The Classical and Neo-classical Perspectives in Economics

The two perspectives of capitalism are similar in that they advocates for free market economies where there is increased privatization of businesses, liberalization of markets and absence of coercive impositions or restrictions from the government regarding economic activities. According to Kates (2014), free-market economies are characterized by valuing of private property and individual rights and political systems that shy away from restrictions or subsidies. Before the emergence of classical economics most national economies were based on command-control, top-down government policies. Classical economics was against mercantilism, which emphasized on maximization of exports and minimization of imports and instead supported a radically different approach. Its perspective regarded the economy as being in a position to rely on market forces to maintain its equilibrium. Intervention from the government in the form of artificial tariffs or other barriers that caused a disruption to the free flow of goods and services were harmful to the economy.

The classical theory is also referred to as laissez-faire economics and focused on growth, free trade and competition and an economic system that is free from government regulation as possible. The theory provides that when people are allowed to pursue their own interests, the whole society benefits (Walsh 2008). The argument under the classical economic theory is that market should be allowed to self- regulate. Under this perspective the concern for profit ensures that resources available in a society are utilized in the most beneficial manner without government’s interference. The role of the government within the classical perspective is providing national defense, a system of public works which includes education and infrastructure as well as a system of justice that enables enforcement of contracts. Similarly, the main goal of neo-classical economics is to enable efficient allocation of scarce resources.

The neo-classical perspective is based on the assumption of rationality which provides that given all possible choices, decision makers will always prefer to maximize their objective (Walsh 2008). According to Shishmanova (2014) the assumption of the theory is that individual's rationality allows them to maximize their profit or utility and its emphasis is placed on equilibrium. The manner in which consumers and firms interact in a free market should contribute to an equilibrium quantity and supply.The theory requires the government to accumulate capital and eliminate trade barriers and encourage foreign direct investments. After capital is accumulated, it flows from areas of low productivity to higher productivity areas.