The neoclassical school is a direction formed in the economic sphere, it appeared in the nineties. The current began to develop during the second stage of the marginalist revolution, and this is due to the creative beginning of the Cambridge and American schools. It was they who refused to consider the global problems of the market in economic terms, and decided to identify patterns of optimal management. So the neoclassical school began to develop.
Theory of theory
This trend has been developed thanks to advanced methodologies. Key ideas of the neoclassical school:
- Economic liberalism, "pure theory."
- Marginal principles of equilibrium at the microeconomic level and subject to full competition.
They began to analyze economic phenomena, give them an assessment, and this was done by business entities, which involved numerical research methods and applied the mathematical apparatus.
What is the object of study of economic science?
The research object was two:
- "Clean economy." The main point is that you need to distract from national, historical forms, from the types of property. All representatives of the neoclassical school, as well as the classical one, wanted to preserve a pure economic theory. They suggested that all researchers not be guided by non-economic estimates, since this is completely unjustified.
- Scope of exchange. Production fades into the background, but distribution, exchange is considered the decisive element of social reproduction.
More precisely, the neoclassical practitioners, using a functional approach in practice , have combined the field of production, distribution, and exchange into two equal areas of holistic system analysis.
What is the subject of study of this trend?
The neoclassical school of economics chose the following as the subject of research:
- The subjective motivation of all activities in the field of economics, which is trying to maximize the benefits and reduce costs.
- The optimal behavior of business entities in an environment where resources are limited, to better meet human needs.
- The problem of establishing the laws of rational management and with free competition, the justification of the laws that are laid in the formation of pricing policy, wages, income and its distribution in society.
The differences between the classical and neoclassical schools
The formation of a neoclassical trend in economics was made possible thanks to the work of an English economist named Alfred Marshall. It was this man who developed the "Principles of an Economist" in 1890 and is considered the legitimate founder of the Anglo-American school of economic science, which received even more good influence in other countries.
Classics focused on pricing theory, and the neoclassical school raised the laws of pricing policy formation, analysis of market demand and offers into the center of research. It was A. Marshall who proposed the formation of a “compromise” direction regarding pricing, completely reworking the Ricardo concept and linking it with the Boehm-Bawerk direction. Thus, a two-factor theory of value was formed, based on an analysis of the relationships between supply and demand.
The neoclassical school never denied the need for state regulation, and this is just one of the main differences from the classics, however, it is the neoclassicists who believe that influence should always be limited. The state creates the conditions for doing business, and the market process, built on competition, is able to guarantee balanced growth, the balance between requests and offers.
It is also worth saying that the main difference of the neoclassical economic school is the practical application of graphs, tables, certain models. They have this not only illustrative material, but also the main tool for theoretical analysis.
What about neoclassical economists?
They represent a heterogeneous environment. They differ in their sphere of interests, they study various problems and ways to solve them. Economists also differ in the applied methods and approaches to the analysis of all activities. This is also a difference from the classics, who have more uniform views, conclusions that are shared by virtually all representatives of this direction.
More about the principle from A. Marshall
The neoclassical school of economics has the most important principle of equilibrium, which defines the whole concept of this direction. What does equilibrium in the economy mean? This is the correspondence that exists between demand and supply, between needs and resources. Thanks to the pricing mechanism, consumer demand is set or production volumes increase. It was A. Marshall who introduced the concept of “equilibrium value” into the economy, which is represented by the intersection of the supply and demand curve. These factors are the main components of the price, and utility and costs play an equal role. A. Marshall in his approach takes into account the objective and subjective aspects. In a short period, equilibrium value is formed at the intersection of supply and demand. Marshall argued that the principle of production costs and “final utility” is a key component of the universal law of supply and demand, each of which can be compared with a blade of scissors.
The economist wrote that one can endlessly argue with the fact that the price is regulated by the costs of the production process, as well as about what exactly cuts a piece of paper - the upper blade of scissors or still lower. At a time when supply and demand are in equilibrium, the number of goods that are manufactured in a given unit of time can be considered equilibrium, and the cost of their sale is considered to be the equilibrium price. Such a balance is called stable, and the cost at the slightest hesitation will tend to return to its previous position, while recalling the pendulum that fluctuates from side to side, trying to return to its original position.
The equilibrium price tends to change, it is not always constant or given. This is due to the fact that its components are changing: demand either grows or falls, as, incidentally, the supply itself. The neoclassical school of economics claims that all changes in price are due to the following factors: income, time, changes in the economic sphere.
According to Marshall, an equilibrium is an equilibrium observed only in the commodity market. This state is achieved only within the framework of free competition and nothing else. The neoclassical school of economic theory is represented not only by A. Marshall, but there are other representatives that are worth mentioning.
The concept of J. B. Clark
An American economist named John Bates Clark used the principle of limit values to solve the problems of the distribution of "public profit". How did he want to distribute part of each factor in the product? He took as a basis the correlation of a couple of factors: labor and capital, and then he made the following conclusions:
- With a numerical decrease in one factor, the return will immediately decrease even if the other factor remains unchanged.
- The market value and share of each factor are set in full accordance with the marginal product.
Clark put forward a concept in which it is argued that the wages of workers coincide with the size of the products that you want to "attribute" to marginal labor. When hiring, an entrepreneur should not exceed certain boundary indicators, beyond which employees will not bring him additional profit. The goods created by the “marginal” employees will correspond to the payment of the invested labor. In other words, marginal product equals marginal profit. The entire payroll is presented as a marginal product, which is multiplied by the number of employees hired. The level of payment is established due to the manufactured products by additional employees. The businessman’s profit consists of the difference that is formed between the value of the manufactured product and the share that makes up the salary fund. Clark put forward the theory that the income of the owner of a manufacturing business is presented as interest on invested capital. Profit is the result of entrepreneurship and hard work, is formed only when the owner is an innovator, constantly introduces new improvements, combinations to improve the production process.
The neoclassical direction of the school according to Clark is not based on the principle of spending, but on the basis of the effectiveness of production factors, their contribution to the manufacture of goods. The price is formed only by the cost of the increase in goods when additional units of the price factor are used in the work. The performance of factors is established by the principle of imputation. Any auxiliary unit of the factor is charged with the marginal product, without taking into account other factors.
Sinjwick and Pigou Welfare Theories
The important principles of the neoclassical school were promoted using the theory of welfare. A great contribution to the development of the current was made by Henry Sidgwick and Arthur Pigou. Sidzhvik wrote his treatise "The Principle of Political Economy", where he criticized the understanding of wealth among the representatives of the classical direction, their doctrine of "natural freedom", which states that any individual works for the benefit of the whole society. Sidzhvik says that private and public benefits often do not coincide at all, and free competition guarantees the productive production of wealth, but cannot give a fair and just division. The system of “natural freedom” itself makes it possible to erupt in conflict situations between private and public interests, in addition, the conflict arises even within the public interest, and therefore, between the benefits of current and future generations.
Pigou wrote The Economic Theory of Welfare, where he put the concept of national dividend in the center. The main task he established was to determine the correlation of the economic interests of society and the individual in terms of distribution problems, using the concept of “marginal net product” in practice. The basic concept in Pigou’s concept is the divergence between private benefits, costs from economic decisions of people, as well as public benefits and expenses that fall to everyone’s share. The economist believed that it was not market relations that penetrated very deeply into the industrial economy, they were of practical interest, but the system of subsidies and state taxes should act as a means of influencing them.
The Pigou effect aroused unprecedented interest. Classics believed that flexible wages and price mobility are two key components for balancing investments and savings, as well as for the supply and demand of funds at full employment. But no one thought about unemployment. The theory of the neoclassical school in conditions of unemployment was called the Pigou effect. It demonstrates the impact of assets on consumption, depending on the money supply, which is reflected in the net debt of the government. The Pigou effect is based on “external money,” not “internal”. With lower prices and wages, the ratio of “external” liquid wealth to national profits increases until the desire to save is saturated and stimulates consumption.
Representatives of the neoclassical school were not limited to only a few economists of that time.
Keynesianism
In the 30s, there was a deep recession in the US economy, because many economists tried to improve the situation in the country and restore its former power. John Maynard Keynes created his interesting theory, in which he also refuted all the views of the classics on the assigned role to the state. This is how Keynesianism of the neoclassical school came about, which examined the state of the economy during the period of depression. Keynes believed that the state is obliged to intervene in economic life due to the lack of necessary mechanisms for conducting free market activity, which would be a breakthrough and exit from depression. The economist believed that the state was obliged to influence the market to increase demand, because the cause of the crisis lay in the overproduction of goods. The scientist proposed to put into practice several instruments - a flexible monetary policy and a stable monetary and financial policy. This would help to step over wage inelasticity by changing the number of monetary units in circulation (if you increase the money supply, then wages will decrease, and this will stimulate investment demand and employment growth). Keynes also recommended increasing tax rates so as to finance unprofitable enterprises. He believed that this would reduce unemployment, remove social instability.
This model somewhat weakened the cyclical fluctuations in the economic sphere over the course of a couple of decades, but it had its own shortcomings, which manifested itself later.
Monetarism
The neoclassical school of monetarism replaced Keynesianism, it was one of the neoliberalism trends. The main conductor of this trend was Milton Friedman. He argued that imprudent government intervention in economic life would lead to inflation, a violation of the rate of “normal” unemployment. The economist strongly criticized and criticized totalitarianism and the restriction of human rights. He studied America’s economic relations for a long time and came to the conclusion that money is the engine of progress, therefore its teaching is called “monetarism”.
Then he suggested his own thoughts for the long-term prospects of the country's development. Monetary methods for stabilizing economic life and guaranteeing employment are at the forefront. They believe that finance is the main tool that shapes the movement and development of economic relations. State regulation is required to be minimized and limited to the usual control of the monetary sphere. The change in money supply should directly correspond to the movement of pricing policy and the national product.
Modern realities
What else can be said about the neoclassical school? Its main representatives are listed, but it’s interesting - is this current applied in practice now? Economists have revised the teachings of various schools and neoclassics, including the development of a modern supply economy. What it is? This is a new concept of macroeconomic regulation of the economy by stimulating investment, containing inflation and increasing production. The main incentive tools were the revision of the tax system, the reduction of spending from the state budget on social needs. The main representatives of this trend are A. Laffer and M. Feldstein. It is these American economists who believe that policies aimed at stimulating supply will be the engine of everything, including overcoming stagflation. Now the recommendations of these two scientists are used by many countries, including the United States and Great Britain.
What is the result?
The neoclassical movement was a necessity in those days, because everyone understood that the theories of the classics did not work, because cardinal changes in economic life were required by many countries. Yes, neoclassical teaching turned out to be imperfect and in some of its periods completely inactive, but it was precisely such fluctuations that helped to shape the current economic relations, which in many countries are very successful and are developing very quickly.