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NEOCLASSICAL ECONOMICS 1. World view - individualistic, atomistic society - rationalism - markets and market equilibrium are natural - free markets coordinate behavior of individuals and enable optimal use of resources and maximization of economic well-being (given their preferences and resources) 2. Values - Claims to be value-free => positive ECONOMICS versus normative economics - Satisfaction of individual wants is a good thing => consumer sovereignty - Individuals’ optima lead to social optimum (Bentham’s calculus of happiness or Pareto optimality) - Mostly liberal 3. Goals - to show that a complete free market system coordination can result in spontaneous economic and social harmony - prediction of individual agents behavior and of likely results of alternative policies - ? practical relevance of conclusions 4. Methodological practice - methodological individualism - abstract-deductive reasoning, rigorous logic, mathematical - statics or comparative statics - “dynamics” in mechanical time or logical time only - models of partial or general equilibrium - partial equilibrium - => instrumentalism - empirical analysis employed to test the rationality hypothesis (fundamental rationality) and to predict outcomes upon parametric change 5. “Hard-core” assumptions - economic agents are egoistic (self- interested) rational economic agents (with consistent ranking of preferences, given preferences and given endowments) aiming at maximizing utility (cardinal or ordinal) - Marginal analysis leading to optimal decisions (first best optimality) 6. “Protective-belt” assumptions - Agents are price takers - Agents are perfectly informed - Diminishing marginal physical products - Substitutability between goods and factors - U-shaped short-run marginal and average costs 7. Central concepts - Partial equilibrium - General equilibrium - Indifference analysis - Perfect competition - Pareto optimality - Externalities 8. Positive heuristic - Statement of a problem and procedures how to solve it and get results e.g. consumer optimum under given constraints 9. Evidence - Intuitive (appealing to common experience) - Testing of basic hypotheses regarded sometimes unnecessary - Indirect testing in laboratory conditions (experimental economics) 10. Economic policy conclusions - no active state intervention - state intervention aiming at maintaining competitive conditions - state intervention aiming at alleviating/solving externalities and increasing welfare by redistribution (old welfare economics)