On The Failure Of So-Called Neoclassical Economics

I want to contrast the theories of classical political economists and marginalists up to, say, the 1920s. I take David Ricardo as representative of classical political economy. For purposes of this post, I consider Karl Marx to also be a classical political economist.

For marginalists, I think of Eugen Bohm Bawerk, John Bates Clark, William Stanley Jevons, Alfred Marshall, Leon Walras, Knut Wicksell, and Philip Wicksteed among a host of others. Obviously, I am, at this level of abstraction, ignoring differences among both groups.

Modern economists have established that the classical political economists were broadly correct. And that the marginalists around the time of their intellectual revolution were ultimately incorrect.

Both groups tried to explain roughly the same object with their theories. That is, they proposed theories of long run equilibrium. (Some argue that, like other technical terms used by marginalists, applying the term 'equilibrium' to David Ricardo's theories is not quite correct.) Prices that exist in markets at any time vary. Even the same commodity may be sold at different prices by different buyers and sellers that are located nearby in time and space. Both goups thought, even so, that some sort of center of gravity was attracting these market prices, that they were fluctuating about this center. Anyways, they developed theories about this position. And in these theories, the law of one price would prevail. In competitive markets, the same rate of profits would prevail in all markets.

They did not theorize that a long run equilibrium would ever be reached. Walras, for example, compared his equilibrium to the flat surface of a lake that was always being disturbed by winds and waves.

But the groups differed on what data they took as given in that part of their theories that explained equilibrium prices. For the classical political economists, the givens in this part of the theory consist of:

• Technology
• The real wage
• How much of each commodity is produced.

As a matter of mathematics, these givens are sufficient to explain the prices prevailing in a long run position.

The marginalists have another set of data. These givens consist of:

• Technology
• Tastes
• The endowments of land, labor, and capital, including the initial distribution of these givens among the agents in the model.

As a matter of mathematics, a consistent model of a long run equilibrium cannot be constructed with these givens How to take the endowment of capital is one of those matters that differed among the marginalists. All of their approaches were incoherent.

This post merely echos conclusions that academics came to about half a century ago and have been repeating. I think of Leontief's input-output analysis and of some applications of mathematical programming as empirical work building on a renewed classical political economy.