Neo Classical Economics Theory And Model

Neo-Classical Economics, Neoclassical Economic Theory and Model

Just prior to 1870, there was a surge of industrial growth accompanied by increased concentration of capital, power, and wealth. Forces of competition continued to prey upon the weak, monopolies developed, markets widened, and improvements in transportation and communication enabled many limited liability and joint stock companies to be established. By 1870, the economic system was dominated by up to 1000 colossal corporations.

Two forms of social relations developed: the bureaucratic organization and mutual interdependence. Increasingly, Adam Smith's analysis of capitalism, especially regarding the "invisible hand" based on pure competition no longer seemed to fit. In Smith's scenario, no individual enterprise was supposed to be able to exercise a significant influence on the overall market -all actions by firms were supposed to be dictated strictly by consumer tastes and by competition of innumerable other small firms. Capitalism, however, was changing and being modified.

The year 1870 marked a new, revolutionary era in terms of economic thought. Beginning with Jevons, Menger, and Walras, economic theory was revolutionized, and modern, scientific, or "marginalized" neo-classical theory became completely severed from the previous classical dogma. With neoclassical economic thought, more emphasis was placed on logical and mathematical rigor independent of its content or pragmatic value. Neoclassical theory took utilitarian notions, including "diminishing marginal utility" and the utility theory of value, to entirely different dimensions by changing their form and even calculating optimum levels through the use differential calculus.

Beginning with neoclassical or "marginalist" thought from 1870, the purpose of this chapter and the remainder of this book will be to review some of the highlights of the history of economic thought from the perspectives of many of the notable "non-classical" economic scholars. We will begin with Jevons, Menger, Walras, and Marshall, then proceed from there.