Neoclassical Economics: History, Features, Assumptions, Criticisms and Role of Government

Neoclassical economics is based on the supply and demand of a person’s rationality and the ability to maximize profit or utility. It was developed from the classical economics in the nineteenth century. The theory has been criticized based on a number of certain critical issues which it has failed to address. The government plays a role in providing public goods and services which the private enterprise may be unable to offer. The monetary regulation, taxes and expenditures are the key elements which the government relies on to increase economic growth and stability.

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Neoclassical Economics
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Neoclassical Economics
The neoclassical economics is a technique in economics which is based on the supply and
demand of a person’s rationality and the ability to maximize profit or utility. It was developed
from the classical economics in the nineteenth century. It began during the times of marginal
revolution and the concept of utility as a fundamental element in estimating value was identified.
According to this school of thought, the consumers tend to control the various market forces that
are demand and price. Such an argument is based on the fact the fundamental objective of the
customer is to maximize utility while that of the company is profit maximization. The demand
for products is affected by the perception of the different customers on products as being
valuable compared to the production cost. Often there is a possibility that a particular economic
option will transform to become valuable in the future and this is typically the base upon which
the various economic options are made. It is also considered to be utilitarian, and this is typically
in its value theory since it applies the marginal theory of value as one of its equations and
models.
According to this school of thought savings determines the investment. It mainly focuses
on the market equilibrium and growth at full emolyment.usually an efficient allocation of the
resources in an economy is due to the competition in the market.
History of Neoclassic Economics
The approach consolidated the utility with the original classical cost of production theory
and this was to help illustrate factor prices and products and the allocation of resources. The
father of the neoclassical economics was Alfred Marshall and he brought the concepts of demand
and supply, costs of production, marginal utility and the price elasticity of demand. It was
developed in the nineteenth century from the classical economics. The classical economics

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mainly focused on the distribution theory. Later in the mid nineteenth century, a section of
English speaking economists discussed on the distribution and value theories. And this was to
discuss the relationship which exist between price of a product and value. However this was
challenging and there was a need for another approach (Morgan, 2015). In the 1870s, some
economists expressed their views on value as being due to the relationship between subjective
elements called supply and demand and costs of production and this was the birth of the
neoclassical economics. The period was referred to as the marginal revolution in economics and
the idea came to be known as the neoclassical economics.
Torstein was the first to use neoclassical economics and later it was used by other
individuals such as John Hicks and George Stigler. The models of Neoclassical economic tend to
assume that all the individuals can obtain information freely to make decisions and such an
assumption has made decision making to be based on the mechanical application of
mathematical rules. The school of thought is based on the rejection of economics of Marxist
which believed that resource allocation would be made by the market systems. The neoclassical
economics has been linked to the Adam Smith wealth of nation in 1776 which focused on the
microeconomics and macroeconomics (Morgan, 2015). According to Adam Smith, the
government intervention in the economy does not really correct some of the externalities and
hence it was prudent to allow such externalities to be corrected by the prevailing economic
conditions. It was from the idea that the neoclassical economics was developed in the 1870s.

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Features of Neoclassical Economics
Rationality
Individuals are assumed to be rational in their behavior, and therefore, they set their goals
in the most efficient way possible (Morgan, 2015). The individuals tend to maximize what they
have the ability to purchase while the firms, on the other hand, maximize on profit making.
Methodological Individualism
It relates to what individuals, that is their behavior which aims at maximizing on utility.
The theory, therefore, focuses on how different individuals influence the economy. The
neoclassical economy, therefore, looks into the key characteristics of the individuals such as taste
and preferences (Hardt, 2017). Such characteristics of the individuals are usually fixed or change
based on the prevailing economic conditions.
Assumptions of Neoclassical Economics
According to Weintraub (2015), there are several assumptions associated with this school f
thoughts, and they include the following as stated below;
 Companies generally aim to maximize profits while the consumers tend to maximize on
utility.
 The actions of individual consumers are independent and are based on the available and
relevant information.
 The choices made by the consumers depends on the rational preferences, and thus each
choice can be assigned a particular value.
 The market transactions typically reveal the welfare of human and thus a little
contribution is made to the welfare of humans by the non-market goods.

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Criticisms of Neoclassical Economics
According to Ruccio & Amariglio (2016), the theory has been criticized based on a
number of certain critical issues which it has failed to address. For example, it is considered to
contain a normative bias such that it does not provide factual ideas on the economy, but instead,
it only highlights what individuals ought to believe. The other criticism is that it tends to rely a
lot on various complex mathematical models which are difficult to comprehend by different
individuals (Morgan, 2015). Further, the neoclassical theory primarily focuses on describing the
theoretical world instead of giving explanations on the real economies. According to the
neoclassical economics, human are rational while making decisions on the choices of items they
tend to make, however, this has been seen to ignore some of the elements of human behavior.
The role of the Government
According to Davidson & Davidson (2016), the neoclassical economics believe in the
fiscal policy and the government uses such a policy to promote economic growth using stable
prices. The policy entails a cut in government expenditure and reduction in tax rates to enable the
private sector and the economy to grow. The government also uses the fiscal policy in the
neoclassical market to control prices of various products and this involves the imposition of taxes
on the commodities.
Based on the ideas of the neoclassical economics, the government tends to the shape the
market through a number of ways. For example, it corrects some of the market failures such as
economic showdown and external costs. It uses both the money and fiscal policies to correct
such failures of the market (Toye, 2014). The other role of the government is that it offers a legal
system which helps to ensure that laws are enforced and that the rights of the private property is

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protected from other individuals who may decide to break the law. Such a role is achieved
through government regulation policies.
According to neoclassical economics, the government plays a role in providing public
goods and services which the private enterprise may be unable to offer. Such a provision of such
items tend to reduce shortage of supply and hence create demand. The government uses the fiscal
policy through an increase of its expenditure towards resource allocation for the provision of the
products and services (Commons, 2017).
Lastly, the government has a role in economic growth and stability. The monetary
regulation, taxes and expenditures are the key elements which the government relies on to
increase economic growth and stability. Such a role ensures that unemployment is reduced. The
policies used are mainly the fiscal and monetary policies (Afonso & Alves, 2014).

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References
Afonso, A., & Alves, J. (2014). The role of government debt in economic growth.
Commons, J. R. (2017). Legal foundations of capitalism. Routledge.
Davidson, G., & Davidson, P. (2016). Economics for a civilized society. Routledge.
Hardt, Ł. (2017). Introduction. In Economics Without Laws (pp. 1-10). Palgrave Macmillan,
Cham.
Morgan, J. (Ed.). (2015). What is neoclassical economics?: Debating the origins, meaning, and
significance. Routledge.
Ruccio, D. F., & Amariglio, J. (2016). Postmodern moments in modern economics. Princeton
University Press.
Toye, J. (2014). Is there a new political economy of development?. Occasional Paper, (2), 160-
185.
Weintraub, E. (2015). Roy (2008).“Neoclassical Economics.”. The Concise Encyclopedia of
Economics.