Editing Neoclassical economics (section)

== Origins ==<!-- This section is linked from [[Labor theory of value]] -->
{{Unreferenced section|date=August 2011}}
[[Classical economics]], developed in the 18th and 19th centuries, included a [[value theory]] and [[Distribution (economics)|distribution]] theory. The value of a product was thought to depend on the costs involved in producing that product. The explanation of costs in classical economics was simultaneously an explanation of distribution. A landlord received rent, workers received wages, and a capitalist tenant farmer received profits on their investment. This classic approach included the work of [[Adam Smith]] and [[David Ricardo]].

However, some economists gradually began emphasizing the perceived [[Value (marketing)|value]] of a good to the consumer. They proposed a theory that the value of a product was to be explained with differences in utility (usefulness) to the consumer. (In England, economists tended to conceptualize utility in keeping with the [[utilitarianism]] of [[Jeremy Bentham]] and later of [[John Stuart Mill]].)

The third step from political economy to economics was the introduction of [[marginalism]] and the proposition that economic actors made decisions based on [[Margin (economics)|margins]]. For example, a person decides to buy a second sandwich based on how full he or she is after the first one, a firm hires a new employee based on the expected increase in profits the employee will bring. This differs from the aggregate decision-making of classical political economy in that it explains how vital goods such as water can be cheap, while luxuries can be expensive.

===Marginal revolution===
The change in economic theory from classical to neoclassical economics has been called the "[[Marginalism#The Marginal Revolution|marginal revolution]]", although it has been argued that the process was slower than the term suggests.<ref>[[Roger E. Backhouse]] (2008). "marginal revolution," ''[[The New Palgrave Dictionary of Economics]]'', 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_M000392&edition=current&q= Abstract] {{Webarchive|url=https://web.archive.org/web/20160304233257/http://www.dictionaryofeconomics.com/article?id=pde2008_M000392&edition=current&q= |date=March 4, 2016 }}.</ref> It is frequently dated from [[William Stanley Jevons]]'s ''Theory of Political Economy'' (1871), [[Carl Menger]]'s ''Principles of Economics'' (1871), and [[Léon Walras]]'s ''Elements of Pure Economics'' (1874–1877).  Historians of economics and economists have debated:
* Whether [[utility]] or marginalism was more essential to this revolution (whether the noun or the adjective in the phrase "marginal utility" is more important)
* Whether there was a revolutionary change of thought or merely a gradual development and change of emphasis from their predecessors
* Whether grouping these economists together disguises differences more important than their similarities.<ref name="William Jaffé 1976">William Jaffé (1976) "Menger, Jevons, and Walras De-Homogenized", ''Economic Inquiry'', V. 14 (December): 511–25</ref>

In particular, Jevons saw his economics as an application and development of [[Jeremy Bentham]]'s utilitarianism and never had a fully developed [[general equilibrium theory]]. Menger did not embrace this hedonic conception, explained diminishing marginal utility in terms of subjective prioritization of possible uses, and emphasized disequilibrium and the discrete; further, Menger had an objection to the use of mathematics in economics, while the other two modeled their theories after 19th-century mechanics.<ref>Philip Mirowski (1989) ''More Heat than Light: Economics as Social Physics, Physics as Nature's Economics'', Cambridge University Press.</ref>  Jevons built on the hedonic conception of Bentham or of Mill, while Walras was more interested in the interaction of markets than in explaining the individual psyche.<ref name="William Jaffé 1976"/>

[[Alfred Marshall]]'s textbook, ''Principles of Economics'' (1890), was the dominant textbook in England a generation later. Marshall's influence extended elsewhere; Italians would compliment [[Maffeo Pantaleoni]] by calling him the "Marshall of Italy". Marshall thought [[classical economics]] attempted to explain prices by the [[cost of production theory of value|cost of production]]. He asserted that earlier marginalists went too far in correcting this imbalance by overemphasizing utility and demand. Marshall thought that "We might as reasonably dispute whether it is the upper
or the under blade of a pair of scissors that cuts a piece of paper, as to whether the value is governed by utility or cost of production".

Marshall explained price by the intersection of supply and demand curves. The introduction of different market "periods" was an important innovation of Marshall's:
* Market period. The goods produced for sale on the market are taken as given data, e.g. in a fish market. Prices quickly adjust to clear markets.
* Short period. Industrial capacity is taken as given. The level of output, the level of employment, the inputs of raw materials, and prices fluctuate to equate [[marginal cost]] and [[marginal revenue]], where profits are maximized. [[Economic rent]]s exist in short period equilibrium for fixed factors, and the rate of profit is not equated across sectors.
* Long period. The stock of [[capital (economics)|capital]] goods, such as factories and machines, is not taken as given. Profit-maximizing equilibria determine both industrial capacity and the level at which it is operated.
* Very long period. Technology, population trends, habits, and customs are not taken as given but allowed to vary in very long period models.
Marshall took supply and demand as stable functions and extended supply and demand explanations of prices to all runs. He argued supply was easier to vary in longer runs, and thus became a more important determinant of price in the very long run.

===Cambridge and Lausanne school===
[[Schools of economic thought#Neoclassical economics|Cambridge]] and [[Lausanne School]] of economics form the basis of neoclassical economics. Until the 1930s, the evolution of neoclassical economics was determined by the Cambridge school and was based on the [[marginal equilibrium theory]]. At the beginning of the 1930s, the Lausanne [[general equilibrium theory]] became the general basis of neoclassical economics and the marginal equilibrium theory was understood as its simplification.<ref name="ndk.cz">{{Cite web |title=Národní digitální knihovna |url=https://ndk.cz/uuid/uuid:1c8026b0-5fc7-11e6-b155-001018b5eb5c |access-date=2024-11-29 |website=ndk.cz}}</ref>

The thinking of the Cambridge school continued in the steps of classical political economics and its traditions but was based on the new approach that originated from the marginalist revolution. Its founder was [[Alfred Marshall]], and among the main representatives were [[Arthur Cecil Pigou]], [[Ralph George Hawtrey]] and [[Dennis Holme Robertson]]. Pigou worked on the theory of [[welfare economics]] and the [[quantity theory of money]]. Hawtrey and Robertson developed the Cambridge cash balance approach to [[theory of money]] and influenced the [[trade cycle]] theory. Until the 1930s, [[John Maynard Keynes]] was also influencing the theoretical concepts of the Cambridge school. The key characteristic of the Cambridge school was its instrumental approach to the economy – the role of the theoretical economist is first to define theoretical instruments of economic analysis and only just then apply them to real economic problems.<ref>{{Cite web |title=Národní digitální knihovna |url=https://ndk.cz/uuid/uuid:1c8026b0-5fc7-11e6-b155-001018b5eb5c |access-date=2024-11-29 |website=ndk.cz}}</ref>

The main representatives of the Lausanne school of economic thought were [[Léon Walras]], [[Vilfredo Pareto]] and [[Enrico Barone]]. The school became famous for developing the [[general equilibrium theory]]. In the contemporary economy, the general equilibrium theory is the methodologic basis of [[mainstream economics]] in the form of [[New classical macroeconomics]] and [[New Keynesian macroeconomics]].<ref name="ndk.cz"/>