Classical neoclassical and new growth theory

A fascinating topic!

Classical, Neoclassical, and New Growth theories are three major schools of thought in economics that have shaped our understanding of economic growth and development. Here's a brief overview of each:

Classical Theory (18th-19th centuries)

• Developed by Adam Smith, David Ricardo, and Thomas Malthus
• Focuses on the concept of "laissez-faire" or free market economy
• Assumes that economic growth is driven by technological progress, population growth, and capital accumulation
• Key features:
  • The "invisible hand" of the market ensures optimal resource allocation
  • Economic growth is driven by technological progress, which increases productivity
  • Population growth and capital accumulation also contribute to growth
  • The economy tends towards a state of equilibrium, where supply equals demand

Neoclassical Theory (late 19th-20th centuries)

• Developed by Alfred Marshall, Leon Walras, and Carl Menger
• Builds upon the classical theory, but introduces new concepts and assumptions
• Focuses on the role of individual decision-making and market equilibrium
• Key features:
  • The concept of diminishing marginal returns: as more resources are used, the marginal output decreases
  • The concept of opportunity cost: the value of the next best alternative forgone
  • The idea of market equilibrium: where supply equals demand, and prices adjust to clear the market
  • The role of government is limited, as the market is seen as efficient

New Growth Theory (late 20th century-present)

• Developed by Paul Romer, Robert Lucas, and others
• Challenges the neoclassical view of economic growth, emphasizing the role of institutions, innovation, and human capital
• Focuses on the idea that economic growth is driven by endogenous factors, such as technological progress and institutional changes
• Key features:
  • The concept of "endogenous growth": growth is driven by internal factors, rather than external shocks
  • The role of institutions: well-functioning institutions, such as property rights and the rule of law, are essential for growth
  • The importance of human capital: education and training are crucial for growth
  • The concept of "knowledge spillovers": the sharing of knowledge and ideas among individuals and firms drives innovation and growth

In summary:

• Classical theory emphasizes the role of technological progress, population growth, and capital accumulation in driving economic growth.
• Neoclassical theory introduces the concept of diminishing marginal returns, opportunity cost, and market equilibrium, and emphasizes the limited role of government.
• New Growth theory challenges the neoclassical view, emphasizing the role of institutions, innovation, and human capital in driving economic growth.

Each theory has its strengths and weaknesses, and they have all contributed to our understanding of economic growth and development.