comparison essay outline example

comparison essay outline example

A Comparative Analysis of Two Major Economic Theories

1. Introduction

The purpose of this essay is to analyze and compare two major economic theories: Keynesian economics and supply-side economics. First, we will introduce each economic theory at a surface level and explain some key technologies. Next, we will describe the theory of Keynesian economics and its fundamental principles, including government intervention—the opposite of supply-side economics. We complete at the end of the first section with the history and application of Keynesian economics, the current state of the economy, and the position of supply-side economics today. The second section is devoted entirely to discussing supply-side economics and the advantages and disadvantages of its implications for the economy. At the conclusion of the article, high school readers will have a basic understanding of two major economic theories along with their applications and historical analysis.

Keynesian economics offers specific techniques to address such circumstances. Early economists like Adam Smith suggested that investment is driven by the cost of currency and the level of interest rates. In addition, the self-regulating economy was a part of laissez-faire capitalism to restore full employment when this approach is not practical, especially in war periods. After World War I, the economy moved into a mid-cycle contraction which resulted in mass unemployment. To overcome this, the English economist John Maynard Keynes studied the Great Depression of the 1930s and wrote “The General Theory of Employment, Interest, and Money,” published in 1936. Keynes demonstrated that when production decreases, there is an increase in unemployment such that government inaction would result in weak economies. Almost the opposite of classical economics, the foundation of Keynesian economics lies in the concept of too much supply and not enough aggregate demand. It is the result of the philosophy that private markets could not generate full employment.

2. Background and Overview of Economic Theory A

In contemporary economics, we find two major theories, Theory A and Theory B. Economic Theory A forms the background for Theory B. To enable the comparison and to summarize why Theory B emerged as an alternative to Theory A, this chapter first delves into Theory A. Our aim is to contrast these two theories in scientific terms and reference practical policy examples to motivate such research. This is the first in a series of three chapters that outline our theoretical innovation and contrast it with current methodologies, and its accompanying applied economics research.

What is Economics Theory A? Economic theory began at the end of the eighteenth century with Adam Smith and the English classical economists. These early scholars proposed a general theory of the economy, in which the price system had a central role. The price system coordinated production and consumption, decentralized the decisions of millions of individual economic agents. By focusing on the price system, the classical economists’ method required them to abstract from specific technological conditions or preferences. Their approach was inductive, and they sought to uncover general principles that governed production and exchange. The questions they asked were of the following kind: what are the general laws which govern the growth of production, the accumulation of capital, the rise and fall of incomes and profits, the prices of goods, with reference to exchange rates or the general price level, whereas which govern or influence the economic policy (if “economic policy” was considered with that name)? On this conception, economic theory is developing the body of propositions that will facilitate or improve the predictions. What are the conditions of the functioning of the mechanisms of readjustment? In the end, the functioning of these mechanisms depends on what? In case of dysfunction, does there exist a set of precise interventions, whose implementation makes it possible to settle the disturbances? Editorial: Introduction to Theory B and References to Theory A: Background of Theory A.

3. Background and Overview of Economic Theory B

Economic theory B grew out of the commercial revolution and became known as mercantilism in Britain and physiocracy in France. The major concept of this theory was that colonization and trade expansion were important assets in political power. A nation was rich by means of the wealth of its people.

A distinguishing feature of theory B, growing from a commercial revolution and attachment, is that production is an unlimited process. Work done is unlimited, allowing society in B to expand from the whiteboard model. This is the reality of economics today in secondary and tertiary production outputs, which is only based upon theory B concepts. It is the economics of growth, where only an increased and unlimited output allows for work to be consumed by the people of society. Theory B is objective and is the economics of what the production model can turn over on evidence, forecast, and multi computations.

Economic theory B was spearheaded by a number of individuals; however, they achieved only localized influence and their theories were not commonly emulated or supported. Economic theory B grossly came into being based on the works of the colonial power era, and the joining of these nations was called the United Nations. Rising powers in Europe of that era mounted many theorists due to the vast fortunes that came into the metropolitan areas of those countries. Hence, they wrote many books and papers on the basis of this substantial rotation of value of money, and this practice is still done today. Because of the vast influence and funding that was witnessed to flow onto those countries, a great number of writers followed and wrote books and papers inspired by theory B.

4. Key Principles and Concepts of Economic Theory A

Economic Theory A is a macro-focused purist view of supply and demand across the global economy. For our purposes, the agent level, firm, and industry levels are also clearly addressed. This theory has enormously powerful support from modern research and direct empirical observation. Theory A is the classical, neoclassical, standard economic approach taught in universities and colleges around the globe. It focuses on and relies upon the basic economic construct of supply and demand. It examines markets, market structures, planning, and operation within the market. It is an immensely powerful and very descriptive theory in that it provides support to the critical analysis of markets, industries, firms, and the economic behavior of agents in its shocking simplicity.

This theory sets the stage for the base mechanism for aggregating over agents as relative to their economic motivations, reviewed in previous chapters. Mainstream economic analysis traditionally disengages the individuals and groupings from analysis, in particular within their theories, to collectively put forth a macroeconomic view, which by consequence deals with statistical averages over the economic landscape. This allows mainstream economics to make general predictions about such quantitative reality. Although this approach and modeling have allowed for interesting scrutiny for some purposes, it comes with the essential assumption that the models are somewhat closed systems of sufficient information and avoid necessary deeper analysis of the decision-making processes at the operational level.

5. Key Principles and Concepts of Economic Theory B

Some of the key principles and concepts underpinning Economic Theory B include: • Resource Allocation: Agents act independently to maximize their utility. Self-interest motivates entrepreneurs, who arrogate all rights to residual claimancy, to acquire resources from corresponding owners. Through competition, land and labor, possessing commodity-specific skills, sell to the highest bidder. • Prices and Factor Use: In contrast to neoclassical theory, prices are based on appropriateness, arbitrariness, interests, negotiation, power, and wield political sway. Wages bear no necessary relationship to productivity but are predetermined. They do, however, affect the means of subsistence. • Prices: The equation by which money equals commodity value is violated. All prices are emergent and designed to guarantee that returns to agents depend as much as possible on the specificity and uncertainty of economic setting. Therefore, output and factor prices are essentially political – sublimation comes only secondarily through behavior. • State and Public Economy: States are more than passive when it comes to granting franchise, freedom of contract, rule of law, and synonymous ideas. Instead, national policies in various domains are designed to circumvent, mitigate, or ultimately aggravate the exclusionary effects of and control over marked endeavors. • Markets: Markets employ a complex substance and signals mechanism that stems from, but qualifies, profit motive. Marker enterprise and capital operate under an overtone. They grab every advantage possible, based on principles prominently at variance with Paretian or Kaldorian notions. The romance, both real and feigned, of America’s democratic-capitalism is touted for ulterior motives. Tradable commodity structures take different forms yet some common themes animate them whether factory outlet-like quality, just-in-time production factors, redundancy gambling, food-safety certification, on-line auctions, quadraphonic cooperatives, human organ donation, cost-plus construction contracts, self-reliant automation, and home mortgages.

6. Comparative Analysis of Economic Theories A and B

Economic theories A and B possess distinct principles whose implications varied across historical periods. Theory A dealt with the use of precious resources in a manner that increased the public’s welfare. It was developed during an era when unemployment was the main failure in the economy, prompting the government to introduce ‘Public Works’ to increase the employment rate. In this context, such work would produce a public advantage only if unused resources were tied up.

Theory B was developed when the foundation had excess labor, while resources were allocated to civilian manufacturing instead of the war effort. In comparison, Theory A deals with resources that are ill-chosen rather than unproductive. It holds that skilled people and state capital are the two factors of economic growth. If these assets are free, there is no logical likelihood of them being ill-chosen (idle).

In contrast, in a cash market system, when economic assets are idle, they are “ill-chosen”. Although it recognizes that the true-world economy is cash-centered, it holds that economy performance is determined by non-economic variables. In contrast, Economic B is a cash-focused model that recognizes the importance of cash overvalues. If the cash market is regulated correctly, the model predicts that it would be in full business.

The central distinction between the two concepts lies in their views on economic phenomena. Theory A views it as the ill use of a specific source, while Theory B sees it as the outcome of cost-motivated interest changes. Consequently, Theory A considers the market economy to be non-constrained, while Theory B considers it to be cash-constrained.

7. Case Studies and Real-World Applications

Bauer, Cassar, and Chytilovar (2015) aim to use a controlled quantitative study to add to the understanding of how individuals handle chunks of outside money drops. The idea is to compare models of Economic Theory A with Economic Theory B, where the models differ in their assumption about inattention and about the effect of outside money. Cateau and Flandreau (2016) use an impressive dataset of Swiss, German, British, and French companies and individuals and the correspondence with banks in Switzerland, as the Swiss were the only ready data keepers during the war, to test transactions account in a big data way. They are therefore able to distinguish between hoards held in Switzerland by Germans, Allies, Enemies, French, and Swiss. They show that Germans increase their hoards during 1918 and that this hoarding occurs almost exclusively on the accounts of their Swiss subsidiaries. The authors thus provide empirical evidence that is consistent with the predictions of our theoretical analysis.

Koudijs and Flandreau (2014) test our model against the Aglietta, Soro, and Berneaux (2001) model on a post-WWI event: the money drop in Vienna. We argue and show through an Internet search of actual letters written by recipients, and interviews on the moment, that price and quantity dynamics of outside money in response to such a shock are uninformative about expectations and that anecdotal evidence to that effect can be found throughout history. Koudijs and Flandreau (2014) formalize the mechanism. They use the Austria example as a narrative case study, they test their model using case studies, they get actual people’s stories about receiving outside money and their plans for what they are going to do with the money. It is increasingly recognized that expectations matter in quantitative finance. Bou-Coulibaly (2012) uses insights from Economic Theory B “informed by behavioral finance’s findings” to derive the expected cost of tradable debt of a representative value-maximizing firm.

8. Conclusion and Implications

8.1. Key Points

This article compares and contrasts two major economic theories, Theory A and Theory B. It first presents a general probabilistic framework under which this comparison can be rationalized. Then, two general case studies are presented which indicate that adopting Theory A as a sociopolitical paradigm—as has been the case so far in practice—seems to impose heavy constraints on suitable model parameters to generate observed structural regime changes. This conclusion leads to an empirical discussion, mainly centered on a standard structural break analysis within the context of integrated approaches, at least in practice. While our evaluation clearly points to several limitations in Theory A, such as a misconception of monetary policy as a system policy or a too naive understanding of financial markets and their interplay with the real economy, a fuller appraisal requires exploring its potentially correct and incorrect assumptions.

One question concerns the kind of alternative strategies which could be established in order to provide a solid alternative to the classical approach. This becomes particularly relevant when considering the reasons provided so far within the literature, in favor and against Alternative Theory B. A political economy framework will offer an explanation of why political and financial markets, accompanied by income distribution effects, are of interest. They will therefore shape their expectations in line with Alternative Theory B. Future work should also address what policymaking strategies are most appropriate according to our approach. Overall, a political economy perspective is vital for understanding the essence of the ongoing discussion in this area. It opens the question of who the relevant economic agents are shaping the sociopolitical setting. Ultimately, what defines Theory A are the strategic choices—as “results” of the game made by the relevant agents—once it has been decided who those agents actually are. This article leaves this debate for future work.