Introduction to Neo-Classical Economics

Neo-classical economics began around the turn of the century. It provided more analysis on the processes through which the market system allocates   economic resources. The application of supply and demand curves, micro-economics and price theory helped to calm many of the disquieting aspects that Marx had created around classical economics. It accomplished this by ignoring the class division and working from the assumption of the existence of the “autonomous” rational wealth maximizer as subject for study.

Alfred Marshall was a professor at Cambridge in the late 1890’s. He created the idea that supply and demand can be used to determine a fair price for the exchange of commodities in an industrialized society. These mathematical equilibrium curves assume that people act as rational agents pursuing economic ends. Another assumption required was formulated in Say’s Law, which says that all income must be spent. Hoarding was seen as irrational, and the cause of a poor economic climate. The interaction of rational economic consumers and producers was suppose to create an equilibrium and fair price, so long as rational economic actors sought to maximize wealth. In this environment, market objects gravitate toward optimum value and use, wasting nothing. Government intervention was seen to bear a heavy responsibility for waste, inefficiency and misallocation of economic resources.

The neo-classical preoccupation with efficiency in production and exchange diverted attention from distributional inequality and from divergent interests of various groups within society, while focusing on the myth of the rational person as a conforming economic agent. Although Marshall himself warned against using this fiction as justification or explanation of the reality of economics, (because people made decisions for reasons other than maximizing wealth) many theorists since claimed that these models are mathematical formulas that actually govern market situations and decisions. The problem with the application of these ideas to real world is that they do not validly consider other rational goals beyond the accumulation of money. Environmental considerations and a host of other rational concerns not related to money should be included in the idea of a rational actor.

Economist promoted these ideas as truth gospel and strongly influenced turn-of-the-century, represented by the wide spread belief in laisse-faire market principles based on individual initiative and reward.

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