism. The core focus of this perspective involves social entities. In addition, this perspective is developed with view of class such as capitalist, workers and landlords who compete for a share of a pie rather than the abstract individuals. Thus the concept of class is more significant in the analysis of social phenomenon. Conversely, the unlike the classical theory, the neoclassical theory relies heavily on research paradigms of methodological individualism. Technically, this means that individuals who share certain preferences or firms endowed with certain technologies that venture into the market as independent entities. In this way, compliance with the model of methodological individualism bears a significant bearing on the kind of neoclassical model. Within the neoclassic perspective, the society is recognized as a collection of individuals, who posses thoughts, needs, wants and deeds. To comprehend the nature of economy, therefore involves understanding the aggregate impacts of individual acts and wants. With regard to neoclassic theory, this is enabled through understanding the manner in which individuals capitalize on their material self-interests through utility of resources as well as the accessible technologies in the market transactions. Accordingly, what takes place in the economy often results from individuals acting this way. It can therefore be concluded that neoclassic economists posit that the economy is an aggregate resulting product from individuals (Tsoulfidis 2010). c) Historical Analysis Within the classical conception, historical analysis is significant while statistical investigations and mathematical models are of limited significance. Classical economists tend to explain the rise of capitalist approach to production based on historical analysis. From the outset, they have shared the perspective that it was the importance of capitalist production that generated an accumulative surplus and the way in which the accumulation is important in relation to the attributes of the capitalist society’s emerging social relations. The classical conception is limited to the commodities that represent typical products of competitive capitalism. Classical economists consider the explanation of the historical incidents as their core task (Solow 1956). On the contrary, rather than the attributes of a particular socio-economic system, the foundation of neoclassical perspective is the ahistorical individual. This means that unlike the classical perspective, neoclassical perspective are laid out in mathematical models with limited reference to history. For instance, only factors of production such as capital, labor and land can be found in the neoclassical tradition (Waterman 2009). From the analysis, since there are no significant distinctions among them, it indicates lack of the concept of class. These methodological attributes arise from the idea in neoclassical economy, the themes are static and can be allocated (Muldera et al 2001). e) Value In economics, several schools of thought have a theory of value at the centre of their models. Aside from identifying the forces that determine prices, the theory of value shows the fundamental framework of the model. In addition, this specific theory is a kind of expression of underlying attitudes that can be adopted to examine certain phenomenon and the problems that should be solved. Concerning analysis of what determines the value of commodities, a range of approaches tend to differentiate two concepts of the value. These include the cost of production of the commodity as reflected by its supply o as established by its consumption and the value consumers get from it as reflected in its demand (Hageman 2009). To this end, proponents of the classical conception argue in defense of the value found to have been determined in the production, such as at the production plant, transportation and marketplace. For instance, the price of a bushel of corn was originally viewed to have depended on the costs of its production. As cost of producing it could be cut down to labor, the approach was adopted to explain the “Labour Theory of Value.” However, they were less concerned about the concept of demand as a primary determinant of value. Some classical theorists such as Ricardo have argued that some ware such as rare artifacts can relate to this conception, as since their prices are dependent on their scarcity (Tsoulfidis 2010). Such a school of thought has maintained that the significance or the value of a commodity is a pre-determinant of its ability to have exchange value. However, it can still be pointed out that the general usefulness of a commodity does not correlate with its value. To this end, it is perceivable that the classical theories of value conceived a perspective that the value of a commodity is associated with the relationship between the person and the object he seeks to acquire (Hageman 2009). Quite the reverse, neoclassical theory indicates the desertion of the classical theory of value based on the importance of work or labor in wealth production. Proponents of neoclassical theory believe that value on the basis of the relationship between demand and supply, and the costs of production. In turn, they suggest that prices are also dependent on the demand that in turn is dependent on the level of consumer satisfaction ensured by individual commodities. This implies that the neoclassical theory of value poses as a supply and demand behavior theory. Within this perspective, the commodity value is determined by its degree of scarcity, where buyers desire that the commodity should exceed its accessibility (Colander 2000). In conclusion, this paper compares classical and neoclassical perspective on the basis of their themes in analysis of methodology, economy or value theory. From the comparative analysis, it can be concluded that the classical theory offers a better model that can explain completion with a market economy. Unlike the classical theory, under the neoclassic theory, evaluation of competition falls within the model of perfect competition, a situation that describes the conditions that must be maintained in the market to cause the existence of perfect competition from the basis of a firm and through extension, the classification of the industry as competitive. References Boianovsky, Mauro and Hoover, Kevin D. (eds) 2009. Robert Solow and the Development of Growth Economics. Annual Supplement to Volume 41, History of Political Economy. Durham NC: Duke University Press. Clifton, J. 1977. “Competition and the Evolution of the Capitalist Mode of Production”. Cambridge Journal of Economics, 1, pp. 137-51. Colander, D. 2000. The Death of Neoclassical Economics. Journal of History or Economic Thought, Vol 22, No. 2, 128-135 Hageman, H. 2009. Solow’s 1956 Contribution in the Context of the Harrod-Domar Model. In Boianovsky and Hoover. Harrod, R. F. 1948. Towards a Dynamic Economics. London. Macmillan. Hunt, S. 2000. A General Theory of Competition. Resources, Competences, Productivity, Economic Growth. London: Sage. Muldera, P., Henri L.F., De Groot, Hofkes, M. 2001. “Economic growth and technological change:A comparison of insights from a neo-classical and an evolutionary perspective.” Technological Forecasting and Social Change, 68, 151-152 Negishi, T. 1989. History of Economic Theory. Amsterdam: North Holland. Shaikh, A.1995. The Stock Market and the Corporate Sector: A Profit Based Approach. Working Paper, No 146. New York: Jerome Levy Institute Solow, R. 1956. “A Contribution to the Theory of Economic Growth”. Quarterly Journal of Economics 70:65-94. Tsoulfidis, L. 2010. Competing Schools of Economic Thought. Heidelberg. Springer. Waterman, A. 2009. “Adam Smith’s Macrodynamic Conception of the Natural Wage”. History of Economics Review 49: 45-60. Read More