History UsefulNotes / EconomicTheories

Neoclassicism transcends the microeconomic vagaries of Keynesian Economics, which make it much an 'Art' as a 'Dismal Science', by modelling microeconomic interactions and integrating them into macroeconomic models. This makes Neoclassical Economics a theoretically-perfect and pure Science which can precisely model and predict all economic activity.

This is accomplished by treating every economic actor as if they were 'rational actors' with full knowledge, perfect reasoning, absolute self-control, total self-interest, and a limited set of desires. Neoclassicism differs from the Austrian school in that does not use the rational actor model on ideological grounds, but in the name of mathematical simplicity and elegance. Neoclassicism rejects Keynesianism's (empirical but) mathematically crude approach to macroeconomics, instead using the same mixture of philosophical reasoning and mathematics used to craft its microeconomic elements. However, neo-Keynesianism seeks to marry Keynesian macroeconomic theory to Neoclassicist rational-actor microeconomic theories.

This is accomplished by treating every economic actor as if they were 'rational actors' with full knowledge, perfect reasoning, absolute self-control, total self-interest, and a limited set of desires. Neoclassicism differs from the Austrian school in that does not use the rational actor model on ideological grounds, but in the name of mathematical simplicity and elegance. Neoclassicism rejects Keynesianism's mathematically imperfect evidence-based approach to macroeconomics, instead using the same mixture of philosophical reasoning and mathematics used to craft its microeconomic elements. However, neo-Keynesianism seeks to marry Keynesian macroeconomic theory to Neoclassicist rational-actor microeconomic theories.

This is accomplished by treating every economic actor as if they were 'rational actors' with full knowledge, perfect reasoning, absolute self-control, total self-interest, and a limited set of desires. Neoclassicism differs from the Austrian school in that does not use the rational actor model on ideological grounds. Instead, it does so in the name of mathematical simplicity and elegance.

Neoclassicism relies on rigorous mathematical models of economic behavior, rather than the ideological principles of the Austrian school and Marx or the evidence-based, ad-hoc models of Keynes. The neoclassicist approach has carried over into other economic schools, especially neo-Keynesianism, which seeks to marry Keynesian macroeconomic theory to microeconomic rational-actor theories.

At the macroeconomic level, Neoclassicism is troubled by its fundamental assumption that an 'invisible hand' of the market both exists and allocates resources perfectly in the absence of central direction. This leads to a tautoligical insistence that measures which have demonstrably improved economic performance in practice (public healthcare, welfare, minimum wage, safety regulations) should be terminated because of they are damaging it in theory (by hindering the perfect ability of the invisible hand to make those services universally available at a high quality and low price).

By maximising their profits, Capitalists-Big Business

* Austrian: On principle, it's intolerable for Government to be any more powerful than is absolutely necessary for society to exist. If we can make Neoclassicism work in practice then we can have near-total democracy, freedom, ''and'' meritocracy simultaneously.

* Austrian: On principle, it's intolerable for Government to be any more powerful than is absolutely necessary for society to exist. Therefore, if we can make the Neoclassicism work in practice then we can have near-total democracy, freedom, ''and'' meritocracy simultaneously.

* Neoclassicism: Mathematically perfectly models of the economy can be made when we assume that all people and organisations make (major) decisions as if they had complete knowledge, consistency, rationality, and selfishness. These models show that the Government should protect and nurture Capitalists-Big Business. This is compatible with meritocracy and democracy because economics, politics, and society are largely unrelated.

* Capitalism (classical economics): Government nurtures Big Business and protects it from workers(' unions and rights), other Governments (free trade), and itself (minimal regulation). By maximising its profits, Big Business grows the economy.
* Marxism: impoverished and oppressed workers seize control of the Government and all Capital, establishing a meritocratic society.
* Keynesianism: Government keeps Capitalism from breaking down periodically, or causing Civil War/Marxist revolution, by establishing a meritocratic and democratic society.
* Neoclassicism: Economics is a completely predictable Science because it is safe to assume that people make all (major) decisions as if they were all-knowing, consistent, and rational.
* Austrian: when the Government is so weak that everyone is free to act with (almost) absolute selfishness, society both continues to exist and allocates resources with almost total efficiency. Near-total personal freedom produces a near-perfect economy.

Neoclassicism transcends the microeconomic vagaries of Keynesian Economics, as much an 'Art' as a 'Dismal Science', by modelling microeconomic interactions and integrating them into mathematically perfect whole-economy models. This makes Neoclassical Economics a theoretically-perfect and pure Science which accurately model and predict the effects of certain policies upon the actual economy, even in the absence of real-world data.

This is accomplished by treating every economic actor as if they were 'rational actors' with full knowledge, perfect reasoning, absolute self-control, and a limited set of desires. Neoclassicism differs from the Austrian school in that does not use the rational actor model on ideological grounds. Instead, it does so in the name of mathematical simplicity and elegance.

Neoclassical theory is mathematically flawless, but human nature makes it a poor tool for understanding or predicting economic activity.
In reality, people and organisations act as if they were (staffed by) people and not as if they were all-knowing, totally rational, perfectly stoic, and only desired a few things. The invalidity of its microeconomic elements renders Neoclassical theory unable to model or predict actual economies at the macroeconomic level.

Neoclassicism is also troubled by its fundamental assumption that an 'invisible hand' of the market both exists and allocates resources perfectly in the absence of central direction, which leads to a tautoligical insistence that measures which have demonstrably improved economic performance in reality (public healthcare, welfare, minimum wage, safety regulations) should be terminated because of they are damaging it in theory (by hindering the perfect ability of the invisible hand to make those services universally available at a high quality and low price).

Neoclassicism's jettisoning of the 'messy' socio-political elements of economics in the name of mathematical perfection meant that it failed to anticipate the real socio-economic effect of its models. Theoretically, if the economy truly were isolated from society and politics then wealth inequality really would initially grow before slowing and then stopping. In reality wealth inequality grows exponentially because wealth can be used to buy political power, which can be used to reshape the rules which govern the economy in ways which facilitate the accumulation of wealth.

Neoclassical theory asserts that every economic actor in an economy acts as if they were 'rational actors' with full knowledge, perfect reasoning, absolute self-control, and a limited set of desires. Therefore, microeconomic models which use rational actors can be integrated into macroeconomic models which accurately model and predict the effects of certain policies upon the actual economy.

Neoclassicism differs from the Austrian school in that does not use the rational actor model on ideological grounds. Instead, it does so in the name of mathematical simplicity and elegance. By disregarding the microeconomic vagaries which make Keynesian economics as much an 'Art' as 'Dismal Science', Neoclassicism makes Economics into a theoretically-perfect and pure Science.

Neoclassical theory asserts that every economic actor in an economy acts as if they were 'rational actors' with full knowledge, perfect reasoning, absolute self-control, and a limited set of desires. Therefore, economic models which use rational actors can then accurately model and predict the effects of certain policies upon the actual economy.

Neoclassicism is also troubled in a mathematical sense by its fundamental assumption that an 'invisible hand' of the market both exists and allocates resources perfectly in the absence of central direction, its placement of producers above consumers in the hierarchy of economic importance, and its tautoligical insistence that measures which have demonstrably improved economic performance in reality (public healthcare, welfare, minimum wage, safety regulations) should be removed because of they are damaging it in theory (by hindering the perfect ability of the invisible hand to make those services to everyone available at the highest quality and lowest price).

The era of neoclassicism has accordingly seen sharp increases in various measures of socio-economic inequality, increases in the political power of the wealthy, and a resurgence of demand-side recessions: examples include the savings and loan bust of the Reagan era and the 2006 housing market collapse that precipitated the Great Recession of 2008.

Neoclassicists respond that these are not failures of their theory but rather events proving that markets are distorted by government intervention. Their proposed solution is to eliminate which demonstrate our need to to establish proper prices and wages.

The key insight of neoclassical theory is that macroeconomic behavior is founded on the sum total of microeconomic behavior. That is to say that it should be possible to derive macroeconomic principles from rules of supply and demand, wages and prices at the level of individual, rational actors. The whole is always exactly the sum of its parts, no more and no less.

To support this idea, neoclassicism relies on rigorous mathematical models of economic behavior, rather than the ideological principles of Marx or the loose, often ad-hoc models of Keynes. This approach has carried over into other economic schools, especially neo-Keynesianism, which seeks to replicate Keynesian theory through microfoundations and rational-actor models.

Neoclassical theory has run into several problems when put into practice. Like the classical theories on which it is based, it places producers above consumers in the hierarchy of economic importance, and attempts to dismantle regulations that are seen as intrusive or coercive to the market's abilities to set prices. Welfare, social security, and other forms of transfer payments are similarly seen as interfering with the market's ability to set wages. Further, rational-actor theory, the basis of microfoundations, is difficult to apply in empirical practice, as most actors are observably not rational and/or not possessed of full and accurate information.

The era of neoclassicism has accordingly seen sharp increases in various measures of economic and social inequality, increases in political influence by the wealthy, and a resurgence of demand-side recessions: examples include the savings and loan bust of the Reagan era and the 2006 housing market collapse that precipitated the Great Recession of 2008.

Neoclassicists respond that these are not failures of their theory but rather events proving that markets are distorted by government intervention and need the removal of that intervention to establish proper prices and wages.

Austrian theory is founded in classical liberalism, which sets the preferences and freedom of the individual above all other priorities. Anything that interferes with the ability of the individual to make decisions is to be rejected. Accordingly, those who consider themselves Libertarian by political affiliation are often also Austrian by economic affiliation, and support minimal or no taxation, no regulation or other interference in markets, and complete freedom of markets to set prices.

* Neoclassicism: Economics is a completely predictable Science because it is safe to assume that everyone always acts as if they were all-knowing, consistent, and rational in all their actions.

* Neoclassicism: Capitalism is a completely predictable Science, and is in no way an Art. Does this by assuming that everyone is all-knowing, consistent, and rational in all their actions.

If you don't want to read any further, here's a brief summary of each major economic system's core premise:

* Capitalism (classical economics): Government nurtures Big Business and protects it from workers(' unions and rights), other Governments (through free trade), and even itself (through minimising regulation). By maximising its profits, Big Business indirectly benefits everyone by growing the economy.

* Keynesianism: Government keeps Capitalism from breaking down periodically, or self-destructing in warfare/Marxist revolution, by establishing a meritocratic and democratic society.
* Neoclassicism: Capitalism as a completely predictable Science, and in no way an Art. Assumes that everyone is all-knowing, consistent, and rational in all their actions.
* Austrian: Capitalism is inherently meritocratic and democratic when the Government is almost powerless. Any other system would be oppressive and therefore (lead to) evil.

Economic systems, whether ad hoc or intentionally designed, accumulate theories about how they function and how best to optimize them -- and, in particular, to respond to adverse events. For purposes of this discussion, we'll talk about economic theories that are based on scarcity models. Post-scarcity is a different beast entirely.

* Capitalism (classical economics): Government nurtures Big Business and protects it from the people & other Governments (through free trade!). By maximising its profits, Big Business indirectly grows the economy and benefits everyone!

* Serfdom: You live and work on my land, you give me everything you make, I let you keep enough to survive, if I'm generous.
* Mercantilism: Business allied with government -- protect our exports with tariffs and armies and we'll give you a cut of the profit.
* Capitalism (classical economics): Letting self-interest run wild generates maximum profits through competition. Free trade!
* Marxism: Oppressed workers seize control of industry, redistribute everything equally among everyone.
* Keynesianism: Government manages capitalism to keep it from getting out of hand.
* Neoclassicism: Capitalism with everyone behaving perfectly rationally all the time.
* Austrian: Every man for himself, self-interest in total freedom from governance is the only right way.

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If you don't want to read any further, here's a brief sentence summary of each major economic system's ideology:

* Barter: Your cow for my pig.

* Mercantilism: Business rules; protect our exports with tariffs and armies.

What Keynes observed in practice, however, was that in a demand-driven crisis, wages and prices resist falling. The precise mechanisms for this have not been perfectly explained; rather, they are based on empirical data. Even in the deepest of depressions, most people don't see a reduction in their wages or a reduction in the prices of products. What happens instead is that people get laid off, their hours get cut back, and they become less able to afford things. Meanwhile, their debts increase in relative value because they have less income to pay them back with.

In conditions of persistently depressed demand, everyone is trying to save more than they spend. As noted above under the paradox of thrift, this causes excess savings to accumulate with nothing to spend them on. In this condition, increasing the money supply, contrary to common wisdom, does not drive inflation, because no matter how much money is in the economy, it's not making its way to consumers who need it to relieve their debt burdens.

* '''Wages''': Money paid in exchange for labor.
* '''Income''': Money acquired through wages, selling products, interest, transfer payments, estates, gifts, etc.

** Money is divisible within reasonable limits. A buyer is not forced to part with more than the price of a product because the seller is unable to make change, except under unusual circumstances. Diamonds are poor currency because splitting them reduces their total value and it's impossible to put them back together again.

* '''Demand''': The capacity within an economy to purchase and consume products. This includes both the desire to obtain a product (is it something the consumer wants or needs?) and the capability to obtain it (does the consumer have the money or equivalent in a barter/socialized economy to acquire it?).

Central to neoclassical theory is a '''supply-side model''' of economic activity, in which it is the role of government to encourage investment in production. This investment will increase economic output through two mechanisms: the labor needed to create the means of production will increase incomes, while selling the resulting products will increase business profits. Said profits get reinvested in additional production, and the cycle continues. This has been termed the '''trickle-down''' theory, in that the benefits of higher capital wealth will be felt by the working classes in the form of higher wages and higher quality products.

Central to neoclassical theory is a '''supply-side model''' of economic activity, in which it is the role of government to encourage investment in production. This investment will increase economic output through two mechanisms: the labor needed to create the means of production will increase incomes, while selling the resulting products will increase business profits. Said profits get reinvested in additional production, and the cycle continues.