Criticisms against the five schools of thought
The classical school
. Rate of Interest is not the true Determinant of Saving and Investment. In the classical
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system, both saving and investment are the functionsl of the rate of interest, and
therefore, equality between saving and investment can be attuned through changes in the
rate of Interest. prof. Keynes says that decisions about saving and investment are taken by
the two fundamentally different groups of people. Saving is not only determined by the
rate of interest but also by the level of money income. likewise, investment is not
influenced by the rate of interest alone, it also depends upon the marginal efficiency of
capital.
The keynesian Revolution
. The difficulty of predicting output gap. An assumption of Keynesian economics is that it is
possible to know how much demand needs to be increased to deal with output gap.
However, the output gap can vary. For example, if there is an unexpected fall in
productivity then the negative output gap may become very low – despite low rates of
economic growth. In this situation, the appropriate response is not increasing demand, but
supply-side reforms to boost productivity.
. Monetarist school of thought
Monetarist theory has had a deep and profound impact on the political sphere since the 1960s,
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yet the theory itself is highly flawed. Not only are its fundamental beliefs riddled with economic
issues, the policy implications are openly detrimental to the stated goals. Of course, all economic
theory aims to stabilize the economy, and to provide growth. However, the monetarist school of
thought, and their subsequent k-percent rule, are simply not capable of meeting that goal.
The quantity theory of money is the basis of monetarist thought, and therefore it is the first thing
worth discussing here. The quantity theory equation is, fundamentally, a gross oversimplification.
For the monetarist there is one single use for money, and that is to purchase goods. According to
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their equation, then, the total money stock must always buy the total stock of existing goods. It is
incapable of buying more or less. This is reflected by the equation MV=PT. If the money stock is
doubled, and purchasing goods is the only use of money, and the stock of goods remains exactly
the same, then the price level must double. This, of course, is not at all what happens. It does
not take much thought to realize that there are many uses for money. (Hazlitt 1976) One that
comes to mind easily is simply holding it. Some people, nearly all in fact, derive value from
holding money. It provides a level of safety. Money is useful as a store of value, not simply as a
medium of exchange.
. The neoclassical macroeconomic
Unrealistic assumptions is
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One of the most common criticisms of neoclassical economics is its unrealistic assumptions. The
assumption of rational behaviors ignores the vulnerability and irrationality in human nature.
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Behavioral economics focuses on studying irrational behaviors in economic decision-making.
The study provides empirical evidence of human behaviors in an economy. It is also argued
whether utility or profit maximization is the only goal of an individual or company.
. The Supply-Side Economics Supply-side policy can take a long time to work its way
through the economy. For example, improving the quality of human capital, through
education and training, is unlikely to yield quick results. The benefits of deregulation can
only be seen after new firms have entered the market, and this may also take a long time.
In addition, supply-side policy is very costly to implement. For example, the provision of
education and training is highly labour intensive and extremely costly, certainly in
comparison with changes in interest rates. Furthermore, some specific types of supplyside policy may be strongly resisted as they may reduce the power of various interest
groups. For example, in product markets, profits may suffer as a result of competition
policy, and in labour markets the interests of trade unions may be threatened by labour
market reforms.