Editing Neoclassical economics (section)

== Criticisms ==
{{anchor|Criticisms}}

Although the neoclassical approach is dominant in economics, the field of economics includes others, such as [[Marxian economics|Marxist]], [[Behavioral economics|behavioral]], [[Schumpeterian]], [[developmentalist]], [[Austrian School|Austrian]], [[post-Keynesian]], [[Humanistic economics]], [[real-world economics]] and institutionalist schools.<ref name=":0">{{Cite book|last=Chang|first=Ha-Joon |title=Economics : the user's guide|date=2014|isbn=978-0-7181-9703-2 |location=Gretna |oclc=872706010}}</ref> All of these schools differ with the neoclassical school and each other, and incorporate various criticisms of the neoclassical economics.<ref name="gk">{{Cite book|last=Komlos|first=J.|title=Foundations of Real-World Economics|date=2023|publisher=Taylor & Francis|isbn=9781000847895|location=Abingdon-on-Thames, UK|url=https://books.google.com/books?id=eResEAAAQBAJ&q=John+Komlos%2C+Foundations|access-date=March 8, 2024|archive-date=March 16, 2024|archive-url=https://web.archive.org/web/20240316144017/https://books.google.com/books?id=eResEAAAQBAJ&q=John+Komlos,+Foundations|url-status=live}}</ref> Not all criticism comes from other schools: some prominent economists such as Nobel Prize recipient and former chief economist of the [[World Bank]] [[Joseph Stiglitz]] are vocally critical of mainstream neoclassical economics.<ref>{{Cite web|title=Interview with Joseph Stiglitz|url=https://archive.globalpolicy.org/social-and-economic-policy/the-three-sisters-and-other-institutions/internal-critics-of-the-world-bank-and-the-imf/50588-interview-with-joseph-stiglitz.html|access-date=April 9, 2021|website=archive.globalpolicy.org|archive-date=October 15, 2023|archive-url=https://web.archive.org/web/20231015054819/https://archive.globalpolicy.org/social-and-economic-policy/the-three-sisters-and-other-institutions/internal-critics-of-the-world-bank-and-the-imf/50588-interview-with-joseph-stiglitz.html|url-status=live}}</ref>

=== Methodology and mathematical models ===
{{more|Unreasonable ineffectiveness of mathematics#Economics and finance|Financial economics#Challenges and criticism}}

{{Expand section|supporting views citing basis in statistical science, comparability with other social sciences|date=August 2021}}

Some see mathematical models used in contemporary research in mainstream economics as having transcended neoclassical economics,<ref>David Colander, Richard Holt, and J. Barkley Rosser Jr. (2004) The changing face of mainstream economics, ''Review of Political Economy'', V. 16, No. 4: pp. 485–99)</ref> while others disagree.<ref>Matias Vernengo (2010) Conversation or monologue? On advising heterodox economists, ''Journal of Post Keynesian Economics'', V. 32, No. 3" pp. 485–99.</ref> Mathematical models also include those in [[game theory]], [[linear programming]], and [[econometrics]]. Critics of neoclassical economics are divided into those who think that highly mathematical method is inherently wrong and those who think that mathematical method is useful even if neoclassical economics has other problems.<ref>Jamie Morgan (ed.) (2016) 'What is Neoclassical Economics? Debating the origins, meaning and significance', Routledge.</ref>

Critics such as [[Tony Lawson]] contend that neoclassical economics' reliance on [[Function (mathematics)|functional relations]] is inadequate for social phenomena in which knowledge of one variable does not reliably predict another.<ref>{{Cite book |title=A guide to what's wrong with economics |date=2004 |publisher=Anthem |editor=Edward Fullbrook |isbn=978-0-85728-737-3 |location=London |oclc=860303932}}</ref> The different factors affecting economic outcomes cannot be experimentally isolated from one another in a laboratory; therefore the explanatory and predictive power of mathematical economic analysis is limited. Lawson proposes an alternative approach called the contrast explanation which he says is better suited for determining causes of events in social sciences. More broadly, critics of economics as a science vary, with some believing that all mathematical economics is problematic or even [[pseudoscience]] and others believing it is still useful but has less certainty and higher risk of methodology problems than in other fields.<ref>{{Cite web|last=Shiller|first=Robert J.|date=November 6, 2013|title=Is Economics a Science? {{!}} by Robert J. Shiller|url=https://www.project-syndicate.org/commentary/robert-j--shilleron-whether-he-is-a-scientist|access-date=April 11, 2021|website=Project Syndicate|language=en|archive-date=November 9, 2013|archive-url=https://web.archive.org/web/20131109094135/https://www.project-syndicate.org/commentary/robert-j--shilleron-whether-he-is-a-scientist|url-status=live}}</ref><ref>{{Cite book |title=What is neoclassical economics?: debating the origins, meaning and significance |date=2016 |editor=Jamie Morgan |isbn=978-1-317-33451-4 |location=London |oclc=930083125}}</ref>

[[Milton Friedman]], one of the most prominent and influential neoclassical economists of the 20th century, responded to criticisms that assumptions in economic models were often unrealistic by saying that theories should be judged by their ability to predict events rather than by the supposed realism of their assumptions.<ref>{{Cite book |title=The philosophy of economics: an anthology |date=2008 |publisher=Cambridge University Press |editor=Daniel M. Hausman |isbn=978-0-511-37141-7 |edition=3rd |location=New York |oclc=192048246}}</ref> He claimed that, on the contrary, a theory with more absurd assumptions has stronger predictive power. He argued that a theory's ability to theoretically explain reality is irrelevant compared to its ability to empirically predict reality, no matter the method of getting to that prediction.

=== Objectivity and pluralism ===
Neoclassical economics is often criticized for having a [[Normative economics|normative]] bias despite sometimes claiming to be [[Value-free economics|"value-free"]].<ref>For example, see [[Alfred S. Eichner]] and [[Jan Kregel]] (Dec. 1975) An Essay on Post-Keynesian Theory: A New Paradigm in Economics, ''Journal of Economic Literature''.</ref><ref>{{cite book |last1=Hayes |first1=W.M. |last2=Lynne |first2=G.D. |title=The Evolution of Ego and Empathy: Progress in Forming the Centerpiece for Ecological Economic Theory In: Robert B. Richardson (ed.) In Building a Green Economy: Perspectives from Ecological Economics |date=2013 |publisher=Michigan State University Press |location=East Lansing, MI |pages=107–118}}</ref> Such critics argue an [[Ideology|ideological]] side of neoclassical economics, generally to argue that students should be taught more than one economic theory and that economics departments should be more [[Pluralism in economics|pluralistic]].<ref>{{Cite book|url=https://www.worldcat.org/oclc/56646531|title=A guide to what's wrong with economics|date=2004|publisher=Anthem|others=Edward Fullbrook|isbn=1-84331-148-8|location=London|oclc=56646531}}</ref><ref>{{Cite journal|last=Parvin|first=Manoucher|date=1992|title=Is Teaching Neoclassical Economics as the Science of Economics Moral?|url=https://www.jstor.org/stable/1183480|journal=The Journal of Economic Education|volume=23|issue=1|pages=65–78|doi=10.2307/1183480|jstor=1183480|issn=0022-0485|access-date=April 22, 2021|archive-date=January 29, 2022|archive-url=https://web.archive.org/web/20220129192117/https://www.jstor.org/stable/1183480|url-status=live}}</ref>

=== Rational behavior assumptions ===
One of the most widely criticized aspects of neoclassical economics is its set of assumptions about human behavior and rationality. The "[[Homo economicus|economic man]]", or a hypothetical human who acts according to neoclassical assumptions, does not necessarily behave the same way as humans do in reality.<ref>{{cite book |last1=Thaler |first1=R.H. |last2=Sunstein |first2=C.R. |title=Nudge: Improving Decisions About Health, Wealth, and Happiness |date=2008 |publisher=Yale University Press |location=New Haven, MA}}</ref> The economist and critic of capitalism [[Thorstein Veblen]] claimed that neoclassical economics assumes a person to be "a lightning calculator of pleasures and pains, who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift about the area, but leave him intact."<ref>[[Thorstein Veblen]] (1898) ''Why Is Economics Not an Evolutionary Science?'', reprinted in The Place of Science in Modern Civilization (New York, 1919), p. 73.</ref>

Veblen's characterization references a number of commonly criticized rationality assumptions: that people make decisions using a rigid [[Utilitarianism|utilitarian]] framework, have perfect information available about their options, have perfect information processing ability allowing them to immediately calculate [[utility]] for all possible options, and are independent decision-makers whose choices are unaffected by their surroundings or by other people. While Veblen is from the [[Institutional economics|Institutional]] school, the [[Behavioral economics|Behavioral]] school of economics is focused on studying the mechanisms of human [[decision-making]] and how they differ from neoclassical assumptions of rationality. Altruistic or empathy-based behavior is another form of "non-rational" decision making studied by behavioral economists, which differs from the neoclassical assumption that people only act in self-interest.<ref>{{cite journal |last1=Cory |first1=G.A. |title=A Behavioral Model of the Dual Motive Approach to Behavioral Economics and Social Exchange |journal=Journal of Socio-Economics |date=2006 |volume=35 |issue=4 |pages=592–612|doi=10.1016/j.socec.2005.12.017 |s2cid=144442430 }}</ref><ref>{{cite journal |last1=Lynne |first1=G.D. |last2=Czap |first2=N.V. |last3=Czap |first3=H.J |last4=Burbach |first4=M.E. |title=Theoretical Foundation for Empathy Conservation: Toward Avoiding the Tragedy of the Commons |journal=Review of Behavioral Economics |volume=3 |pages=245–279}}</ref> Behavioral economists account for how psychological, neurological, and even emotional factors significantly affect economic perceptions and behaviors.<ref>{{Cite journal|last=Cartwright|first=Alex C.|date=July 2015|title=Richard H. Thaler: Misbehaving: the making of behavioral economics|url=http://dx.doi.org/10.1007/s11127-015-0276-5|journal=Public Choice|volume=164|issue=1–2|pages=185–188|doi=10.1007/s11127-015-0276-5|issn=0048-5829|s2cid=155150481}}</ref>

[[Rational choice theory]] need not be problematic according to a paper written by the economist [[Gary Becker]] which was published in 1962 in the ''[[Journal of Political Economy]]'' called "Irrational Behavior and Economic Theory".<ref name="Becker">{{Cite journal |last=Becker |first=Gary S. |date=1962 |title=Irrational Behavior and Economic Theory |url=https://www.jstor.org/stable/1827018 |journal=Journal of Political Economy |volume=70 |issue=1 |pages=1–13 |doi=10.1086/258584 |jstor=1827018 |issn=0022-3808}}</ref> According to Becker, this paper demonstrates "how the important theorems of modern economics result from a general principle which not only includes rational behavior and survivor arguments as special cases, but also much irrational behavior." The specific important theorems and results which are shown to result from a broad range of different type of irrational behavior, as well as rational behavior by market participants in the paper, are that market demand curves are downward sloping or "negatively inclined", and that if an industry transformed from a competitive industry to a completely monopolistic cartel and profits are always maximized, then output per firm under the cartel would decrease compared to its equilibrium level when the industry was competitive.

This paper was largely based on the 1950 paper "Uncertainty, Evolution, and Economic Theory" by [[Armen Alchian]].<ref name="Alchian">{{Cite journal |last=Alchian |first=Armen A. |date=1950 |title=Uncertainty, Evolution, and Economic Theory |url=https://www.jstor.org/stable/1827159 |journal=Journal of Political Economy |volume=58 |issue=3 |pages=211–221 |doi=10.1086/256940 |jstor=1827159 |issn=0022-3808}}</ref> The paper sets out a justification for supply analysis separate from relying on the assumption of rational consumption, the representative firm and the way neoclassical economists analyze firm behavior in markets which does not rely on rational behavior by the decision makers in those firms, nor any other type of foresighted or goal directed behavior by them. Becker's subsequent 1962 paper provides an independent justification for neoclassical market demand analysis. The two papers offer separate justifications for the use of neoclassical methodology for supply and demand analysis without relying on assumptions otherwise criticised as implausible.

=== Methodological individualism ===
{{Jargon cleanup|section|date=May 2021}}
Neoclassical economics offers an approach to studying the economic behavior of ''homo-economicus''. This theory is based on methodological individualism and adopts an atomistic approach to social phenomena, according to which social atoms are the individuals and their actions.<ref>{{Cite book|last=Heath|first=J.|date=2005|title=Methodological individualism|publisher=Metaphysics Research Lab, Stanford University|url=https://plato.stanford.edu/entries/methodological-individualism/|access-date=April 27, 2021|archive-date=September 30, 2018|archive-url=https://web.archive.org/web/20180930192421/https://plato.stanford.edu/entries/methodological-individualism/|url-status=live}}</ref> According to this doctrine, individuals are independent of social phenomena, but the opposite is not true. Individuals' actions can explain macro-scale behavior, and social collections are nothing more than aggregates, and they do not add anything to its components (Ibid). Although methodological individualism does not negate complex social phenomena such as institutions or behavioral rules, it argues any explanation should be based on constituent components' characteristics of those institutions. This is a reductionist approach based on which it is believed that the characteristics of the social system are derived from the individuals' preferences and their actions.<ref>{{Cite journal|last1=Janaćković|first1=Marko|last2=Petrović-Ranđelović|first2=Marija|date=November 22, 2019|title=Relationship Between Ease of Doing Business Indicators and the Foreign Direct Investment Inflows in the Republic of Serbia|journal=Facta Universitatis, Series: Economics and Organization|pages=269|doi=10.22190/fueo1903269j|issn=2406-050X|doi-access=free}}</ref>

A critique of this approach is that the individuals' preferences and interests are not fixed. The structures contextualize individual's. According to social constructivists, systems are co-constituted alongside the actors, and ideas within the system define actors' identities, their interests, and thus their behavior.<ref>{{Cite journal|last=Corsten|first=Michael|date=March 1998|title=Review Symposium on Searle: John Searle, The Construction of Social Reality. Free Press, New York, 1995. Pp. 241. $25. I. Between Constructivism and Realism—Searle's Theory of the Construction of Social Reality|url=http://dx.doi.org/10.1177/004839319802800105|journal=Philosophy of the Social Sciences|volume=28|issue=1|pages=102–121|doi=10.1177/004839319802800105|issn=0048-3931|s2cid=141750997}}</ref> In this regard, actors in various circumstances (exposed to different impressions and experiences) will construct their interests and preferences differently, both within each other and over time.<ref>{{Cite book|author=Hay, Colin|url=http://worldcat.org/oclc/945766614|title=Political Analysis: a Critical Introduction|year=2002|isbn=978-1-137-24149-8|oclc=945766614}}</ref> Given the individualistic foundation of the economic theory, critics argue that this theory should consider individual action's structural contexts.

=== Inequality ===
Neoclassical economics is often criticized as promoting policies that increase [[economic inequality|inequality]] and as failing to recognise the impact of inequality on economic outcomes. In the case of the former claim, neoclassical economics is often used for analysis in support of policies reducing economic inequality—in particular through determining the diminishing marginal utility of income, whereby poorer individuals gain greater net benefits from a given increase in income than comparable richer individuals,<ref>{{Cite journal|last=Leightner|first=Jonathan|date=June 2005|title=Utility Maximization, Morality, and Religion|url=https://www.tandfonline.com/doi/abs/10.1080/00213624.2005.11506814|journal=Journal of Economic Issues|volume=39|issue=2|pages=375–381|doi=10.1080/00213624.2005.11506814|s2cid=157744335|access-date=May 2, 2021|archive-date=June 23, 2022|archive-url=https://web.archive.org/web/20220623085846/https://www.tandfonline.com/doi/abs/10.1080/00213624.2005.11506814|url-status=live}}</ref><ref>{{Cite journal|url=https://doi.org/10.1016/j.jpubeco.2008.01.007|doi=10.1016/j.jpubeco.2008.01.007|title=The marginal utility of income|year=2008|last1=Layard|first1=R.|last2=Mayraz|first2=G.|last3=Nickell|first3=S.|journal=Journal of Public Economics|volume=92|issue=8–9|pages=1846–1857}}</ref> but more generally by being the primary means by which the impact on inequality of any given policy is assessed. In the case of the latter claim, neoclassical economics is the prevailing lens through which the relationship between inequality and economic outcomes is studied.<ref>{{cite book|author=Federico Cingano
|year=2014|doi=10.1787/5jxrjncwxv6j-en|title=Trends in Income Inequality and its Impact on Economic Growth|series=OECD Social, Employment and Migration Working Papers |doi-access=free}}</ref>

=== Ethics of markets ===
Neoclassical economics tends to promote [[commodification]] and [[privatization]] of goods due to its principle that market exchange generally results in the most effective allocation of goods. For example, some economists support markets for human organs, on the basis that it increases supply of life-saving organs and benefits willing donors financially.<ref>{{Cite news|last=topeditor|date=November 13, 2007|title=Econ Debate: A Market for Human Organs?|language=en-US|work=[[The Wall Street Journal]]|url=https://www.wsj.com/articles/BL-REB-725|access-date=May 2, 2021|issn=0099-9660|archive-date=May 2, 2021|archive-url=https://web.archive.org/web/20210502154039/https://www.wsj.com/articles/BL-REB-725|url-status=dead}}</ref> However, there are arguments in [[moral philosophy]] that use of markets for certain goods is inherently unethical. Political philosopher [[Michael Sandel]] summarizes that market exchanges have two ethical problems: coercion and corruption.<ref>{{Cite web|last=Sandel|first=Michael|date=May 1998|title=What Money Can't Buy: The Moral Limits of Markets|url=https://tannerlectures.utah.edu/_documents/a-to-z/s/sandel00.pdf|website=The Tanner Lectures on Human Values, The University of Utah|access-date=May 2, 2021|archive-date=April 21, 2021|archive-url=https://web.archive.org/web/20210421042506/https://tannerlectures.utah.edu/_documents/a-to-z/s/sandel00.pdf|url-status=dead}}</ref> Coercion happens because market participation may not be as free as proponents often claim: people often participate in markets because it is the only way to survive, which is not truly voluntary. Corruption describes how commodification of a good can inherently degrade its value.