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Neoclassical Economics





Classical writers worked with horizontal supply curves and ignored the role of demand curves. Around 1870, three scholars independently laid the foundation for modern economics by devising an analysis that could synthesize both demand elements and cost elements. They were W. Stanley Jevons (1835-1882) in England, Carl Menger (1840-1921) in Austria, and Leon Walras (1834-1910) in Switzerland.

The key element in the neoclassical revolution was to understand how consumer preferences (called ‘utility’) enter the demand for goods. The neoclassical economists provided the missing link in a complete theory of the market mechanism by showing that demand depends upon marginal utility.

Walras discovered how to analyze the economy as a whole – as a general equilibrium of all the labor, land, and product markets. Joseph Schumpeter (1883-1950) used to say that of all great economists, surely Walras was the greatest – for it was he who discovered how all markets interact in a general equilibrium.

Ever since Adam Smith analyzed the harmful effects of government regulation of the market, economists have devised technical tools that could measure the losses that arise from government interferences with a competitive equilibrium; important innovations were the concepts of consumer surplus devised by Alfred Marshall and allocational efficiency introduced by Vilfredo Pareto. But neoclassical economists were not all proponents of laissez-faire. Most of the great economists have been critical of capitalism’s inequality.

Even as economics became more ‘scientific’, it never lost its interest in policy. Most of the great economists were inspired by the idea how to help improve the world. But, however much the great economists wanted to bring about a more just economic order.





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