DIFFERENCE BETWEEN CLASSICAL AND MODERN ECONOMIC THEORY

Classical economists tend to discuss qualitative parameters in decision making in qualitative terms while reducing the decision process to an optimization or a neo classical problem. That implies they believe in efficient markets and shapley values resulting in hard best answers for all problems including agency problems defined mathematically within and allowing qualitative discussions of the problem in essay form. The discipline in fact rose from the concept of the “Political economy” but traditionally economics allowed itself to exist as perfect markets in search of utopia conversely including hard mathematical truths of Cournot and Bertrand equilibrium in markets that allowed for Perfect supply and demand as determinants of prices. Classical economists continue to look for hard optimization in determining whether an antitrust decision be made against a planned merger in deciding post merger industry outlooks and market shares etc. The welfare paradigm in classical economics mostly extends to public owned entities and government spending as synonymous with all and every welfare objectives as also with all inefficiencies, corruptions and other externalities. The definition of classical and modern economists in trade through the literature is mostly about the evolution of one such economics arm from traditional power centered economics to factor trade based economics)

Modern Economists tend to rely more on Irrational expectations allowing logical argument against efficient markets’ utopian results. While behaviourists have made considerable inroads, Modern economists rely on complex game theory and while still being mathematically rigorous, look at more complex theoretical constructs with these new tools to define markets, corporate decision making and political actions governing markets. They are also comfortable discovering mysteries of leadership and advantages of smaller businesses, startups or private equity while continuing to believe in the welfare paradigm.