Neoclassical Economics

Recall that "improving the allocation of resources" is one of the five ways we might increase the wealth of a nation. "allocation of resources" is a key concept especially for microeconomics, and you will read about it here again and again. Almost all economists would agree that the allocation of resources is an important aspect of economic thinking and of real economic systems. I say almost all economists -- I would like to say all economists would agree to that, but I'm not quite sure there is anything all economists would agree on. Certainly the allocation of resources is important from the point of view of this book.

However, there has been a school of thought in economics in the twentieth century, enormously influential especially in the United States, for which the allocation of resources is more than just one of the considerations. This school of thought is called "neoclassical economics," and the "neo" means that they differ in important ways from the "classical economists" of the previous century.

Neoclassical economists share some of the following points in common.

For neoclassical economics, economics is the study of the allocation of resources. In this school of thought, economics is defined as "The study that considers human behavior as a relation between scarce means and alternative ends."
Almost all neoclassical economists are positive economists, though there are some positive economists who are not neoclassical. Thus, neoclassical economists regard the study of the allocation of resources as essentially a scientific, not a normative, study.
Neoclassical economists believe that free markets usually bring about an efficient allocation of resources.
Conversely, efficient allocation is the important thing about free markets. In those more or less rare cases when markets "fail" to bring about an efficient allocation of resources, it is appropriate for the government to intervene to correct the situation, if it can.

With this strong focus on the allocation of resources and on the role of markets, neoclassical economists have indeed learned an enormous amount about these topics, and will have much to teach us. Neoclassical economists have led the way in clearing up some key concepts almost all economists would rely on. Let us spend a few more pages on topics that -- while important to all economists -- are especially central for neoclassical economists.

Assumptions of Neoclassical Economics