Episode #5 of the course “Brief History of Economic Thought”
Neoclassical economics is a theory of analyzing economic patterns that expands on the theories of classical economics, but introduces a “modernized classical view.” It is often used to focus on microeconomic systems. With the coining of the phrase by Thorstein Veblen, neoclassical economics became widely popular in the early 20th century as it was adopted and adapted by numerous other economists.
Most notably, neoclassical economic theorists introduced the idea of margins, which effectively combined Marxist economic theory with classical economics. The theory emphasizes and encourages a natural equilibrium, and assumes a self-regulating market based on individuals meeting needs. The changes are understood in terms of margins, in which economists began to study the rates of change in the fluctuations of supply and demand, as well as different “periods” in a market’s history. In addition, economists began to fine-tune their concept of a self-regulating market, especially understanding that the system of competition, and the competitors themselves, were “imperfect.”
Key thinkers in neoclassical economic theory, such as E. Roy Weintraub, focus on the individual as an economic agent, recognizing that individuals make economic decisions based on relevant and available information. Additionally, the interests of individuals and businesses do not align; while companies seek to increase profits, individuals seek to increase the value of their time—the utility of their hours. However, in general, the claims of neoclassical economic thought are often critiqued because of their idealism; they tend to assume that people make rational decisions, including economic ones. Many critics of neoclassical economic theory point out that they believe it ignores some very real and very economically impactful aspects of natural human behavior.
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