Neoclassical economics is a term applied to modern market-based economic theory. The term was introduced in the 1900 article “Preconceptions of Economic Science” by Thorstein Veblen, who described different realms of economic thought, particularly those market-based as contrasted to more socially oriented schools, such as Marxism.
Neoclassical economic theories dominate microeconomics today, while Keynesian economics rules the roost of macroeconomic thought.
Neoclassical economics is founded upon a few axioms common to several schools of economic thought. American economist Roy Weintraub characterized 3 critical assumptions.
1. People have rational preferences, which create identifiable outcomes to which quantitative values can be assigned.
2. Individuals maximize utility and firms maximize profits.
3. People act independently on the basis of complete relevant information.
All 3 perfect-world assumptions are hallucinations. (Evidence for the delusionality of neoclassical economic theory is found within this book and Spokes 5: The Echoes of the Mind.)
1. Human rationality takes a back seat to emotive desire. Reason serves fulfilling wants and is not the master of being that is supposed by economists.
2. Constraints on and conflicting goals of individuals and firms means that nothing is maximized. Any assumption of optimality is unrealistically simplistic.
3. People act more like cattle than individualists, and they almost never have all relevant information before they act.
Neoclassical economics emphasizes equilibria, where market forces provide circumstance which creates convergence toward model optimality. The lynchpin mechanism for this is supply and demand as expressed through price.
Herein lies the great failing of most economists: viewing the pricing mechanism as a static outcome of equilibrium, as opposed to the vacillating dynamic process which Marx and Engels aptly described.
No economic analysis can be correct with such mistaken foundations in place, but from such naïve fantasies neoclassical economics proceeds.