What is Neoclassical Economics?

Debating the origins, meaning and significance

Jamie Morgan, Jamie Morgan

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317334514
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

Despite some diversification modern economics still attracts a great deal of criticism. This is largely due to highly unrealistic assumptions underpinning economic theory, explanatory failure, poor policy framing, and a dubious focus on prediction. Many argue that flaws continue to owe much of their shortcomings to neoclassical economics. As a result, what we mean by neoclassical economics remains a significant issue. This collection addresses the issue from a new perspective, taking as its point of departure Tony Lawson's essay 'What is this 'school' called neoclassical economics?'.

Few terms are as controversial for pluralist and heterodox economists as neoclassical economics. This controversy has many aspects because the term itself has different specifications and connotations. Within this multiplicity what we mean by neoclassical matters to pluralist and heterodox economists for two primary reasons. First, because it informs how we view and critique the mainstream; second, because the relationship between heterodox and mainstream economics influences how heterodox economists model, apply methods and construct theory. The chapters in this collection each have different things to say about these matters, with contributions ranging across the work of key thinkers, such as Thorstein Veblen and Kenneth Arrow, applied issues of non-linear modelling of dynamic systems, and key events in the history of economics.

This book will be of use to those interested in methodology, political economy, heterodoxy, and the history of economic thought.

1 What is this ‘school’ called neoclassical economics?

Tony Lawson

Introductory observations

More than a century ago, Thorstein Veblen introduced the term ‘neoclassical’ into economics prima facie to characterise a particular ‘school’. The latter quotation marks were provided by Veblen himself, suggesting that there may be a sense, however, in which the object of focus was not really a school of thought at all. Even so, Veblen certainly had in mind the nature of the output of a set of contributors, as we shall see.

Currently, the term ‘neoclassical’ pervades the discourse of academic economics, being employed to denote a range of substantive theories and policy stances. It does not take too much research or reflection, however, to realise that not only is the Veblenian heritage typically not acknowledged (and conceivably not always appreciated) but the term is invariably employed rather loosely and somewhat inconsistently across different contributors.

For many the act of describing an economic contribution as neoclassical is considered a form of criticism, though usually when the term is so used it is without explanation or elaboration; it mostly signals dissent.¹ In similar fashion those who accept the term for their own output seem very often, and again mostly without definition or explanation, to suppose that any contribution they make is neoclassical in nature.

There are numerous more careful or systematic interpreters of the term, found typically (though not exclusively) amongst methodologists and/or historians of thought, who do seek to elaborate its meaning rather more cautiously. Here two strategies dominate.

First, there are those who suppose that intrinsic to the notion of neoclassical is a sense of both continuity and difference with something called classical economics. Certainly, if the category neoclassical economics is to be maintained it does seem prima facie reasonable to expect this to be the case. Yet those historians of thought and others who focus on this expectation² typically conclude that the criterion is not met and, most especially, that contributions classified as neoclassical fail to reveal meaningful continuity with any conception of classical economics.³

Second, there are those interpreters of the term who prioritise internal coherence (rather than continuity with some classical tradition) and instead seek to systematise any analytical features that are common to, or generative of, those contributions most widely accepted as somehow quintessentially neoclassical.

The conceptions developed by the latter set of interpreters do have significant features in common. Perhaps the most notable is the highly abstract nature of the characterisations advanced, very often taking the form of a set of ‘axioms’ or ‘meta-axioms’ or perhaps a ‘meta-theory’. Additional commonalities are that the axioms identified tend to make reference to individuals as the units of analysis and indicate something of the states of knowledge and/or forms of typical behaviour of these individuals. In addition it is often the case that certain supposed (typically equilibrium) states of the economic system get a mention.

Thereafter, however, agreement is harder to find and significant variety creeps in. Sometimes individual knowledge is assumed to be in some sense ‘perfect’ or ‘complete’, sometimes systematically limited, and very often knowledge specifications do not figure explicitly at all. Behaviour is often treated as rational in some technical sense, though not always, and where it is, there is significant variety in the particular specifications. Further, there is wide disparity over whether equilibrium states are part of the essential framework of neoclassicism, and, where they are accepted as so, disagreement as to whether such states are held axiomatically always to prevail, or whether their possible existence is a matter of study, or something else; and so on. In short there is significant variety of interpretation of the term ‘neoclassical economics’ even across the more cautious interpreters.⁴

No less significant is the observation that the various substantive categories (rationality, equilibrium), which frequently occur across the conceptions of these more cautious interpreters, seem to be in declining use in modern economics discourse and despite the continuing prevalence of the category neoclassical economics. Others have noted the same developments. Thus David Colander et al. (2004), for example, insist that modern: ‘economics is moving away from strict adherence to the holy trinity—rationality, selfishness, and equilibrium—to a more eclectic position of purposeful behaviour, enlightened self-interest and sustainability’ (Colander et al., 2004: 485); an assessment shared by John Davis (2005), amongst others.

If current use of the term ‘neoclassical’ has lost touch with its original meaning, does not live up to its billing of signalling continuity with a classical school and is not consistently or usefully interpreted even by those who seek internal coherence, it seems to be additionally the case that there is no real need for such a term anyway, at least not for capturing major developments and/or approaches within the modern economics academy.

The reason for so concluding is that the major research groupings or divisions of study of modern economics are more than adequately characterised without employing the term. Certainly the contemporary discipline is dominated by a mainstream tradition. But whilst the concrete substantive content, focus and policy orientations of the latter are highly heterogeneous and continually changing,⁵ the project itself is adequately characterised in terms of its enduring reliance, indeed, unceasing insistence, upon methods of mathematical modelling. In effect it is a form of mathematical deductivism in the context of economics.⁶ Deductivism is just the doctrine that all explanation be expressed in terms of ‘laws’ or ‘uniformities’ interpreted as (actual or ‘hypothetical’) correlations or event regularities (see later discussion and Lawson, 2003).

Moreover, if the contemporary mainstream project is appropriately characterised as one of mathematical modelling in economics, a form of mathematical deductivism, each of the various academic heterodox traditions that stand opposed to this hugely dominant mainstream project has its own self-identifying label, including post-Keynesianism, feminist economics, (old) institutionalism, Marxian economics, Austrian economics, social economics and numerous others. It is thus prima facie unclear that the designation ‘neoclassical economics’ is anywhere required.

Why it matters

But so what? Does any of this matter? After all, it might be argued, in all spheres of human activity many categories are seemingly used rather loosely and without agreement, but appear to do little harm; this, it might thereby be supposed, is the case with the use of the term ‘neoclassical’ in modern economics.

I suspect that in most contexts of human interaction more clarity is preferable to less. Of course, (lexical) ambiguity can sometimes be useful (for example, when an author does not want to reveal too much early on in a text) as can ambivalence (when a contributor is unable to weigh up the arguments and seeks to avoid making a commitment prematurely⁷); I doubt that either are ever entirely avoidable whatever a contributor’s intentions. In addition the meanings of many (if not most) categories do evolve to an extent over time, and in any case may, in part at least, be determined (and so revealed only) in use. Certainly there is no desire here to reify or underplay nuance or performativity and so forth. However, in the current situation the manner in which, and wide disparity in the ways, the term ‘neoclassical’ is applied is not only productive of severe obfuscation, and seemingly increasingly so, it is also, or so I shall argue, positively debilitating of the discipline not least through hindering effective critique. Indeed, a major motivation of this article is precisely an assessment that the looseness with which this central term is interpreted (along with the toleration of this looseness) is a major factor inhibiting progress in economic understanding.

Not only is the economy in crisis but, as is now widely recognised, so is the discipline of economics itself. Yet the debate over the nature of the latter’s problems, weaknesses and limitations has so far been mostly fairly superficial; indeed, it is apparent that within the academy there has been very little if any significant progress. A major reason for this, I will be arguing, is that loose and varying interpretations of neoclassical theorising, especially when standing in as forms of criticism and dismissal, actually serve to distract sustained reflective attention from the real, or more systematic, causes of the discipline’s failings.

If I am correct in my assessment here that the term is not only without obvious use but also debilitating (the latter, as I say, being a contention defended later), a seemingly reasonable reaction is to suggest jettisoning the category ‘neoclassical economics’ altogether, as indeed has been the recourse of a few commentators (for varying reasons) previously.⁸

This, in effect, has tended to be my own previous orientation; I have rarely if ever employed the term in previous writings. But I have often been criticised for this, not least because a stance of non-recognition or non-engagement through avoidance is taken to be if not itself confusing then insufficiently critical (Fine, 2004; Bernard Guerrien, 2004), or even accommodating, of results maintained under the neoclassical head. Perhaps, too, the non-appearance (rather than an explication) of the term ‘neoclassical’ in analyses seeking to identify and illuminate the causes of problems of the discipline has in itself encouraged some to treat the latter analyses less seriously. Although I shall argue that theorising and policy stances labelled neoclassical are not the primary causes of the discipline’s problems, I accept (below) they may often be manifestations of it; so that determining the relation of at least the seemingly most coherent account of neoclassical to the real causes of the discipline’s problems, will hopefully provide practical insight. Moreover, I am aware that there is interest in, and I suspect there may be value to determining, how a conception of the contemporary mainstream economics as a form of mathematical deductivism, a conception I have long advanced, relates to at least the seemingly most sustainable conception of neoclassical economics. Furthermore, there is simply a repeatedly observed questioning of the nature of neoclassical thinking.

For various reasons, then, I take the opportunity here to elaborate that interpretation of the term that I believe to be the most sustainable. Let me stress at the outset that I do actually believe that a coherent construal is possible. I might also add that I am sympathetic to the idea that elaborating a coherent interpretation of such a pervasive term is an interesting intellectual project in itself. I also think it an intrinsically interesting exercise to systematically re-examine Veblen’s purposes in formulating the term. But primarily, and more practically, the reason for seeking a coherent conception here is to facilitate clarity in the hope and expectation that, one way or another, this can contribute to advancing the discipline. If merely avoiding the use of the term is considered unhelpful and misleading for the reasons just given, then seeking as coherent an account as is feasible seems the obvious alternative recourse. Either way (if not through discarding the term altogether then through rendering it coherent), my aim is to help remove certain significant obstacles that obstruct the path of seriously addressing those factors that are the more fundamental causes of the modern discipline’s increasingly widely recognised and indeed very widespread problems.

There is little point, of course, in my merely asserting a novel or alternative conception of neoclassical economics. Rather, any interpretation worth maintaining must fit at least the criteria implicit in criticising current uses above. The conception I advance does so. In particular, I argue for an interpretation that is (developmentally⁹): consistent with the historical origins of the meaning of the term given it by Veblen; is both continuous with, as well as different from, a meaningful conception of classical economics; is not only consistent with but in a sense encompasses seemingly all the explicit modern interpretations, not least those put forward by the more careful/cautious contributors and indeed, makes sense of and explains the latter; renders equally intelligible the contradictions of the wider, looser literature; possesses a clear referent, one that is currently without a category name; and is useful in at least (through all the foregoing) bringing clarity to academic discussion.

Obviously, I cannot, any more than anyone else, stipulate that a specific interpretation of the term be accepted, but I can hope to persuade that a particular version is more adequate than others, at least in terms of its ability to satisfy all of the various criteria of coherence already elaborated. Indeed, in terms of satisfying the noted criteria I suspect that the conception defended here may be as good as it gets. Whether this is ultimately good enough for the purposes laid out, and indeed whether the fact of a coherent interpretation of the term renders it worth persevering with, are matters that I also examine in due course.

In presenting and defending the interpretation I have in mind, Veblen’s initial conception is an obvious starting point. Unfortunately, Veblen’s conception needs a fair bit of elaboration to convey its essential meaning. This in part, I suspect, explains why it seems rarely to be seriously discussed or even acknowledged. I believe, though, that there are significant rewards to treating Veblen’s analysis on these matters explicitly and systematically, to recovering his basic message. This I attempt to accomplish eventually below (where I find that in the few cases where Veblen is referenced on the matters before us, standard interpretations of his intentions are not quite right). Before I turn to such matters, however, I want first to expand a little on a central claim made in the introductory overview, concerning the real causes of the discipline’s problems. The issues involved are likely not overly familiar to everyone; some of them require argumentation; many of them, as we eventually see, are highly relevant at some level for understanding Veblen’s own conception of the neoclassical ‘school’.

The real source of the discipline’s problems

I have suggested that a widespread loose usage of the phrase ‘neoclassical economics’ or ‘neoclassical theorising’, especially in criticism, has tended to deflect from the real source of the discipline’s problems, so I had better indicate here what the latter is and how the slack use of the category neoclassical economics hinders effective critique.

The source (as opposed to immediate manifestations) of the problems of the discipline of modern economics lies not at the level of substantive theorising at all but at the level of methodology and social ontology (the study, or a theory, of the nature of social reality). Modern economics, as has already been noted, is dominated by a mainstream tradition that insists on the repeated application of methods of mathematical modelling. The models actually employed, like all tools, are useful in some conditions and not in others. As it happens the sorts of conditions under which the modelling methods economists have employed would be useful are found to be rather uncommon, and indeed unlikely, occurrences in the social realm. Alternatively put, the ontological presuppositions of the heavy emphasis on mathematical modelling do not match the nature of the ‘stuff’ of the social realm. The heavy use of these tools in conditions for which they are found to be inappropriate both explains the repeated explanatory failings of the discipline as well as why formulations are of a nature that are typically recognised by almost everyone as rather unrealistic. That, in summary, is the real cause of the discipline’s problems.¹⁰

Let me briefly elaborate some of the detail of t...

Table of contents

• Cover Page
• What is Neoclassical Economics?
• Economics as Social Theory
• Title
• Copyright
• Contents
• List of Figures
• List of Contributors
• Introduction: The Meaning and Significance of Neoclassical Economics
• 1 What is this ‘School’ Called Neoclassical Economics?
• 2 From Neoclassical Theory to Mainstream Modelling: Fifty Years of Moral Hazard in Perspective
• 3 Neoclassicism, Critical Realism and the Cambridge Methodological Tradition
• 4 Lawson, Veblen and Marshall: How to Read Modern Neoclassicism
• 5 Lawson on Veblen on Social Ontology
• 6 Why is this ‘School’ Called Neoclassical Economics? Classicism and Neoclassicism in Historical Context
• 7 Ten Propositions on ‘Neoclassical Economics’
• 8 Neoclassical Economics: An Elephant is not a Chimera but is a Chimera Real?
• 9 The State of Nature and Natural States: Ideology and Formalism in the Critique of Neoclassical Economics
• 10 Heterodox Economics, Social Ontology and the use of Mathematics
• 11 Is Neoclassical Economics Mathematical? Is there a Non-neoclassical Mathematical Economics?
• 12 Neoclassicism Forever
• 13 Reflections upon Neoclassical Labour Economics
• Index