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Neoclassical Economics

Neoclassical Economics

The origin of a classical approach to economics goes back to the 18th century. Adam Smith’s book on Economics, An enquiry into the nature and causes of wealth of nations was published in the year 1776. Neoclassical theory proposes or assumes that the market as an abstract idea. And all the players in the market, i.e. the buyers and sellers as well are ‘actors’ who are playing their part. It also proposes that markets will reach equilibrium, if all the sellers who want to sell at or below a given price will sell to buyers who are willing to buy at or above a given price, the price is worked out in the market.

Neoclassical theory is an approach to economics that relates supply and demand to an individual’s rationality and his or her ability to maximize utility or profits. The concept used mathematical equations to study the various aspects of economy. This approach was developed in the late-nineteenth century, based on books by William Stanley Jevons, Carl Menger and Leon Walrus.

It provides an analytical framework from which to argue in favor of the existing distribution of wealth: wealth is the result of the decisions that individuals make, not the result of processes of coercion, theft, colonization, etc. In neoclassical theory, those who become wealthy do so by hard work and frugality, while those who become poor do so by profligacy and laziness. It must be noted that the economy will attain equilibrium only when there are unrestrained market exchanges, allowing individuals to take decisions without the interference from the government.

Adam Smith proposed the concept of an ‘Invisible Hand’. The idea of the invisible hand was that, in a free market, individuals conduct their economic affairs in their own best interest and the overall economy will work well. As Smith put in, “in a market economy individuals, while pursuing their own self-interests, seem to be led by an ‘invisible hand’ to maximize the general welfare of everyone in the economy.”

Since its inception, the neoclassical approach has grown to become the primary take on the modern-day economics. It is one of the widely taught form of economics.

Neoclassical concept of economics is criticized by Keynesian Concept of economists. They do not believe in the abstract assumptions taken by the classical economists.

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