Neoclassical Thought

NEOCLASSICAL economics is the body of thought that developed in the latter half of the 19th century and continued on through the 20th century and beyond. The term is used to demarcate a methodological break with the previous body of thought known as classical economics. The expression neoclassical economics goes back to Thorstein Veblen and was originally attributed to the Marshallian School.

The beginning of neoclassical economics can be placed around 1870, when the so-called marginal utility revolution began. This revolution in economics is usually associated with three or four contributors, although there are a number of important precursors. William Stanley Jevons, Karl Menger, and Leon Walras were in the forefront, while Alfred Marshall, who wrote around the same time but published later, was the fourth creator of the new approach to economics. What characterized the new approach was the self-declared use of mathematics and marginalism. It was more scientific in its approach in many ways. Economics became the science of scarcity—thus of measures—and it is no long shot to describe neoclassical economics as the quantitative method in contrast to classical economics.

Classical economists focused on development and growth, the distributive shares of income among capitalists, landowners and laborers, international trade, money, and population. The focus in their economics was the national economy. With neoclassical economics, this prominence gave way to the individual in economics, that is, to the microeconomics of the household, firm, and industry.

The three writers most responsible for launching neoclassical economics, Menger, Walras, and Jevons, all independently discovered the neoclassical paradigm. No longer would the science be called political economy but economics. Although the three writers emphasized marginalism and utility in their economics, they each had a different tack. Of the three, two—Menger and Walras—established genuine schools with followers to elaborate and extend their economics.

Menger founded the Austrian School of economics with his Principles of Economics in 1871. The school would be famous for its subjectivism and methodological individualism. The school stressed the importance of theory as well as empiricism, as opposed to undirected empirical analysis. Austrians opposed the historicism of the German School.

Walras is the founder of the general equilibrium approach. Economic systems—with firms and consumers giving way to supply and demand in various markets—have a great degree of interdependence. Markets must determine many prices and quantities simultaneously, and when any one market is not at equilibrium, a situation where there is excess demand or supply means that some other market will also be in disequilibrium. Walras constructed a mathematical model whereby he showed a general equilibrium occurring with consumers maximizing utility and firms maximizing profits.

Although Jevons failed to inaugurate a sizable following, he did manage to pave the way for the Cambridge School, founded by Alfred Marshall. Jevons's focus was on a theory of exchange based on utility-max-imizing individuals. He did not formulate a theory of the firm. Jevons also made original contributions in the problem of index numbers and in capital theory.

The final major contributor to this revolution, although he had a later publishing record, was Marshall, founder of the Cambridge School. Marshall's Principles of Economics, whose first edition appeared in 1890, sold remarkably well and became the standard text among English-speaking nations for many years.

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