What is Neoclassical Economics?

Neoclassical Economics is a dominant economic theory that argues, as the consumers goal is utility maximization and the organizations goal is profit maximization, the customer is ultimately in control of market forces such as price and demand. The theory relates the supply and demand to an individuals rationality and ability to maximize utility. It applies mathematical equations to analyze different aspects of economics.

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The History of Neoclassical Economic Theory

The Neoclassical economics has its root in the works of Adam Smith (1723-90) and David Ricardo (1772-1823). The theory was refined by Alfred Marshall (1842-1924), Vilfredo Pareto (1848-1923), John Clark (1847-1938), and Irving Fisher (1867-1947) during 19th and 20th century. The term Neoclassical economics was coined in 1900. 

Today, the mainstream economics is dominated by the Neoclassical synthesis formed by the Neoclassical economics together with Keynesian economics. 

Neoclassical Economics and its Critics

The Neoclassical theory assumes the consumers often perceive a product as being more valuable than the cost of production and the perceived value depends on the utility of the product and it affects the demand of the product. In contrary, classical economics calculates the value of a product as the cost of material plus the cost of labor. The neoclassical thought refutes this idea of product cost. 

The Neoclassical economists argue, the consumers want to maximize their personal satisfaction and thus they make informed decisions based on the evaluation utility of a product. This is similar to the rational behavior theory which argues that people rationally make economic decisions. 

This theory also states that competition leads to an efficient allocation of resources within an economy. It says the market equilibrium between supply and demand is established by this resource allocation. The critics of the neoclassical economic theory argue the neoclassical economics is based on unrealistic assumptions that are far from the real situations. It assumes all parties behave rationally while taking an economic decision, but this assumption does not consider the susceptibility of human nature to other forces. The decision of a consumer is not free, and they may make irrational choices due to other forces. 

The neoclassical theory holds that matters like labor law will improve naturally as a result of the economic condition. This argument is vehemently criticized by many economists who believe this theory leads to inequalities in global debt and trade relations. 

The neoclassical theory states, there is no upper limit for a capitalist's profit-making. As the value of the product depends on the perception of the consumers, the capitalists can exploit this to make money. The selling price minus the cost of the production is called the economic surplus.

Related Topics

• Neoclassical Economics
• Say's Law
• Neoclassical Analysis
• Supply Side Theory
• Laffer Curve
• Keynesian Economics
• Keynes' Law
• Keynesian Analysis
• Demand Side Theory
• Market Forces
• Aggregate Demand / Aggregate Supply Models
• The Phillips Curve