Neoclassical theories often revolve around utility and profit maximization. Profit maximization lies behind the neoclassical theory of the firm[?], the derivation of supply curves for consumer goods[?], and the derivation of demand curves for factors of production. Utility maximization is the source for the neoclassical theory of consumption, the derivation of demand curves for consumer goods, and the derivation of factor supply curves and reservation demand[?].
Neoclassical economics emphasizes equilibria, where equilibria are the solutions of individual maximization problems. Regularities in economies are explaned by methodological individualism, the doctrine that all economic phenonema can be ultimately explained by aggregating over the behavior of individuals. The emphasis is on microeconomics. Institutions, which might be considered as prior to and conditioning individual behavior, are de-emphasized. Economic subjectivism accompanies these emphases. See also general equilibrium.
William Stanley Jevons' Theory of Political Economy (1871), Carl Menger's Principles of Economics (1871), and Leon Walras's Elements of Pure Economics (1874-1877). These three economists have been said to have promulgated the marginal utility revolution, or Neoclassical Revolution. Historians of economics and economists have debated
In particular, Walras was more interested in the interaction of markets than in explaining the individual pysche through a hedonistic psychology. Jevons saw his economics as an application and development of Jeremy Bentham's utilitarianism and never had a fully developed general equilibrium theory. Menger emphasized disequilibrium and the discrete. Menger had a philosophical objection to the use of mathematics in economics, while the other two modeled their theories after 19th century mechanics.
Alfred Marshall's textbook, Principles of Economics (1890), was the dominant textbook in England a generation later. Marshall's influence extended elsewhere; Italians would compliment Maffeo Pantaleoni[?] by calling him the "Marshall of Italy". Marshall thought classical economics attempted to explain prices by the cost of production[?]. He asserted that the neoclassicals went too far in correcting this imbalance by overemphasizing utility and demand. Marshall thought the question of whether supply or demand was more important was analogous to the pointless question of which blade of a scissors did the cutting.
Marshall explained prices by the intersection of supply and demand curves. The introduction of different market "periods" was an important innovation in Marshall:
Marshall took supply and demand as stable functions and extended supply and demand explanations of prices to all runs. He argued supply was easier to vary in longer runs, and thus became a more important determinate of price in the very long run.
Joan Robinson[?] and Edward H. Chamberlin, with the near simultaneous publication of their respective books, The Economics of Imperfect Competition (1933) and The Theory of Monopolistic Competition (1933), introduced models of imperfect competition. Theories of market forms and Industrial Organization[?] grew out of this work. They also emphasized certain tools, such as the marginal revenue[?] curve.
Joan Robinson's work on imperfect competition, at least, was a response to certain problems of Marshallian partial equilibrium[?] theory highlighted by Piero Sraffa. Anglo-American economists also responded to these problems by turning towards general equilibrium theory, developed on the European continent by Walras and Vilfredo Pareto. J. R. Hicks' Value and Capital (1939) was influential in introducing his English-speaking colleagues to these traditions. He, in turn, was influenced by the Austrian School economist Friedrich Hayek's move to the London School of Economics, where Hicks then studied.
These developments were accompanied by the introduction of new tools, such as indifference curves and the theory of ordinal utility. The level of mathematical sophistication of neoclassical economics increased. Paul Samuelson's Foundations of Economic Analysis (1947) contributed to this increase in formal rigor.
The interwar period in American economics has been argued to have been pluralistic, with neoclassical economics and institutialism[?] competing for allegiance. Frank Knight[?], an early Chicago school economist attempted to combine both schools. But this increase in mathematics was accompanied by greater dominance of neoclassical economics in Anglo-American universities after World War II.
Hicks' book had two main parts. The second, which was arguably not immediately influential, presented a model of temporary equilibrium. Hicks was influenced directly by Hayek's notion of intertemporal coordination and paralleled by earlier work by Lindhal. This was part of an abandonment of disaggregated long run models. This trend probably reached its culmination with the Arrow-Debreu model[?] of intertemporal equilibrium. The Arrow-Debreu model has canonical presentations in Gerard Debreu's Theory of Value (1959) and in Arrow and Hahn.
Pareto optimality obtains. Key assumptions of neo-classical economics which are widely criticised as unrealistic include:
In the opinion of some, these developments have found fatal weaknesses in neoclassical economics. Economists, however, have continued to use highly mathematical models, and many equate neoclassical economics with economics, unqualified. Mathematical models include those in game theory, linear programming, and econometrics, many of which might be considered non-neoclassical. So economists often refer to what has evolved out of neoclassical economics as "mainstream economics".
The critique of the assumption of rationality is not confined to social theorist and ecologists. Many economists, even contemporaries, have criticized this vision of economic man. Thorstein Veblen put it most sardonically:
Herbert Simon's theory of bounded rationality has probably been more influential. Is economic man a first approximation to a more realistic psychology, an approach only valid in some sphere of human lives, or a general methodological principle for economics? Early neoclassical economists often leaned toward the first two appoaches, but the latter has become prevalent.
Neoclassical economics is also often seen as relying too heavily on complex mathematical models, such as those used in general equilibrium theory, without enough regard to whether these actually describe the real economy. Many see an attempt to model a system as complex as a modern economy by a mathematical model as unrealistic and doomed to failure.
Critics of neoclassical models accuse it of copying of 19th century mechanics and the "clockwork" model of society which seems to justify elite privileges as arising "naturally" from the social order based on economic competititions. This is echoed by modern critics in the anti-globalization movement who often blame the neoclassical theory, as it has been applied by the IMF in particular, for inequities in global debt and trade relations. They assert it ignores the complexity of nature and of human creativity, and seeks mechanical ideas like equilibrium: