Monday, August 16, 2010

What are the beliefs of the new classical theory?

The new classical model of business analytics came about in the 1970's and 1980's as a rejection of Keynesian economics.  There are many belief's in the new system and they vary depending on the approach to the study of economics.  There are three main approaches.  The main difference is the level of government involvement in the economy. 


The free-market approach assumes markets alone are sufficient to generate maximum wealth.  This is the main point of new classical economics.  Markets are believed to be self-correcting and agents within the markets will always exploit information to their gain because it will perfect their potential.  Loss through surplus or deficit are believed to be from poor predictive behavior; therefore, agents will improve or be destroyed in the free-market.  Government is seen as neither a good or bad entity, but a part of the process.


The public-choice approach is more of an extreme approach.  This approach supposes all government interference is bad for the market because it distorts outlook potential.  This model suggests removing government from the equation and becoming a completely autonomous market where the public is the only consumer (the government becoming a simple consumer rather than a market force).


The market-friendly approach suggests the market should be a free market, which will work most of the time, and allow for some governmental influence when there is need such as missing markets, imperfect knowledge or outside extremes the market cannot reasonably handle.  This compromise approach is more to the center of new classical economics.


A major belief is the supply will equal demand due to rational expectations.  This assumes actors will always make the best decisions for their company because it will have a future impact.  Information is a key driving force in the market because it is needed to properly apply decisions to get supply equaling demand. 

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