neo-classical economics

Economics, as an academic discipline, is predominantly the study of the allocation of scarce resources to alternative uses via market prices. The dominant paradigm in modern economics is neo-classical theory which developed from the so-called marginalist revolution pioneered by Leon Walras, William Stanley Jevons, and Alfred Marshall in the late nineteenth century. This posits that prices are determined by marginal utility (of consumers) and marginal productivity (of factors of production). Neo-classical theories are based on simple behavioural models at the micro-level (households, firms) which assume perfect information, freedom of movement, individual choice, optimizing and rational decision-making. The basic conditions for these models are private enterprise, consumer sovereignty, and market-clearing prices. Institutional influences on individual behaviour are defined exogenously as given characteristics and do not form part of the basic behavioural model. However, game-theoretic approaches have been developed recently to explain individual behaviour within institutional rules.

A recent development in modern economic theory, developed in the USA, goes under the name of ‘political economy’ and has nothing to do with radical or Marxist versions to which the label is more commonly applied. This literature applies neo-classical principles to areas outside the economy, such as public policy, focusing on artificially induced scarcities (‘rents’) which are produced by political pressure exerted by economic interest groups.