A Comparison Of Neoclassical and Modern Microeconomics

Let us conclude this chapter with a discussion of six attributes that distinguish neoclassical from modern economics.
1. Neoclassical economics focuses on allocation of resources at a given time. This attribute is embodied in Robbins's definition—the allocation of scarce resources among alternative uses—which became the standard definition of neoclassical economics.

The focus on allocation at a given point in time ended long ago. Been there, done that. The focus of research in modern economics has turned to allocation over time, a much harder problem. During the 1990s, for example, growth was a key topic; and the new growth theory is decidedly mainstream and non-neoclassical. In fact, it is generally contrasted with neoclassical growth theory.

2. Neoclassical economics accepts some variation of utilitarianism as playing a central role in understanding the economy. The movement to demand and subjective choice theory, and away from supply considerations, was a hallmark of early neoclassical thought. While initially the focus was almost entirely on utilitarianism and demand, the focus quickly evolved to a view that demand was only one blade of the scissors.

Few modern economists accept utilitarianism—most view it as merely historical—and utility theory is rarely used today. In his Nobel Prize speech, Amartya Sen recounted the problems of utilitarianism. While it is true that, in principles and intermediate books, students are still taught versions of utilitarianism, these are presented for pedagogical reasons only, not because utilitarianism is the reigning approach of modern economists.

3. Neoclassical economics focuses on marginal tradeoffs. It came into exis­tence as calculus spread to economics, and its initial work was centered on the marginal tradeoffs that calculus focused on.
While many undergraduate texts still present economics within a marginal framework, that is not the way it is presented in graduate schools or the way top economists think about issues. In fact, by the 1930s, in cutting-edge theory, calculus was already being dropped, having been mined for its insights, and the mathematics being used was moving to set theory and topology, as economists tried to expand the domain of eco­nomics to include a wider variety of topics. In modern graduate microeco­nomics, game theory has almost completely replaced calculus as the central modeling apparatus.

4. Neoclassical economics assumes far-sighted rationality. In order to struc­ture an economic problem within a constrained-maximization framework, one has to specify rationality in a way that is consistent with constrained optimization. Specific rationality assumptions quickly became central to the neoclassical approach.
The decrease in the focus on utilitarianism has been accompanied by a decrease in the far-sighted rationality assumption. In modern economics, bounded rationality, norm-based rationality (perhaps established through evolutionary game theory), and empirically determined rationality are fully acceptable approaches to problems.

5. Neoclassical economics accepts methodological individualism. This as­sumption, like the two before it, is closely tied to the constrained-maximi­zation approach. Someone must be doing the maximizing, and in neoclassical economics it was the individual. One starts with individual rationality, and the market translates that individual rationality into social rationality.
While individualism still reigns, it is under attack by certain branches of modern economics. Complexity theorists challenge the entire individu­alistic approach, at least when that approach is used to understand the aggregate economy. Evolutionary game theorists are attempting to show how such norms develop and constrain behavior. New institutionalists consistently operate within a framework that is at odds with methodologi­cal individualism.

6. Neoclassical economics is structured around a general equilibrium concep­tion of the economy. This last attribute is more debatable than the others. Schumpeter made the general equilibrium conception of the economy central to his definition of neoclassical economics.12 Admittedly it is important, but if it were absolutely central, it would eliminate Marshall from the neoclassical school. However, Schumpeter is right in the follow­ing way: in order to make neoclassical economics more than an applied policy approach to problems (something Schumpeter wanted to do), one needs a unique general equilibrium conception of the economy. Formal welfare economics is based on this general equilibrium conception.

The existence of a unique general equilibrium is still the predominantly held view, but that is primarily because general equilibrium models are seldom used. In theory, work on multiple equilibria is ongoing, and equilibrium selection mechanisms are an important element of study. Neoclassical economics never seriously considered the problem of multiple equilibria. In modern economics, theoretical economists are quite willing to consider multiple equilibria, as can be seen in the work of economists such as Karl Shell and Michael Woodford. It is true that modern work in policy generally avoids any discussion of multiple equilibria, and that is one of the contradictions in modern economics, but the topic of multiple equilibria is no longer out of bounds.