Neoclassical economics

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The prevailing school of orthodox economics between 1871 and 1930; heavily influential on economic thought since 1973.

Contents

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Context

Prior to 1870, economic orthodoxy was dominated by the classical school of economics, which was largely molded by the writings of Jean-Baptiste Say, David Ricardo, and Nassau Senior. The premises of classical economics were:

  • Supply creates its own demand
  • All saving is invested
  • Markets determine prices based on factor availability and opportunity cost
  • Labor is a commodity (and ideally, as cheap as possible).

While neoclassical economics departed from the classicals in several matters, it retained these fundamental propositions.


Classical economics had stumbled, however, on several issues of concern to policy makers. One of these was persuasiveness: the rival historicist school had won control of German and US educational institutions, and was aggressively making headway in France and Britain. Classical economic literature often has great literary merit, but it was a field dominated by polymaths and gentleman amateurs.[1] The new protagonists were keen to apply mathematical methods to economics as a final arbiter.[2] In order to do this, however, they required a series of propositions that could render fixed answers to mutable questions. The marginalist revolution provided those answers.

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Theory of Value

A crucial concept to the neoclassical school was the idea of the utility theory of value. Many writers on the topic, most notably Schumpeter, deny that there is any logical connection between a labor theory of value and the concept of exploitation,[3] then fulminate about the "socialists" who inflicted this idea on economics. But the concept of value as arising from human appropration of Nature's bounty is simply a logical recognition of value as a social creation. Humans did have to have a form of social organization for land to become a form of wealth; property is not property until a group of humans can recognize that it "belongs" to one of them; as anthropologists have noted, the concept of private property may take a long time afterwards to develop, as the rights and responsibilities associated with "ownership" evolve. A distinctive attribute of the bourgeois society was the re-organization of all social relations along the lines of property rights.


This is not intended as a plea for a revived labor theory of value, since theories of value seem to play a small role in economic thought. But the introduction of the utility theory of value was employed to allow a mathematical treatment of general equilibrium, and ought to be regarded therefore as one stylized representation of reality among many possible.

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Political Ideology

Neoclassical economics wears its ideology on its sleeve: it is rightwing. Classical economics was also very ideological, and in the same direction as its successor, but neoclassicism represented a phase in economic thought that was traumatized, as it were, by the invasion of political activism into its sphere. Hence, the enormous impact of Karl Marx's Capital on its basic underpinnings.


The history of economic thought is mostly dominated by the history of the bourgeoisie's attorneys scrambling to defend whatever decision the bourgeoisie should want to make, regardless of self-contradiction. The neoclassical school coincided with a period described by Hannah Arendt as "the political emancipation of the bourgeoisie," a period beginning in the 1870's with the collapse of Napoleon III's Second Empire, the creation of a federal constitution in Germany, and the emergence of a emphatically bourgeois politics in the English-speaking world (as opposed to a cautious oligarchy). Bourgeois conceptions of the polity and its relation to the outside world triumphed, and for several decades the bourgeoisie governed with parliamentary institutions. The crisis of 1914-1921 was a moment of moral bankruptcy from which the bourgeoisie never recovered, although it survived long afterwards.


The present manifestation of neoclassical economics represents a fetishization of the bourgeoisie (defunct, but stylish), and also a fetishization of technology. The fetishization of the bourgeoisie takes the form of the heroic, rational actor; a statistical Howard Roark as it were, whose very failures are acts of courage (e.g., "intertemporal substitution of leisure for labor," rather than involuntary unemployment). The fetishation of technology takes the form of endless potential flexibility and expansion.

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Notes

  1. ↑ For example, John Stuart Mill and [David Ricardo], respectively.
  2. ↑ An exception to this was the Austrian School, especially Carl Menger.
  3. ↑ see, for example, History of Economic Analysis, III.v.5. p.558, Oxford University Press (1996/1954)
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See Also

Capital (economic factor) Classical economics Marginalism Dynamic general equilibrium theory

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External Links & Sources

See also marginalism

James R MacLean (17:13, 1 October 2007 (PDT))

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