Neoclassical economics

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Under neoclassical neoclassical theory or refers to a family of economic science approaches that have been developed since the second half of the 19th century. The neoclassical sparked historically from the particular founded by Adam Smith classical economics. Neoclassicism dominated the ( liberal ) economic thinking to the twenties of the 20th century until the Keynesianism took a dominant role for some decades. After this was displaced slowly in the 1970s, experienced a renaissance neo-classical thinking.

• 3.1 Positive Theory
• 3.2 Normative Theory
• 3.3 Combination of Positive and Normative Theory

Basic assumptions and models

The neoclassical theory is not a uniform flow; particular " routine research " within the neoclassical must be distinguished from the essential building blocks of today's neoclassical " mainstream ". Referring to Fritsch Hampicke calls the following five constitutive features of the " naive ", " textbook " neoclassical:

• Methodological and normative- political individualism;
• Utilitarianism in the sense of a teleological - consequentialist ethics, the separation of value judgments and instruments, the orientation of human benefit foundation and the deliberative calculation;
• Assumption individually rational behavior ( ie presence of a complete preference ordering, transitivity of preferences );
• Exchange paradigm, consistent thinking in opportunity costs;
• Belief in the Invisible Hand and the substitution paradigm.

However, these five axioms could be changed in cases where the empirical assumptions behind them as grossly inaccurate. Important fields of limitations and supplements called Hampicke

• The possibility of voluntary contracts, which restrict the individuals their freedom of action in favor of cooperative or coordinated conduct;
• The possibility of a "Government - Assisted Invisible Hand ", the market - like allocation permits where these can not be achieved spontaneously due to prohibitive transaction costs;
• Introduction of institutional economic analysis approaches ( strategic behavior, incomplete information, "power" in exchange relations, etc.)

Even when using "collective " behavior as an explanation, however, the bottom of the methodological individualism will never leave.

Homo economicus

The central illustration of the assumption of neoclassical theory is the model of " homo economicus ". This is a fictitious business entity that has fixed preferences and rational acts in the sense that it selects under given alternatives always the one that maximizes its own benefit. It should be noted here that " benefit" is reconstructed empirically from the analysis of observed choices between alternatives without these decisions selfish motives must be assumed in the ethical sense.

The principle of rational behavior has been transferred to two institutions:

• The households that within its capacity (determined by given prices, wages and other income ), the utility-maximizing alternative select ( the household optimum).

• The companies that select under the respective conditions as perfect competition, oligopoly, monopoly, etc., and given the production technology, the corporate objective (often, but not necessarily, profit maximization) corresponds best.

Neoclassical theory as the optimization decisions

Taken together, the results using the neoclassical marginal analysis all economic events on individual optimization decisions back: companies maximize their profit, resulting in the factor demand curves and supply curves goods arise. Households maximize their utility, hence the factor supply curves and consumer demand curves result.

Based on this developed by Leon Walras basic principle, uses the neoclassical theory, mathematical methods, which are often called " marginalism ". By Carl Menger, Friedrich Wieser and Eugen Bohm- Bawerk introduced the marginal calculus, they have in a sense rediscovered two hundred years after Newton and Leibniz differential calculus.

From the basic principle of Walras shows that the neoclassical theory basically set up as a system optimization problems under constraints and with the mathematical methods of maximization can be analyzed ( for example, the Lagrangemethode ). This results in optimized conditions, such as the second law of Gossen or the value of the marginal product rule.

During the development of this basic principle has been refined by the behavior within the household ( economic theory of the family of Gary Becker) and within the company ( principal-agent theory ) was considered as an optimization. In addition, the approach is extended to other areas such as politics ( New Political Economy ) or legal system.

Perfect Market

Many models of neoclassical theory assume perfect markets, both for the study of real markets as well as a reference in comparison to models imperfect competition. It is assumed that the market dictates the prices and the entrepreneur reacts as price takers.

However, there are also models of imperfect competition analyzes:

• Monopoly ( monopsony ): There are Good for the considered only one supplier (or demand ). The extent provided by producers (or requested ) Quantity pricing is determined.
• Duopoly, oligopoly: There are two or more providers. To analyze this case further assumptions on the strategic behavior of firms must be made.

Other standard assumptions

• Information and information retrieval: basic models of neoclassical economics are based on complete information. This assumption, however, in many models replaced by limited information. In addition, information retrieval can be integrated by search costs and transaction costs are taken into account.

• No externalities: production decisions of an entrepreneur only act on the market for the consumption or the production of other individuals. The environmental economics can be described as that field of neoclassicism, which dispenses systematically in terms of environmental externalities in this standard assumption.

• Private Goods: The goods under consideration donate only the benefits that it has ( rivalry principle). All other individuals can be excluded by legal and / or technical measures of consumption (exclusion principle). The model can be extended to public goods ( public goods ).

For the analysis of institutional arrangements such as contracts, private property, businesses, electoral systems and constitutions under the New Institutional Economics, some of the additional assumptions are repealed.

Benefits

The neoclassical modeling allows a ( mathematically exact ) calculation of variables such as price, quantity sold, etc. These can be used to predict and make the theory falsifiable. In contrast to Keynesian macroeconomics neoclassical macroeconomics is not based on assumptions of aggregate sizes, but on assumptions of individual behavior, the aggregate sizes are calculated from this model internally. The mathematical simplicity of the basic model allows a wide plethora of extensions. Likewise, the neoclassical model serves as a benchmark for further theories (which are the basic assumptions of the model loosen the part).

Disadvantages

Since the determination of the benefit is empirical (it is assumed that any actual decision of a consumer is optimal), can be explained by the neoclassical model almost arbitrary actions. More accurate predictions will in part only by further assumptions on preferences (eg, monotonicity or quasi -linearity ), but which in reality do not have to be given. However Realistic assumptions may be mathematically complex, or insoluble, and are therefore not taken.

Central theses

The neoclassical theory supplied with their marginalist consideration the theoretical basis for the resolution of the paradox of value in classical political economy. The value ( expressed as a price ) of a commodity arises then from its marginal benefit (demand) and its marginal cost (supply).

From classical economics, the neoclassical raised, inter alia, by the shifted question: paradigm of classical music was the production: You asked about the origin, growth and distribution of economic wealth in the society. Paradigm of neoclassical economics is the exchange (trade ) between rational individuals: It asks for the optimal distribution ( allocation) given scarce resources to different uses and individuals with fixed interests and facilities given to goods and skills.

The distribution follows the theory of marginal productivity and not the labor theory of value.

In the neoclassical theory, there is a sharp distinction between the real sector of an economy in which the relative prices of all goods and factors of production, the production quantities of the various consumer goods and distribution ( allocation) of factors of production is determined in the production of various goods, and the monetary sector in which, ultimately, only cash prizes will be determined, and from which no ( longer-term ) effects on the real sector. These real economic " neutrality of money " finds its theoretical explanation in the quantity theory of money.

Another central element of the neoclassical theory is the equilibrium analysis. Economic analysis is understood as essentially the analysis of markets in the balance of supply and demand: Be it (with Léon Walras ) in terms of an instantaneous general equilibrium in all markets (determined by solving a system of equations ), or be it ( at Alfred Marshall ) in the sense of partial equilibria to the considered markets in different time horizons (eg very short notice for the determination of market prices, or long term for the determination of normal prices ).

The neoclassical theory always assumes the functioning and stability of market economies. In all markets there is a balance between supply and demand, whereby the prices of all consumer goods and factors of production are determined. Disturbances and crises are attributed to imperfections of the market, the market place after removing these imperfections back into balance (see also General equilibrium theory ).

One consequence of this combination of individual optimization and equilibrium thinking is the impossibility of involuntary unemployment and overproduction, as long as competitive markets do not (for example, forced unions excessive wages ) are restricted in their function through government intervention or other distortions. The neoclassical thus sees the saysche theorem is always satisfied, the general ( aggregate ) and longer-term imbalances excludes, as each ( aggregate ) supply also creates its own demand. In view of the capital market, this assumes that the interest rate on the price of capital and savings and investment are in equilibrium.

Analysis

The neoclassical theory analyzes the economy by two fundamentally different methods, the Positive Theory and the Normative Theory.

Positive theory

The Positive theory assumes that the economy is well modeled by the basic assumptions made ​​, derives from these assumptions with mathematics conclusions and verifies the validity of the results with econometric methods. In analyzing this equilibrium concepts are at the forefront. In this way, working as the general equilibrium theory and game theory.

Normative theory

The Normative theory tries to determine an optimal state for a neoclassical modeled society. This creates the problem that very many individual optimization conditions are to be considered according to the basic assumption of homo economicus, which are not identical in most cases, as for example, households compete for the same goods and companies to the same factors. To solve this problem, there are basically two ways to come to a mono-criteria problem:

Linking Positive and Normative Theory

For the case of perfect competition are the main theorems of welfare economics creates a link of equilibria and Pareto optima.

Historical development

The origin of neoclassical economics is closely connected to the marginalist revolution known as: first, the transfer of marginal analysis on the demand decisions of households. The resulting marginal utility theory of consumer demand and the value was about the same time and independently of each other developed around 1870 by William Stanley Jevons in England, Menger in Austria and Leon Walras in Switzerland. Thus, the classical value and price theory was ( ultimately a pure production cost theory ) be replaced or supplemented by a subjective theory of value.

With the world economic crisis, the neoclassical got into a credibility crisis because its main flow did not seem to give a satisfactory explanation for such a serious crisis in which the self-healing powers of the market seemed to fail, even suggesting also promising economic policy recommendations. These gaps filled in. John Maynard Keynes and his General Theory of Employment, Interest and Money, and based thereon Keynesianism, which promised both a systematic explanation of the possibility of longer-term underemployment equilibria as well as indications of economic policy paths from such crises.

However, this did not mean an end to the neoclassical theory: On the one survived neoclassical thinking in microeconomics, which can be understood in its core than the formally more perfect development and extension to new issues of the basic intuitions of neoclassicism, on the other hand experienced neoclassical thinking a renaissance in macroeconomics after his hand came in the wake of the seventies of the twentieth century Keynesianism in a credibility crisis.

Criticism

John Maynard Keynes disagreed before the global economic crisis in 1923, alleged by the neoclassical theory neutrality of money. With a strong price deflation, it will come to a negative return on investment and a loss of value of the stock of goods and commodities. It is therefore in the interest of every entrepreneur to adjust his business if possible and to postpone investments as long as possible. The return on the investment is therefore affected by a change in prices, while the neoclassical claims that the rise or fall of prices would have no influence on the decisions of consumption and investment.

The economy is controlled by Keynes on monetary influences, because the amount of potential savings of households depends on the net investment in the company. When canceled, the investment in a serious deflationary depression like 1929 to 1933 had about the savings capacity of households are reduced accordingly, so Keynes:

The central thesis of neoclassical economics that market crises and involuntary unemployment would be impossible based on the proposition to be proved thesis already falsely in the assumptions of the argument ( saving not sink the scale of production ) hidden retaining fallacy: The model assumes that the saving of households savings in the amount of the difference between the consumption of households and production at full employment generating. These savings would be offered by the households in the capital market of the model on which the company ask savings for their investment. If the savings exceed the planned investment by the company, the interest rate would go down. A lower interest rate would increase the investment to saving and investment are exactly the same, so that the production potential would be always at full capacity. However, the saving of households does not generate savings that could be offered on a capital market: from John Maynard Keynes was shown that the savings is always identical to the net investment and results only from these. The fact that the savings of households producing an aggregate savings to their consumption, according to the paradox of thrift is an over generalization only for individual cases, upon consideration of an individual household, valid rule.

In the new institutional economics, such as in transaction cost theory or principal-agent theory, factors such as asymmetric information and opportunism are considered. Moreover, bounded rationality is often a more realistic assumption than that of the fully rational homo economicus.

Economists such as Joan Robinson and Edward Hastings Chamberlin tried to design a more accurate picture of the reality with which the imperfect competition model.

Representatives of the Environmental Economics accuse the neo-classical, for ignorance of the classical production factor to tend the soil in which the ecological limitations of human economic activity spiegle. With more fundamental criticism of the nature, power and justice oblivion neoclassical to ecological economics seeks to an economic theory of sustainable development.

Joseph Schumpeter and others opposed the static view of the neoclassical school because it can explain the dynamics of economic processes adequately.

In the capital controversy or in the Neoricardianische theory, the price, distributive, growth-and capital- theoretical statements of neoclassicism be questioned. A basis for this criticism, the font Piero Sraffa's "The Law of Returns under Competitive Conditions" (1926 ), criticized in the Sraffa in particular the adoption of a diminishing marginal product of labor, which brings far-reaching consequences for all other assumptions of neoclassical economics with it. In 1960 Sraffa and other researchers also criticized the neoclassical assumption of a single capital without which it can not claim to cover the interest rate with an assumed marginal product of capital.

A comprehensive critique of neoclassical economics Steve Keen presented with the book " Debunking Economics", also prominent neoclassical authors against the neoclassicism be mentioned in the said next above, whose publications were so far ignored in standard neoclassical textbooks.

In addition to these multiple internal controversies is also criticism from external side, or more precisely the philosophy of science, practiced. In the German-speaking area in this context is especially criticism Hans Albert became known, who has called the way neoclassical model building as a "model - Platonism ." Albert criticized it in the first place, the fact that modeling is often put under comprehensive ceteris paribus reservations, where you often have no knowledge of all relevant boundary and initial conditions that characterize a sub -else match - conditions - situation closely. However, this ceteri paribus reservations are designed to complete immunization of a theory against experience: If it appears that a theory as empirically refuted, you can always retreat to the position that the theory but agree, only the relevant boundary and initial conditions in the specific case were not met. The scientific theorist Alexander Rosenberg takes the view that the neoclassical often presenting no empirical meaty theories, so do not operate tangible empirical research, but only complex mathematics that have to do with reality only slightly.