Neoclassical economics

Neoclassical economics refers to a general approach (a "metatheory") to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. Mainstream economics is largely neoclassical in its assumptions. There have been many critiques of neoclassical economics, both from within orthodox economics, and from outside of it, and often these critiques have been incorporated into new versions of neoclassical theory.

Criticisms of neoclassical economics

Neoclassical economics is frequently criticised for having a normative bias. In this view, it does not focus on explaining actual economies, but instead on describing a "utopia" in which Pareto optimality obtains. Key assumptions of neo-classical economics which are widely criticised as unrealistic include:

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• The focus on individuals in the economy may obscure analysis of wider long term issues, such as whether the economic system is desirable and stable on a finite planet of limited natural capital.
• The assumption that individuals act rationally may be viewed as ignoring important aspects of human behavior. Many see "economic man" as being demonstrably different to a real man on the real earth. Large corporations might perhaps come closer to the neoclassical ideal of profit maximisation, but this is not necessarily viewed as desirable if this comes at the expense of a "locust-like" neglect of wider social issues. But they are not human, and are increasingly criticized for not being human. The assumption of rational expectations which has been introduced in more modern neo-classical models (sometimes also called new classical) may also be strongly criticised on the grounds of realism.
• Problems with making the neoclassical general equilibrium theory compatible with an economy that develops over time and includes capital goods. This was explored in a major debate in the 1960s - the Cambridge Capital Controversy - about the validity of neoclassical economics, with an emphasis on the theory of growth, capital, aggregate theory, and the marginal productivity theory of distribution. There were also internal attempts by neoclassical economists to extend the Arrow-Debreu model to disequilibrium investigations of stability and uniqueness. Some think the Sonnenschein-Mantel-Debreu results put paid to these attempts.

In the opinion of some, these developments have found fatal weaknesses in neoclassical economics. Economists, however, have continued to use highly mathematical models, and many equate neoclassical economics with economics, unqualified. Mathematical models include those in game theory, linear programming, and econometrics, many of which might be considered non-neoclassical. So economists often refer to what has evolved out of neoclassical economics as "mainstream economics".

Related Topics:
Game theory - Linear programming - Econometrics

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The critique of the assumption of rationality is not confined to social theorist and ecologists. Many economists, even contemporaries, have criticized this vision of economic man. Thorstein Veblen put it most sardonically:

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:lightning calculator of pleasures and pains, who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift about the area, but leave him intact.

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Herbert Simon's theory of bounded rationality has probably been more influential. Is economic man a first approximation to a more realistic psychology, an approach only valid in some sphere of human lives, or a general methodological principle for economics? Early neoclassical economists often leaned toward the first two appoaches, but the latter has become prevalent.

Related Topics:
Herbert Simon - Bounded rationality

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Neoclassical economics is also often seen as relying too heavily on complex mathematical models, such as those used in general equilibrium theory, without enough regard to whether these actually describe the real economy. Many see an attempt to model a system as complex as a modern economy by a mathematical model as unrealistic and doomed to failure.

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Critics of neoclassical models accuse it of copying of 19th century mechanics and the "clockwork" model of society which seems to justify elite privileges as arising "naturally" from the social order based on economic competititions. This is echoed by modern critics in the anti-globalization movement who often blame the neoclassical theory, as it has been applied by the IMF in particular, for inequities in global debt and trade relations. They assert it ignores the complexity of nature and of human creativity, and seeks mechanical ideas like equilibrium:

Related Topics:
Anti-globalization movement - IMF

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:And in Poinset's Elements de Statique..., which was a textbook on the theory of mechanics bristling with systems of simultaneous equations to represent, among other things, the mechanical equilibrium of the solar system, Walras found a pattern for representing the catallactic equilibrium of the market system. (William Jaffe)

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