The NeoClassical Theory is a more developed version of the classical theory that incorporates behavioral sciences into management. The organization, according to this theory, is a social system whose performance is influenced by human actions.
The classical theory placed a strong emphasis on physiological and mechanical variables, considering them to be the most important factors in determining an organization's efficiency. However, when the organization's effectiveness was examined, it was discovered that, despite the positive aspects of these variables, no positive response in work behavior was elicited.
As a result, the researchers attempted to pinpoint the causes of human behavior at work. As a result, a NeoClassical theory emerged, focusing largely on the human beings in the organization. In organizations, this approach is often referred to as a "behavioral theory of organization" or a "human relations" approach.
The NeoClassical theory posits that an organization is the combination of both the formal and informal forms of organization, which is ignored by the classical organizational theory. The informal structure of the organization formed due to the social interactions between the workers affects and gets affected by the formal structure of the organization. Usually, the conflicts between the organizational and individual interest exist, thus the need to integrate these arises.
According to the NeoClassical theory, an individual is motivated by a variety of factors and desires to meet specific needs. Communication is a critical metric for determining the effectiveness with which information is transmitted from and to various levels of the organization. Teamwork is a requirement for the organization's smooth operation, and it can only be accomplished through a behavioral approach, how people communicate and react to one another.
Neoclassical growth theory was formulated as a result of extensive research in the field of growth economics in the late 1950s and 1960s of the twentieth century.
Robert Solow, an American economist who won the Nobel Prize in Economics, and J. E. Meade, a British economist, are two well-known contributors to the neoclassical theory of growth. This neoclassical growth theory emphasizes capital accumulation and its associated saving decision as a key determinant of economic growth. The neoclassical growth model used two factor production functions as output determinants: capital and labor. In addition, technology, an exogenously determined factor, was added to the production function.
As a result, the following production function is used in the neoclassical growth model:
Y = AF (K, L) … (i)
Where Y denotes Gross Domestic Product (GDP), K denotes capital stock, L denotes the amount of unskilled labor, and A denotes the exogenously determined level of technology. It's worth noting that a shift in the production function would result from a change in this exogenous variable, technology.
Technology parameter A can be introduced into the production function in two ways. One common way to include the technology parameter in the production function is to assume that technology is labor augmenting, in which case the production function is written as follows:
Y= F (K, AL) … (ii)
It's worth noting that technological change that enhances labor productivity is referred to as "labor-augmenting."
The second important way to incorporate the technology factor into the production function is to presume that technological progress augments all factors, not just labor (in our production function). The above production function equation I has been written in this manner. To reiterate, the production function in this method is written as
Y-AF (K, L)
In this case, A stands for cumulative factor efficiency (that is, productivity of both factor inputs). When we empirically estimate a production function defined in this way, the contribution of A to total output growth is known as the Solow residual, which means that total factor efficiency actually measures the increase in output that is unaffected by changes in factors, capital, and labor.
Unlike the Harrod-Domar model of economic growth, which uses a fixed proportion production function, the neoclassical growth model uses a variable proportion production function, which considers limitless opportunities of capital and labor substitution in the production process.
Because the earlier neoclassical considered such a variable proportion production function, it is called the neoclassical growth model. The second major difference between neoclassical and Harrod-Domar growth models is that neoclassical growth theory assumes that planned investment and saving are still equal due to price fluctuations (including interest).
Neoclassical growth theory, based on these assumptions, focuses on supply side factors such as capital and technology in determining a country's rate of economic growth. As a result, unlike the Harrod-Domar growth model, it does not take into account aggregate demand for goods as a constraint to economic growth. As a result, it is referred to as both "classical" and "neo."
In this model, output growth is achieved, at least in the short run, by a higher rate of saving and, as a result, a higher rate of capital formation. In this model, however, diminishing returns to capital limit economic growth. Though the neoclassical growth model assumes constant returns to scale, capital and labor both have decreasing returns.
We will show how the neoclassical growth model describes economic growth through capital accumulation (saving and investment) and how this growth process leads to steady-state equilibrium in the following sections. By steady ‘State equilibrium for the economy, we mean that the rate of growth of output equals the rate of growth of the labor force and the rate of growth of capital (i.e., Y/Y = L/L = K/K), so that per capita income and capital do not change.
It's worth noting that for income per capita and capital per worker to remain constant in this steady state equilibrium as the labor force grows, revenue and capital must increase at the same rate. In this steady state equilibrium, since growth in the labor force (or population) is usually denoted by letter, = Y/Y = K/K = N/N = n. The process of growth from any initial part to this steady state equilibrium is explained by neoclassical growth theory.
Production Function and Savings in Neoclassical Growth Theory:
As previously stated, the following production function is used in neoclassical growth the:
Y = AF (K, L)
The neoclassical theory, on the other hand, uses the above production function in its intensive form, that is, in per capita terms, to describe the growth process. We divide both sides of the given production function by L, the number of labor force, to get the above production function in per capita terms. Consequently,
Y/L = AF (K,L, L/L)
= AF (K/L, 1) = AF (K/L) . . . (2)
Fundamental Growth Equation in Neoclassical Growth Theory:
The rate of saving, according to neoclassical theory, is critical to an economy's growth process. Neoclassical theory, like the Harrod-Domar model, takes saving as a constant percentage of income. As a result
S = sY …(5)
Where S = saving
Y = income
s = propensity to save
Average propensity to save equals marginal propensity to save since s is a constant fraction of revenue. Furthermore, since national income equals national product, equation (5) can be written as
sY = sF (K, L)
Because planned investment is always equal to planned saving in neoclassical theory, net addition to the stock of capital (A K), which is the same as investment (I), can be calculated by subtracting depreciation of capital stock over time from planned saving. As a result
∆K = I = sY-D … (6)
Where K denotes net capital addition, I denotes investment, and D denotes depreciation. Depreciation is calculated as a percentage of the total capital stock. The total depreciation (D) is calculated as follows:
D = dK
