The neoclassical school is a direction formed in the economic sphere, it appeared in the nineties. The current began to develop during the second stage of the marginalist revolution, and this is connected with the creative beginning of the Cambridge and American schools. It was they who refused to consider the global problems of the market in economic terms, and decided to identify patterns of optimal management. This is how the neoclassical school began to develop.
Ideological theory
This trend has developed thanks to advanced methodologies. The main ideas of the neoclassical school:
- Economic liberalism, "pure theory".
- Marginal equilibrium principles at the microeconomic level and subject to full competition.
Economic phenomena began to be analyzed, evaluated, and this was done by business entities, which involved numerical research methods and applied mathematical apparatus.
What is the object of study of economic science?
There were two objects of study:
- "Clean Economy". The main essence lies in the fact that it will be necessary to abstract from national, historical forms, from types of ownership. All representatives of the neoclassical school, as well as the classical one, wanted to preserve pure economic theory. They suggested that all researchers not be guided by non-economic estimates, as this is completely unjustified.
- Sharing sphere. Production fades into the background, but the decisive link in social reproduction is distribution, exchange.
To be more precise, the neoclassicists, applying the functional approach in practice, united the area of production, distribution, exchange into two equal spheres of a holistic system analysis.
What is the subject of this trend?
The neoclassical school of economics chose the following as the subject of study:
- The subjective motivation of all activities in the field of economics, which tries to maximize benefits and reduce costs.
- Optimal behavior of business entities in an environment where resources are limited to better meet human needs.
- The problem of establishing the laws of rational management and with free competition, the rationale for the laws that are put in the formation of pricing policy, wages, income and its distribution in society.
Differences between classical and neoclassical schools
The formation of a neoclassical direction in the economy became possible thanks to the worksEnglish economist named Alfred Marshall. It was this man who developed the "Principles of the Economist" in 1890 and is considered the rightful founder of the Anglo-American school of economics, which has gained even more good influence in other countries.
The classics paid their main attention to the theory of pricing, and the neoclassical school raised the laws of pricing policy formation, analysis of market demand and supply to the center of the study. It was A. Marshall who proposed to form a "compromise" direction regarding pricing, completely reworking the concept of Ricardo and linking it with the Böhm-Bawerk direction. Thus, a two-factor theory of value was formed, based on the analysis of supply and demand relationships.
The neoclassical school has never denied the need for state regulation, and this is just one of the main differences from the classics, but it is the neoclassicals who believe that influence should always be limited. The state forms the conditions for doing business, and the market process, built on competition, is able to guarantee balanced growth, a balance between demand and supply.
It is also worth saying that the main difference between the neoclassical economic school is the practical application of graphs, tables, certain models. For them, this is not only illustrative material, but also the main tool for theoretical analysis.
What about neoclassical economists?
They represent a heterogeneous environment. They differ in the sphere of interests, study various problems andways to solve them. Economists also differ in the methods used, approaches to the analysis of all activities. This is also a difference from the classics, who have more homogeneous views, conclusions that are shared by virtually all representatives of this direction.
Detailed principle from A. Marshall
In the neoclassical school of economics there is the most important principle of balance, which determines the whole concept of this direction. What does equilibrium mean in an economy? This is the correspondence that exists between supply and demand, between needs and resources. Due to the price mechanism, consumer demand is limited or production volumes are increased. It was A. Marshall who introduced the concept of "equilibrium value" into the economy, which is represented by the point of intersection of the supply and demand curve. These factors are the main components of the price, and utility and costs play an equal role. A. Marshall in his approach takes into account the objective and subjective sides. In the short run, the equilibrium value is formed at the intersection of supply and demand. Marshall argued that the principle of production costs and "ultimate utility" is a key component of the universal law of supply and demand, each of which can be compared to a scissor blade.
The Economist wrote that one can endlessly argue with the basis that the price is regulated by the costs of the production process, as well as with what exactly cuts a piece of paper - the upper blade of the scissors or the lower one. At the moment whensupply and demand are in equilibrium, then the number of goods that are produced in a certain unit of time can be considered equilibrium, and the cost of their sale can be considered the equilibrium price. Such a balance is called stable, and at the slightest fluctuation, the value will tend to return to its previous position, while reminding a pendulum that swings from side to side, trying to return to its original position.
The equilibrium price tends to change, it is not always constant or given. All due to the fact that its components are changing: demand is either growing or falling, as, indeed, the supply itself. The neoclassical school of economics claims that all changes in price are due to the following factors: income, time, changes in the economic sphere.
Marshall's equilibrium is an equilibrium observed only in the goods market. This state is achieved only within the framework of free competition and nothing else. The neoclassical school of economic theory is represented not only by A. Marshall, but there are other representatives who are worth mentioning.
JB Clark concept
An American economist named John Bates Clark used the principle of marginal values to solve the problems of distribution of "social profits". How did he wish to distribute a portion of each factor in the product? He took as a basis the ratio of a pair of factors: labor and capital, and then made the following conclusions:
- With a numerical decrease in one factor, the return will immediately decrease even withunchanged state of another factor.
- The market value and share of each factor is set in full accordance with the marginal product.
Clark put forward the concept, which states that the wages of workers coincide with the amount of production that needs to be "attributed" to marginal labor. When hiring, an entrepreneur must not exceed certain threshold indicators, beyond which employees will not bring him additional profit. The goods created by the "marginal" employees will correspond to the payment for the labor invested. In other words, marginal product equals marginal profit. The entire payroll is represented as the marginal product, which is multiplied by the number of employees hired. The level of payment is established due to the products produced by additional workers. The profit of a businessman consists of the difference that is formed between the value of the manufactured product and the share that makes up the salary fund. Clark put forward a theory according to which the income of the owner of a manufacturing business is presented as a percentage of the invested capital. Profit is the result of entrepreneurship and hard work, it is formed only when the owner is innovators, constantly introducing new improvements, combinations to improve the production process.
The neoclassical direction of the school according to Clark is not based on the principle of spending, but on the basis of the effectiveness of production factors, their contribution to the manufacture of goods. The price is formed only by the value of the increase in goods atthe use of additional units of the price factor in the work. The productivity of factors is established by the principle of imputation. Any auxiliary unit of the factor is imputed to the marginal product, without regard to other factors.
Welfare theories according to Singwick and Pigue
Important tenets of the neoclassical school were promoted through welfare theory. Henry Sidgwick and Arthur Pigou also made a great contribution to the development of the current. Sidgwick wrote his treatise "The Principle of Political Economy", where he criticized the understanding of we alth among the representatives of the classical direction, their doctrine of "natural freedom", which says that any individual works for the benefit of the whole society for his own benefit. Sidgwick says that private and social benefits often do not coincide perfectly, and free competition guarantees the productive production of we alth, but cannot give a true and fair division. The system of “natural freedom” itself makes it possible for conflict situations to break out between private and public interests, in addition, conflict arises even within the public interest, and therefore between the benefit of current and future generations.
Pigou wrote The Economic Theory of Welfare, where he put the concept of the national dividend at the center. He set the main task to determine the correlation of the economic interests of society and the individual himself in the aspect of distribution problems, applying in practice the concept of "marginal net product". The main concept in Pigou's concept is the divergence between private benefits, costs from economicdecisions of people, as well as social benefits and expenses that fall to the lot of each person. The economist believed that non-market relations penetrate very deeply into the industrial economy, are of practical interest, but the system of subsidies and state taxes should act as a means of influencing them.
The Pigou effect has aroused unprecedented interest. The classics believed that flexible wages and price mobility were the two key ingredients for balancing investment and saving, and for supply and demand for funds at full employment. But no one thought about unemployment. The theory of the neoclassical school under conditions of unemployment has been called the Pigou effect. It shows the impact of assets on consumption, depends on the money supply, which is reflected in the net debt of the government. The Pigou effect is based on "outside money" rather than "inside money". As prices and wages fall, the ratio of "external" liquid we alth to national income rises until the drive to save saturates and stimulates consumption.
Representatives of the neoclassical school were not limited to only a few economists of the time.
Keynesianism
In the 30s, there was a deep recession in the US economy, because many economists tried to improve the situation in the country and return it to its former power. John Maynard Keynes created his own interesting theory, in which he also refuted all the views of the classics on the assigned role of the state. This is how the Keynesianism of the neoclassicalschool, which examined the state of the economy during the depression. Keynes believed that the state is obliged to intervene in economic life due to the lack of the necessary mechanisms for conducting free market activity, which would be a breakthrough and a way out of the depression. The economist believed that the state must influence the market to increase demand, because the cause of the crisis lay in the overproduction of goods. The scientist proposed to put into practice several tools - a flexible monetary policy and a stable monetary policy. This would help overcome wage inelasticity by changing the number of currency units in circulation (if you increase the money supply, then wages will decrease, and this will stimulate investment demand and employment growth). Keynes also recommended increasing tax rates in order to finance unprofitable enterprises. He believed that this would reduce unemployment, remove social instability.
This model dampened some of the cyclical fluctuations in the economy over a couple of decades, but it had its own shortcomings that emerged later.
Monetarism
The neoclassical school of monetarism replaced Keynesianism, it was one of the directions of neoliberalism. Milton Friedman became the main conductor of this direction. He argued that imprudent state intervention in economic life would lead to the formation of inflation, a violation of the indicator of "normal" unemployment. Economist in every way condemned and criticizedtotalitarianism and the restriction of human rights. He studied the economic relations of America for a long time and came to the conclusion that money is the engine of progress, therefore his teaching is called "monetarism".
Then he offered his own thoughts for the long-term development of the country. At the forefront are monetary and credit methods of stabilizing economic life, job security. They believe that it is finance that is the main instrument that shapes the movement and development of economic relations. State regulation must be reduced to a minimum and limited to the usual control of the monetary sphere. Changes in the money supply should directly correspond to the movement of pricing policy and the national product.
Modern realities
What else can be said about the neoclassical school? Its main representatives are listed, but I wonder if this current is being applied in practice now? Economists have revised the teachings of various schools and neoclassicists, including the development of modern supply-side economics. What it is? This is a new concept of macroeconomic regulation of the economy by stimulating investment, curbing inflation and increasing production. The main instruments of stimulation were the revision of the tax system, the reduction of spending from the state budget for social needs. The main representatives of this trend are A. Laffer and M. Feldstein. It is these American economists who believe that supply-side policies will drive everything, including overcoming stagflation. NowMany countries, including the USA, Great Britain, use the recommendations of these two scientists.
What is the result?
The neoclassical trend was a necessity in those days, because everyone understood that the theories of the classics did not work, because many countries needed fundamental changes in economic life. Yes, the neoclassical doctrine turned out to be imperfect and in some of its periods completely inactive, but it was precisely such fluctuations that helped to come to the formation of today's economic relations, which in many countries are very successful and are developing very quickly.
