Modern Microeconomics Theory Analysis

The Development of Modern Microeconomic Theory

Microeconomics Definition, Basic Microeconomics

Neoclassical economics was not a single entity: it was a multidimensional school of thought that evolved over time. It focused on marginalism, assumptions of rationality, and a strong policy presumption that markets worked, although that was subject to a number of provisos. The neoclassical school was quite fluid: as soon as neoclassical economists became the orthodoxy, and possibly even before, it started to change. Bit by bit economics moved away from its neoclassical footing. Marginalist calculus was replaced by set theory; ration­ality assumptions were modified by insights from psychology; the set of issues to which economic analysis was applied expanded; evolutionary game theory raised the possibility that individuals exhibit class-consciousness; and sociological explanations were used to supplement analyses of the labor market. As these and similar changes occurred, what had .been seen as necessary components of neoclassical thought ceased to be components of modern thought. Our belief is that sufficient components have changed to warrant a new term to describe modern economics.

Many elements of neoclassical economics still exist within modern microeco­nomics, but what distinguishes modern microeconomics is not these elements; it is a modeling approach to problems. The assumptions and conclusions of the model are less important than whether the model empirically fits reality.

In this chapter we discuss the evolution of microeconomics from neoclassical to modern. We trace that path from the 1930s through a highly formalistic stage in which there was an attempt to tie microeconomics together within a single theory—with little regard for that theory's empirical relevance—to its modern state, in which microeconomics consists of a set of models focused almost entirely on empirical relevance.

We start our story in the 1930s with the fall of Marshallian economics.