What Is Neoclassical Economics?
Neoclassical economics is a school of thought in economics that views economics as a study of people’s decisions based on scarcity and how they allocate resources to meet their needs and wants. It postulates that rational people make rational decisions and that economic markets are self-regulating. Neoclassical economics is based on the theories of classical economics, which began in the late eighteenth century. Neoclassical economics is typically referred to as “mainstream economics” and has become the dominant economic school of thought in the modern world.
Key Assumptions of Neoclassical Economics
Neoclassical economics is based on four key assumptions:
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People act rationally – Consumers and producers act rationally and make decisions based on the most efficient option available.
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People face trade-offs – People must make trade-offs when making decisions because of limited resources.
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Markets are self-regulating – Markets are naturally efficient and self-regulating when the right incentives are in place.
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Economic growth is possible – Economic growth can be achieved by focusing on maximizing productivity and efficient allocation of resources.
Criticisms of Neoclassical Economics
Neoclassical economics has been the target of criticisms from many different angles and perspectives. Here are some of the most common criticisms of neoclassical economics:
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It is overly simplistic – Neoclassical economics assumes that people are always rational and their decisions are based solely on self-interest. This simplistic view does not take into account the complexity of real-world behavior and does not allow for consideration of external and non-economic factors.
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It ignores externalities – Neoclassical economics views the market as a self-regulating system and ignores externalities, or unintended consequences of economic decisions. This means that environmental, social, ethical, and other external factors are not taken into account, potentially leading to inefficient and harmful outcomes.
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It ignores distributional issues – Neoclassical economics assumes that economic growth is possible without any attention to issues of inequality. This idea neglects the importance of an equitable distribution of resources and the need for policies to promote fairness and reduce poverty.
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It focuses on short-term outcomes – Neoclassical economics is focused on short-term outcomes, such as efficiency and growth, with little consideration for long-term impacts. This short-term focus can lead to decisions that have negative long-term consequences, such as increased pollution and environmental damage.
Neoclassical economics is a school of thought in economics that views economics as a study of rational decisions based on scarcity. It is based on four core assumptions and has become the dominant economic school of thought in the modern world. However, neoclassical economics has been criticized for being overly simplistic, ignoring externalities, ignoring distributional issues, and focusing on short-term outcomes. Despite these criticisms, neoclassical economics continues to be the basis of much of the current economic thought and the dominant school of economics.
