What is the neoclassical economy?
Neoclassical economics is a broad theory that focuses on supply and demand as the driving forces behind the production, prices and consumption of goods and services. It appeared around 1900 to compete with earlier theories of classical economics.
Key points to remember
- Classical economists assume that the most important factor in the price of a product is its cost of production.
- Neoclassical economists argue that the consumer’s perception of the value of a product is the determining factor in its price.
- They call the difference between the actual costs of production and the retail price the economic surplus.
One of the first key assumptions of the neoclassical economy is that utility for consumers, not cost of production, is the most important factor in determining the value of a product or service. This approach was developed at the end of the 19th century from the books of William Stanley Jevons, Carl Menger and Léon Walras.
Neoclassical economic theories underpin modern economics, as well as the principles of Keynesian economics. Although the neoclassical approach is the most widely taught economic theory, it has its detractors.
Understanding the neoclassical economy
The term neoclassical economics was coined in 1900. Neoclassical economists believe that the primary concern of a consumer is to maximize personal satisfaction. Therefore, they make purchasing decisions based on their assessments of the usefulness of a product or service. This theory coincides with the theory of rational behavior, which states that people act rationally when making economic decisions.
Furthermore, neoclassical economics stipulates that a product or service often has a value greater than and greater than its production costs. While classical economic theory assumes that the value of a product results from the cost of materials and the cost of labor, neoclassical economists argue that consumers’ perception of the value of a product affects its price and demand.
Finally, this economic theory asserts that competition leads to an efficient allocation of resources within an economy. The forces of supply and demand create market equilibrium.
Unlike the Keynesian economy, the neoclassical school claims that savings determine investment. It concludes that market equilibrium and growth at full employment should be the government’s main economic priorities.
The case against the neoclassical economy
Critics argue that the neoclassical approach cannot accurately describe real savings. They argue that the assumption that consumers behave rationally when making choices ignores the vulnerability of human nature to emotional responses.
Neoclassical economists argue that the forces of supply and demand lead to an efficient allocation of resources.
Some critics also accuse the neoclassical economy of inequalities in global debt and trade relations, as the theory is that labor rights and living conditions will inevitably improve as a result of economic growth.
A neoclassical crisis?
Proponents of the neoclassical economy believe that there is no upper limit to the profits that can be made by intelligent capitalists since the value of a product is determined by the perception of consumers. This difference between the actual costs of the product and the price for which it is sold is called the economic surplus.
However, one could say that this type of thinking led to the financial crisis of 2008. As this crisis approached, modern economists believed that synthetic financial instruments had no price cap because investors perceived the price there. housing market as unlimited in its growth potential. Economists and investors were mistaken and the market for these financial instruments collapsed.