On Neo-classical economics

This post is the first in the series- On Neoclassical Economics. This series attempts to look at the basic concepts of Neoclassicalism or Marginalism. The concepts that this series will cover are that of man being rational, measurement of utility, equilibrium from demand and supply, Micro and Macro economics and notion of perfect competition.

Remind yourself that what we (mostly) see in textbooks is Neoclassical economics (In India). Is there another approach to Economics which these textbooks fail to talk about? The answer is yes. It is known as ‘Classical Political Economy’.

Classical Political Economy

The concern of the classical economists from Adam Smith to David Ricardo was the laws governing the emerging capitalist economy, characterized by wage labour, an increasingly sophisticated division of labour, the coordination of economic activities via a system of interdependent markets in which transactions are mediated through money, and rapid technical, organizational and institutional change. In short, they were concerned with an economic system in motion. [Kurz and Salvadori 1998]

This approach does not break economics into monetary, fiscal, international trade, microeconomics, macroeconomics etc. Nowadays, economics has got lot many divisions and specialties, that I feel the essence is getting compromised. [Thomas 2006] Classical Political Economy does not make such compartments like the ‘mainstream economics’ and is also dynamic in nature.

Neoclassical economics began as a project to fashion an economic model in the image of Newtonian mechanics, one in which economic agents could be treated as if they were particles obeying mechanical laws, and all of whose behaviour could, in principle, be described simultaneously by a solvable system of equations. [www.paecon.net ]

This post delves into the origin and the importance utility enjoys in Microeconomics aka ‘the pet of Neoclassicalists‘.

Economists are subject to many vices, and one of them has been to talk about ‘utility’, which is a quantitative conception that there is no known way of measuring. [Robinson 1979] Still, hours and hours are dedicated to the task of measuring Utility and ‘Marginal’ Utility in colleges and universities. It forms the basis of Microeconomics and also helps in bringing more mathematics into the realm of economics.

Bernard Guerrien writes in Issue 12 of the Post-Autistic Economics Review that “The French students’ movement against autism in economics started with a revolt against the disproportionate importance of microeconomics in economics teaching. The students complained that nobody had really proved to them that microeconomics was of any use; what is the interest of going through “micro1”, “micro2”, “micro3”, etc., using lots of mathematics to speak of fictitious households, fictitious enterprises and fictitious markets?”

Can economic policies be made based on such ‘fictitious’ measurements? Is economics a policy science or an intellectual game? One becomes a skeptic when wondering about why ‘Microeconomics’ has come to dominate economics learning. Is it to make economics more mathematical?

A digression: Economy

The concept of the ‘economy’ is of utmost importance in this regard. Does the ‘economy’ occupy a separate existence from that of the community and the state? Very often, the headlines in the media say so, but it is not so. And economics is not tantamount to money.

According to C. T. Kurien, Economy is a structure of relationships among a group of people, in terms of the manner in which they exercise control over resources, use resources and labour in the production of goods, and define and settle the claims of the members over what is produced, emphasising that while the economy is concerned with goods and services, it should be recognised essentially as a set of social relationships.

The economy consists of two realms, namely the community and the market. Community refers to real, on-the-ground associations and to imagined solidarities that people experience. [Gudeman 2001] Gudeman goes on to say that ‘Neoclassical economics focuses on one value domain, the market, which is modified as a separate sphere making up the whole of economy in which all goods are priced and available for exchange.’

On Utilitarianism

Bentham played a crucial role in the development of ‘utility measurement’. He proposed the ‘felicific calculus’, namely the quantitative evaluation and the algebraic summation of pleasures and pains stemming as consequences from any given course of action. ‘Good’ is whatever gives as its result an algebraically positive felicific magnitude, and hence increases the ‘amount of happiness’ within human societies; ‘bad’ is whatever gives as its result a negative quantity, and as a consequence decreases the amount of social happiness. [Roncaglia 1999]

But, Mill in his Utilitarianism (1987) criticizes this notion of measurement of utility by stating that ‘Utility is an uncertain standard, which every different person interprets differently, and even ‘in the mind of one and the same individual, justice is not some one rule, principle, or maxim, but many.’

If there is an intellectual field where the utilitarian attitude-namely, looking at the consequences of human actions-dominates, to the point of being identified with the scientific attitude tout court, this is economics” [Roncaglia 1999](Italics added)

Utility, when taught to students, appears very logical and thus is easily comprehended and imbibed. Of course, no individual would do any activity if it didn’t give him or her pleasure or rather, ‘utility’. As a philosophical concept, it does make sense. But when it is introduced into the realm of economics, it fails miserably. The demand function which is built on utility along with the supply is what determines the equilibrium price and quantity in neoclassical economics. But if one stops to think and to try and relate it to the real world, one would fail. Think of how prices are determined; and are prices based on demand and supply functions?

Conclusions

What has neoclassical theory taught us? That individuals do what they do because they get ‘utility’ out of it? And that this helps in calculating the demand of an economy which further helps in the determination of prices? Does it tell us anything about the working of the economy?

References

1) Kurz, H and Salvadori, N (edited), The Elgar companion to classical economics (A-K), 1998.
2) Robinson, Joan, Collected Economic Papers, 1979.
3) Kurien, C T, Rethinking Economics, 1995.
4) Gudeman, Stephen, The anthropology of economy, 2001.
5) Thomas, A M, Undergraduate Economist, The fellowship of economics, 2007.

10 thoughts on “On Neo-classical economics

  1. Hi alex. Lontime!
    While i agree with your critique of neoclassical economics and also sympathize with your inerest in political economy, i wud still say that the neo-classical school has helped us learn much. My knowledge here is extremely limited, but one can deny that neo-classical economics has deepened our understanding of “the nice little and useful instruments” (following Sen here) we call markets. Yes there is a need to rethink economics, but then, that rethinking, can itself draw from the lessons of marginalism, on where it has gone wrong, and where it has gone right. I know i have just generally written down points without offering much justifications here, but i am sure u get the point to get across.

  2. Nukkad,

    Markets have been comprehended from very early on. And Adam Smith gives a splendid analysis of markets and how significant it is for growth of the economy as a whole.

    Let me bring to your attention this piece which i have posted. Do put your down your thoughts regarding it.

  3. But Alex, information assymentry, market failure, externalities, arent these recent outcomes? I am not aware whether we should place these all with neoclassical economics, but i think, mathematics and neolclassical economics would have had some role in their development, and these are significant improvements in the understanding of markets. What i would say is, that i do not like the domination of this school of economics. “While markets are nice little instruments to organise production, they should hardly be so significant as to determine our philosophies of life and living” (Amartya Sen) I see the neoclassical school doing exactly that, propagating markets as philosophies of life.
    As for the other post, indeed valid questions. And frankly, i( as well as perhaps the neoclassical school) has little by way of answers to these.

  4. i agree with your point of view, but i must add that you do have to understand something to be able to say that it does not make sense..to me political economy makes perfect sense and is easy to understand. concepts in micro have their own worth and their own use as well. this could be the topic of endless debates, but i just want to add that there are many ways to solve the same problem..if mathematics can be used to understand and explain even art to some extent, then why not economics? even economics is just a way of looking at and understanding social and individual reality and thus within it also there are various approaches. whatever works for you, you should do that..i feel the need to study neo-classical economics even if it’s only to be able to criticize it with credibility.

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  7. iam from ethiopia and iam a 3rd year student at faculity of buseness and economics……..whats hapen in world is simply due to lack of intervention by goverment body.And its larglly afect the economy of the poor like ethiopia……..

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