Neoclassical Economics

Economic Approaches:

Key assumptions and aspects:

Neoclassical economics arose out of the marginalist revolution, during the long depression which started in the 1870s. Neoclassical economics was largely a reaction against Marxian political economy as it argued that markets create harmony, not conflict. Human beings were assumed to be rational and selfish, as their decisions are solely motivated by expected utility maximization based on their given and stable preferences. Mathematically deduced from these assumptions about individuals, an analysis of market equilibria arises. These markets work mainly through price mechanisms; their efficiency as well as their potential failures are analysed. Neoclassical economics quickly became an important strand of thinking after its birth in the late 19th century, and after the Second World War it became the dominant theoretical approach in most countries. The increase in its practitioners gave rise to many different sub-branches of neoclassical economics, such as general equilibrium and neoclassical growth theory. Sometimes neoclassical economics is lump together with neoliberalism. While there is overlap between neoliberal thought and neoclassical sub-branches, such as monetarism and new classical macroeconomics, the two are not the same. Many economists, among which neo-Keynesians for example, use and build on neoclassical (microeconomic) models to oppose neoliberal ideas. To this day, neoclassical economics remains a highly influential approach, in research, policy making, and especially education. Many have been arguing for, or predicting, its demise for already a couple of decades. New approaches, such as behavioural, evolutionary and complexity economics, are often thought to replace neoclassical economics as core of the mainstream discipline. Whether this will indeed be the future remains to be seen.

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