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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)