Neoclassical Paper

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1 Clarissa Alejandro/Robbin Dickson/Bryton Lam Econ 577 11/8/2023 Neoclassical School Paper The Historical Background of the Neoclassical School The Neoclassical School began to emerge around 1890 as an attempt to show the limitations of the Classical School. It is known as the “marginal revolution”. At that time, Alfred Marshall had written “Principles of Economics. While he is considered the most influential economic theorist, it took him a long time to publish some of his works, and many thought of his work as outdated, and unpopular. He was obsessive and would overthink his works. However, Marshall was a brilliant mathematician, and he would often make notes of his mathematical equations for others to view. “One of the key early assumptions of neoclassical economics is that utility to consumers, not the cost of production, is the most important factor in determining the value of a product or service. This approach was developed in the late 19th century based on books by William Stanley Jevons, Carl Menger, and Léon Walras.” (Kenton, 2023) Neoclassical theory focuses on supply and demand. Economists had the idea that consumers focused on personal satisfaction and cared less about other attributes of a product and more about what it could do for them. During the Neoclassical school, they also believed that a
2 product would provide way more to the consumer and pay for itself over and over far exceeding what the original cost was to make the product. Marshall believed in “diminished marginal utility”. Marshall explained that “diminished marginal utility” meant that consumers that already possessed a product and continued to increase the amount they had of that product, it would decrease their desire to have the product; hence “diminishing” the interest. This was all known as the utility approach by many. The Major Tenets of the Neoclassical School Supply and demand are the most recognized and probably the most important tenet of the Neoclassical School. The market equilibrium is determined by supply and demand and dictates a lot in regard to economics. Utility, another major tenet, was designed and implemented because of the way that consumers think. It is the behavior of the consumer and how they choose products based on personal satisfaction and what makes them happy which is something that is human nature. Efficiency, while focusing on social welfare as the main way to view how resources should be applied, also became a main focus in the Neoclassical school. Free trade was a major part of the Neoclassical school as well because it stressed the need to allow businesses, etc. to have the ability to produce products that they had the most knowledge and ability to produce based on their economic ability. We also can’t dismiss marginal analysis. It was an important part of the Neoclassical School. Marginal analysis focuses on small changes
3 in costs and benefits of producing an additional unit of a good or service. Consumers still see this today as the norm in large corporations and small. Whom did the Neoclassical School benefit or seek to benefit? Society as a whole benefited from the Neoclassical school because it laid out what is and should be the ideal economy. The theory of supply and demand encapsulates exactly what is most important in society for economics to work for business, government, etc. Economic policy is also decided on and based off of supply and demand. Some have argued that the Neoclassical school did not include ecological economics, such as the environment and therefore that would need to be better thought out to benefit that part of society. However, society is what drove and still drives the theory of Neoclassicalism. How Was the Neoclassical School Valid, Useful, or Correct in Its Time? The Neoclassical School was valid, useful, and correct in its time because the industrial revolution was continuing to blossom, and the theory of Neoclassicalism encouraged production within the industries. It also encouraged growth within the economy for small businesses, and growth among consumers. “Neoclassical economics offers an approach to study the economic behavior of homo-economicus.” (Wikipedia, 2023) The intense study of consumers and how they relate to supply and demand, etc. assisted economists during the Neoclassical School period when they were developing the Neoclassical School. The impact of the Neoclassical school helped to create a pathway for the industrial revolution.
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4 Which Tenets of the School Became Lasting Contributions? Alfred Marshall understood supply and demand. He also understood the curve associated with it due to his mathematics background. He used the idea of time and how it determined value. He revolutionized the way we determine market prices. We still use the mathematical principles that Marshall uses today predict shifts in the market. Another important tenet for the Neoclassical School is Knut Wicksell. Wicksell developed a theory on Interest and Prices, which contributed heavily to what we know as macroeconomics today. He often lectured on the political economy and came up with the quantity theory of money which is known as, “monetarism”. Irving Fisher, also contributed to monetary theory and he is also well known for his theory of capital. He used a method called “equation of exchange” to determine the purchasing power of money. The five determinants of purchasing power are still taken into consideration today when companies, economists, etc. make evaluations and decisions. Edward Chamberlin: Published “The Theory of Monopolistic Competition” in 1933. Chamberlin is also known for coming up with the term “product differentiation”. The main implication of Chamberlin's model is that companies, etc. in a competitive industry will be too small if they do not differentiate their products. Joan Robinson, also a great contributor, authored “The Economics of Imperfect Competition”. Robinson is also known for her work in macroeconomics. Robinson's article “The Production Function and the Theory of Capital” that was published in 1954, began what would later be called the Cambridge controversy. The
5 theories and practices that were developed during the Neoclassical School are very important today in the world of economics.
6 Works Cited Brue, S. L., & Grant, R. R. (2013). The evolution of economic thought . Kenton, W. (n.d.). Neoclassical economics: What it is and why it’s important . Investopedia. https://www.investopedia.com/terms/n/neoclassical.asp#:~:text=One%20of%20the %20key%20early,Carl%20Menger%2C%20and%20L%C3%A9on%20Walras . Wikimedia Foundation. (2023, October 10). Neoclassical economics. Wikipedia. https://en.wikipedia.org/wiki/Neoclassical_economics
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