WHAT IS THE NEOCLASSICAL THEORY OF ECONOMICS? - CULTURE VOCABULARY - 2025

The neoclassical theory of economics is an approach to economics focused on the determination of goods, products, and income distributions in markets through supply and demand.

Neoclassical economics dominates microeconomics and, together with Keynesian economics, forms the neoclassical synthesis that dominates mainstream economics today.

Although neoclassical economics has gained wide acceptance by contemporary economists, there have been many criticisms of neoclassical economics, often incorporated in newer versions of neoclassical theory.

Neoclassical economics is an approach to economics that relates supply and demand to the rationality of an individual and his ability to maximize utility or profit.

He also uses mathematical equations to study various aspects of economics. This approach developed in the 19th century, based on books by William Stanley Jevons, Carl Menger, and Leon Walras, and became popular in the early 20th century.

Important Aspects of Neoclassical Theory of Economics

The origin and development, adverse theories and other characteristics of the neoclassical theory of economics are important parts for the understanding of this subject.

Here are the most relevant aspects of the neoclassical theory of economics.

Origin

Classical economics, developed in the 18th and 19th centuries, included a theory of value and a theory of distribution.

The value of a product was thought to depend on the costs involved in producing that product. The explanation of costs in classical economics was at the same time an explanation of distribution.

A landlord received rent, workers received wages, and a capitalist tenant received a return on his investment. This classical approach included the work of Adam Smith and David Ricardo.

However, some economists gradually began to emphasize the perceived value of a good to the consumer. They proposed a theory that the value of a product should be explained with differences in utility to the consumer.

The third step from political economy to economics was the introduction of marginalism and the proposition that economic actors made decisions based on margins.

For example, a person decides to buy a second sandwich based on how full it is after the first, a company hires a new employee based on the expected increase in benefits the employee will bring.

This differs from classical political economy aggregate decision making in that it explains how vital goods such as water can be cheap, while luxuries can be expensive.

Development

The change in economic theory from classical economics to neoclassical economics has been called the "marginal revolution," although it has been argued that the process was slower than the term suggests.

It is frequently dated from William Stanley Jevons' Theory of Political Economy (1871), Carl Menger's Principles of Economics (1871), and Léon Walras's Elements of Pure Economics (1874-1877).

In particular, Jevons saw his economics as an application and development of Jeremy Bentham's utilitarianism and never had a fully developed general equilibrium theory.

Menger did not accept this hedonic conception, explained the decline in marginal utility in terms of subjective prioritization of possible uses, and emphasized disequilibrium and discretion.

Menger had an objection to the use of mathematics in economics, while the other two modeled their theories after 19th century mechanics.

Jevons was based on the hedonic conception of Bentham or Mill, while Walras was more interested in the interaction of markets than in explaining the individual psyche.

Alfred Marshall's book, "Principles of Economics" (1890), was the dominant textbook in England a generation later. Marshall's influence spread elsewhere; Italians would congratulate Maffeo Pantaleoni by calling him the "Marshall of Italy."

Marshall thought that classical economics tried to explain prices by the cost of production. He claimed that earlier marginals went too far to correct this imbalance by exaggerating utility and demand.

Marshall thought that "we could reasonably dispute whether it is the top or bottom blade of a scissors that cuts a piece of paper, as if value is governed by utility or cost of production."

Example of neoclassical economics

For example, followers of neoclassical economics believe that since the value of a product is driven by consumer perception, there is no upper limit to the income or profits that smart capitalists can make.

This difference between the actual costs of the product and the price at which it is actually sold is called the “economic surplus”.

However, this thinking led in part to the financial crisis of 2008. During this time, modern economists believed that synthetic financial instruments had no ceiling and that they insured the market against risk and uncertainty.

These economists were wrong, and the very financial products they praised led to the 2008 housing market crash.

Criticisms against the neoclassical theory of economics

Since its inception, neoclassical economics has grown to become the primary take on modern economics. Although it is now the most widely taught form of economics, this school of thought still has its detractors.

Most critics point out that neoclassical economics makes many unfounded and unrealistic assumptions that do not represent real situations.

For example, the assumption that all parties will behave rationally overlooks the fact that human nature is vulnerable to other forces, which can cause people to make irrational choices.

Neoclassical economics is also sometimes blamed for inequalities in global debt and trade relations because the theory holds that issues like labor rights will naturally improve as a result of economic conditions.

References

1. Jevons, William Stanley. 2001. The Theory of Political Economy. Adamant Media Corporation. ISBN 0543746852.
2. Marshall, Alfred. 1997. Principles of Economics. Prometheus Books. ISBN 1573921408.
3. Samuelson, Paul A. 1983. Foundations of Economic Analysis. Harvard University Press. ISBN 0674313011.
4. Colander, David; The Death of Neoclassical Economics.
5. Roy Weintraub. (2007). "Neoclassical Economics". The Concise Encyclopedia Of Economics. Retrieved August 13, 2017.
6. Thompson, H. 1997. Ignorance and Ideological Hegemony: A Critique of Neoclassical Economics. Journal of Interdisciplinary Economics 8 (4): 291-305.