Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by cost-constrained firms employing available information and factors of production, in accordance with rational choice theory. Neoclassical economics dominates microeconomics, and together with Keynesian economics forms the neoclassical synthesis, which dominates mainstream economics today. There have been many critiques of neoclassical economics, often incorporated into newer versions of neoclassical theory as human awareness of economic criteria changes.

The term was originally introduced by Thorstein Veblen in 1900, in his ''Preconceptions of Economic Science'', to distinguish marginalists in the tradition of Alfred Marshall from those in the Austrian School.

"No attempt will here be made even to pass a verdict on the relative claims of the recognized two or three main "schools" of theory, beyond the somewhat obvious finding that, for the purpose in hand, the so-called Austrian school is scarcely distinguishable from the neo-classical, unless it be in the different distribution of emphasis. The divergence between the modernized classical views, on the one hand, and the historical and Marxist schools, on the other hand, is wider, so much so, indeed, as to bar out a consideration of the postulates of the latter under the same head of inquiry with the former." - Veblen

It was later used by John Hicks, George Stigler, and others to include the work of Carl Menger, William Stanley Jevons, John Bates Clark and many others. Today it is usually used to refer to mainstream economics, although it has also been used as an umbrella term encompassing a number of other schools of thought, notably excluding institutional economics, various historical schools of economics, and Marxian economics, in addition to various other heterodox approaches to economics.

Neoclassical economics is characterized by several assumptions common to many schools of economic thought. There is not a complete agreement on what is meant by neoclassical economics, and the result is a wide range of neoclassical approaches to various problem areas and domains—ranging from neoclassical theories of labor to neoclassical theories of demographic changes. As expressed by E. Roy Weintraub, neoclassical economics rests on three assumptions, although certain branches of neoclassical theory may have different approaches:

#People have rational preferences among outcomes that can be identified and associated with a value. #Individuals maximize utility and firms maximize profits. #People act independently on the basis of full and relevant information.

From these three assumptions, neoclassical economists have built a structure to understand the allocation of scarce resources among alternative ends—in fact understanding such allocation is often considered the definition of economics to neoclassical theorists. Here's how William Stanley Jevons presented "the problem of Economics".

"Given, a certain population, with various needs and powers of production, in possession of certain lands and other sources of material: required, the mode of employing their labour which will maximize the utility of their produce."

From the basic assumptions of neoclassical economics comes a wide range of theories about various areas of economic activity. For example, profit maximization lies behind the neoclassical theory of the firm, while the derivation of demand curves leads to an understanding of consumer goods, and the supply curve allows an analysis of the factors of production. Utility maximization is the source for the neoclassical theory of consumption, the derivation of demand curves for consumer goods, and the derivation of labor supply curves and reservation demand. Market supply and demand are aggregated across firms and individuals. Their interactions determine equilibrium output and price. The market supply and demand for each factor of production is derived analogously to those for market final output to determine equilibrium income and the income distribution. Factor demand incorporates the marginal-productivity relationship of that factor in the output market.

Neoclassical economics emphasizes equilibria, where equilibria are the solutions of agent maximization problems. Regularities in economies are explained by methodological individualism, the position that economic phenomena can be explained by aggregating over the behavior of agents. The emphasis is on microeconomics. Institutions, which might be considered as prior to and conditioning individual behavior, are de-emphasized. Economic subjectivism accompanies these emphases. See also general equilibrium.

== Origins == Classical economics, developed in the 18th and 19th centuries, included a value theory and 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 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 margins. For example, a person decides to buy a second sandwich based on how full they are 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.

The Marginal Revolution

Neoclassical economics is frequently dated from William Stanley Jevons's ''Theory of Political Economy'' (1871), Carl Menger's ''Principles of Economics'' (1871), and Leon Walras's ''Elements of Pure Economics'' (1874–1877). These three economists have been said to have begun “the Marginal Revolution”. 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.

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. Walras' conception of utility, like that of Menger, was that of ''usefulness'' in general, rather than the hedonic conception of Bentham or of Mill; and Walras was more interested in the interaction of markets than in explaining the individual psyche.

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. 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 whether 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 rents exist in short period equilibrium for fixed factors, and the rate of profit is not equated across sectors.

Long period. The stock of 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.

Further developments

An important change in neoclassical economics occurred around 1933. Joan Robinson and Edward H. Chamberlin, with the near simultaneous publication of their respective books, ''The Economics of Imperfect Competition'' (1933) and ''The Theory of Monopolistic Competition'' (1933), introduced models of imperfect competition. Theories of market forms and industrial organization grew out of this work. They also emphasized certain tools, such as the marginal revenue curve.

Joan Robinson's work on imperfect competition, at least, was a response to certain problems of Marshallian partial equilibrium theory highlighted by Piero Sraffa. Anglo-American economists also responded to these problems by turning towards general equilibrium theory, developed on the European continent by Walras and Vilfredo Pareto. J. R. Hicks's ''Value and Capital'' (1939) was influential in introducing his English-speaking colleagues to these traditions. He, in turn, was influenced by the Austrian School economist Friedrich Hayek's move to the London School of Economics, where Hicks then studied.

These developments were accompanied by the introduction of new tools, such as indifference curves and the theory of ordinal utility. The level of mathematical sophistication of neoclassical economics increased. Paul Samuelson's ''Foundations of Economic Analysis'' (1947) contributed to this increase in mathematical modelling.

The interwar period in American economics has been argued to have been pluralistic, with neoclassical economics and institutionalism competing for allegiance. Frank Knight, an early Chicago school economist attempted to combine both schools. But this increase in mathematics was accompanied by greater dominance of neoclassical economics in Anglo-American universities after World War II.

Hicks' book, ''Value and Capital'' had two main parts. The second, which was arguably not immediately influential, presented a model of temporary equilibrium. Hicks was influenced directly by Hayek's notion of intertemporal coordination and paralleled by earlier work by Lindhal. This was part of an abandonment of disaggregated long run models. This trend probably reached its culmination with the Arrow-Debreu model of intertemporal equilibrium. The Arrow-Debreu model has canonical presentations in Gerard Debreu's ''Theory of Value'' (1959) and in Arrow and Hahn's "General Competitive Analysis" (1971).

Many of these developments were against the backdrop of improvements in both econometrics, that is the ability to measure prices and changes in goods and services, as well as their aggregate quantities, and in the creation of macroeconomics, or the study of whole economies. The attempt to combine neo-classical microeconomics and Keynesian macroeconomics would lead to the neoclassical synthesis which has been the dominant paradigm of economic reasoning in English-speaking countries since the 1950s. Hicks and Samuelson were for example instrumental in mainstreaming Keynesian economics.

Macroeconomics influenced the neoclassical synthesis from the other direction, undermining foundations of classical economic theory such as Say's Law, and assumptions about political economy such as the necessity for a hard-money standard. These developments are reflected in neoclassical theory by the search for the occurrence in markets of the equilibrium conditions of Pareto optimality and self-sustainability.

Criticism

Neoclassical economics is sometimes criticized for having a normative bias. In this view, it does not focus on explaining actual economies, but instead on describing a "utopia" in which Pareto optimality applies.

The assumption that individuals act rationally may be viewed as ignoring important aspects of human behavior. Many see the "economic man" as being quite different from real people. Many economists, even contemporaries, have criticized this model of economic man. Thorstein Veblen put it most sardonically. 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."

Large corporations might perhaps come closer to the neoclassical ideal of profit maximization, but this is not necessarily viewed as desirable if this comes at the expense of neglect of wider social issues. The response to this is that neoclassical economics is descriptive and not normative. It addresses such problems with concepts of private versus social utility.

Problems exist with making the neoclassical general equilibrium theory compatible with an economy that develops over time and includes capital goods. This was explored in a major debate in the 1960s—the "Cambridge capital controversy"—about the validity of neoclassical economics, with an emphasis on the economic growth, capital, aggregate theory, and the marginal productivity theory of distribution. There were also internal attempts by neoclassical economists to extend the Arrow-Debreu model to disequilibrium investigations of stability and uniqueness. However a result known as the Sonnenschein-Mantel-Debreu theorem suggests that the assumptions that must be made to ensure that the equilibrium is stable and unique are quite restrictive.

Neoclassical economics is also often seen as relying too heavily on complex mathematical models, such as those used in general equilibrium theory, without enough regard to whether these actually describe the real economy. Many see an attempt to model a system as complex as a modern economy by a mathematical model as unrealistic and doomed to failure. A famous answer to this criticism is Milton Friedman's claim that theories should be judged by their ability to predict events rather than by the realism of their assumptions. Mathematical models also include those in game theory, linear programming, and econometrics. Critics of neoclassical economics are divided in those who think that highly mathematical method is inherently wrong and those who think that mathematical method is potentially good even if contemporary methods have problems.

The assumption of rational expectations which has been introduced in some more modern neoclassical models (sometimes also called new classical) can also be criticized on the grounds of realism.

In general, allegedly overly unrealistic assumptions are one of the most common criticisms towards neoclassical economics. It is fair to say that many (but not all) of these criticisms can only be directed towards a subset of the neoclassical models (for example, there are many neoclassical models where unregulated markets fail to achieve Pareto-optimality and there has recently been an increased interest in modeling non-rational decision making).

See also

microeconomics

static equilibrium

marginalism

neo-classical synthesis

References

External links

Neoclassical economics from the Concise Library of Economics

Introduction to neoclassical economics at Drexel

Category:Economic theories

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This is a list of people whose names in English are commonly appended with the phrase "''the Great''", or who were called that or an equivalent phrase in their own language. Other languages have their own suffixes such as ''e Bozorg'' and ''e azam'' in Persian and Urdu respectively.

In Persia, the title "the Great" at first seems to be a colloquial version of the Old Persian title "Great King". This title was first used by the conqueror Cyrus II of Persia.

The Persian title was inherited by Alexander III of Macedon (336–323 BC) when he conquered the Persian Empire, and the epithet "Great" eventually became personally associated with him. The first reference (in a comedy by Plautus) assumes that everyone knew who "Alexander the Great" was; however, there is no earlier evidence that Alexander III of Macedon was called "''the Great''".

The early Seleucid kings, who succeeded Alexander in Persia, used "Great King" in local documents, but the title was most notably used for Antiochus the Great (223–187 BC).

Later rulers and commanders began to use the epithet "the Great" as a personal name, like the Roman general Pompey. Others received the surname retrospectively, like the Carthaginian Hanno and the Indian emperor Ashoka the Great. Once the surname gained currency, it was also used as an honorific surname for people without political careers, like the philosopher Albert the Great.

As there are no objective criteria for "greatness", the persistence of later generations in using the designation greatly varies. For example, Louis XIV of France was often referred to as "The Great" in his lifetime but is rarely called such nowadays, while Frederick II of Prussia is still called "The Great". A later Hohenzollern - Wilhelm I - was often called "The Great" in the time of his grandson Wilhelm II, but rarely later.

Rulers

Abbas I of Persia (1571–1629), Shah of Iran

Akbar (1542–1605), ruler of the Mughal Empire of South Asia, mainly India

Alain I of Albret (1440–1522), French aristocrat

Alexander the Great (356-323 BC), King of Macedonia, Persia, Greece, Egypt, and all of Mesopotamia

Alexander I of Georgia (1386–1446), King of Georgia

Alfonso III of León (c. 848-910), King of León, Galicia and Asturias

Alfred the Great (848/849-899), King of Wessex

Antiochus III the Great (c. 241–187 BC), ruler of the Seleucid Empire

Ashoka the Great (c. 304–232 BC), Indian emperor of the Maurya dynasty

Ashot I of Iberia “the Great”(died 826/830), presiding prince of Iberia (modern Georgia),

Askia Mohammad I (c. 1442–1538), ruler of the Songhai Empire

Bhumibol Adulyadej (born 1927), King of Thailand

Bolesław I Chrobry (967-1025), sometimes called "the Great", first King of Poland

Bruno the Great (925–965), Archbishop of Cologne and Duke of Lotharingia (also listed in the following section)

Buddha Yodfa Chulaloke (1736–1809), founder and ruler of the Rattanakosin Kingdom (in what is now Thailand)

Cnut the Great (c. 985 or 995-1035), King of Denmark, England, Norway and parts of Sweden

Casimir III the Great (1310–1370), King of Poland

Catherine the Great (1729–1796), Empress of Russia

Chandragupta II (reigned 375-413/415), also known as Vikramaditya, ruler of the Gupta empire in India

Charlemagne (died 814), King of the Franks and Emperor of the Romans

Chulalongkorn (1853–1910), King of Siam (now Thailand)

Chlothar II (584-629), King of Neustria and King of the Franks

Conrad, Margrave of Meissen (c. 1097-1157), Margrave of Meissen

Constantine I (c. 272-337), Roman emperor

Cyaxares the Great (c. 625-585 BC), third king of Media

Cyrus the Great (c. 600 BC or 576 BC–530 BC), founder and ruler of the Persian or Achaemenid Empire

Darius the Great (550 – 486 BC), third ruler of the Persian Empire

Devapala (died 850), ruler of the Pala Empire in the Indian subcontinent

Dionysius I, Greek tyrant of Syracuse

Ferdinand I of León and Castile (c. 1015–1065), King of León and Count of Castile

Frederick the Great (1712–1786), King of Prussia

Genghis Khan (1162?-1227), founder and Great Khan of the Mongol Empire

Gero (c. 900–965), ruler of Marca Geronis, a very large march in Europe

Gustavus Adolphus of Sweden (1594–1632), King of Sweden, founder of the Swedish Empire, and noted military leader

Gwanggaeto the Great, King of Goguryeo, one of the Three Kingdoms of Korea

Hanno the Great, the name of three leaders of Carthage, in the 4th, 3rd, and 2nd centuries BC

Henry I, Duke of Burgundy (946–1002)

Henry IV of France (1553–1610), King of France and King of Navarre

Herod the Great (73/74 BC-4 BC), King of Judea

Hugh the Great (898-956), Duke of the Franks and Count of Paris

Hugh Magnus of France (1007–1025), co-King of France

Hugh I, Count of Vermandois (1057–1101)

Humphrey I de Bohun (died c. 1123), Anglo-Norman aristocrat

Ivan III of Russia (1440–1505), Tsar of Russia

John I of Portugal (1358–1433), King of Portugal and the Algarve

John II of Aragon (1398–1479), King of Aragon and, through his wife, King of Navarre

Justinian I (483-565), Byzantine Emperor

Kamehameha I (c. 1758-1819), first King of Hawai'i

Kanishka (died c. 127), ruler of the Kushan Empire in Central Asia and parts of India

Kvirike III of Kakheti (1010–1029), King of Kakheti in eastern Georgia

Kublai Khan (1215–1294), Mongol ruler in the 13th century and Emperor of China; founder of the Yuan Dynasty

Llywelyn the Great (c. 1172–1240), Prince of Gwynedd and de facto ruler of most of Wales

Louis I of Hungary (1326–1382), King of Hungary, Croatia and Poland

Mangrai the Great (1238–1317), Lanna, northern Thailand

Emperor Meiji (1852–1912), Emperor of Japan

Mircea I of Wallachia (1355–1418)

Mithridates II of Parthia (died 88 BC), ruler of the Parthian Empire (in present day Iran)

Mithridates VI of Pontus (134 BC–63 BC), ruler of Pontus and the Bosporan Kingdom

Mstislav I of Kiev (1076–1132), Grand Prince of Kievan Rus

Narai (1633–1688), King of Ayutthaya (in what is now modern Thailand)

Naresuan (1555–1605), King of Ayutthaya

Odo the Great (died c. 735), Duke of Aquitaine

Otto I, Holy Roman Emperor (912-973)

K'inich Janaab' Pakal (603-683), ruler of the Mayan city-state of Palenque

Parakramabahu I of Polonnaruwa (1123–1186), King of Sri Lanka

Peter Krešimir IV of Croatia (died 1075), King of Croatia

Peter the Great (1672–1725), Tsar of Russia

Peter III of Aragon (1239–1285), King of Aragon and King of Sicily

Pompey (106 BC-48 BC), military and political leader of the late Roman Republic, rival of Julius Caesar

Radama I (1793–1828), first king of greater Madagascar

Raja Raja Chola I (c. 947-1014), Indian emperor of the Cholas.

Rajendra Chola I (reigned 1014–1044), Tamil King of India

Ramesses II (reigned 1279 BC – 1213 BC), considered the greatest pharaoh of Ancient Egypt

Ram Khamhaeng (around 1237 to 1247-1298), King of Sukhothai (in present day Thailand)

Ramon Berenguer III, Count of Barcelona (1082–1131), also Count of Provence and various other counties

Rhodri the Great (c. 820–878), King of Gwynedd (in present day Wales)

Roman the Great (after 1160-1205), Grand Prince of Kiev

Saladin (c. 1138-1193), Kurdish Sultan of Egypt and Syria, founder of the Ayyubid dynasty, and victor over the Crusaders

Samudragupta (c. 335–375), ruler of the Gupta empire in the Indian subcontinent

Sancho III of Navarre (c. 992-1035), King of Kingdom of Navarre

Sargon of Akkad (died c. 2215 BC), ruler of the Akkadian Empire

Sejong the Great (1397–1450), Korean king

Shapur II (309-379), king of the Sassanid Empire, Persia

Simeon I of Bulgaria (864/865-927), ruler of the First Bulgarian Empire

Stephen III of Moldavia (1433–1504), Prince of Moldavia (Romania)

Stephen Uroš IV Dušan of Serbia (c. 1308-1355), King of Serbia and Emperor of the Serbs and Greeks

Taksin (1734–1782), King of the Thonburi Kingdom (Thailand)

Timur (1336–1405), better known as Tamerlane, founder of the Timurid Dynasty

Theobald II, Count of Champagne (1090–1151), Count of Blois and of Chartres as Theobald IV, Count of Champagne and of Brie

Theodoric the Great (454-526), King of the Ostrogoths, regent of the Visigoths and a viceroy of the Byzantine Empire

Theodosius I (347-395), Roman emperor

Tigranes the Great (140-55 BC), Emperor of Armenia

Tiridates III of Armenia (285-339), King of Armenia

Umar (c. 586 to 590–644), second caliph of the Muslim Empire

Valdemar I of Denmark (1131–1182), King of Denmark

Valentinian I (364-375), Roman Emperor

Vladimir I of Kiev (c. 958-1015), ruler of Kievan Rus

Vytautas (c. 1350-1430), archduke of the Lithuanian Grand Duchy

William I, Count of Burgundy (1020–1087), Count of Burgandy and Mâcon

William V, Duke of Aquitaine (969-1030), also Count of Poitou

Xerxes I (519-465 BC), King of Kings of the Achaemenid Empire (Persia)

Yu the Great (c. 2200-2100 BC), legendary ruler in ancient China

Religious figures

Abraham the Great of Kashkar (ca. 492-586), monk and saint of the Assyrian Church of the East

Abraham Kidunaia (died c. 366, hermit, priest, and Christian saint of Mesopotamia

Albertus Magnus (1193/1206–1280), medieval German philosopher and theologian

Anthony the Great (c. 251–356), early Christian saint of Egypt

Babai the Great (c. 551–628), Assyrian church leader

Basil of Caesarea (330-379), Greek bishop and theologian

Bruno the Great (925–965), Archbishop of Cologne and Duke of Lotharingia (also listed in the previous section)

Euthymius the Great (377-473), abbot and Roman Catholic and Eastern Orthodox saint

Gertrude the Great (1256-c. 1302), German Benedictine, mystic, theologian and Roman Catholic saint

Pope Gregory I (c. 540-604)

Hiyya the Great, 3rd-century rabbi, Palestine

Pope John Paul II (1920–2005)

Pope Leo I (c. 391 or 400-461)

Macarius of Egypt (c. 300-391), Egyptian hermit

Pope Nicholas I (c. 800-867)

Photius I of Constantinople (c. 810–c. 893), Eastern Orthodox saint and Patriarch of Constantinople

William of Maleval (died 1157), founder of the Catholic congregation of Williamites

Other

Beli Mawr, a figure in medieval Welsh literature and genealogies

Emmy the Great, folk singer

Matteo Rosso the Great, Roman politician and father of Pope Nicholas III

Prokop the Great, Hussite general in Bohemia

See also

Epithet

List of monarchs by nickname

List of nicknames of European Royalty and Nobility: G-I

James, son of Zebedee, also known as James the Greater, one of the twelve apostles of Jesus

Ajax (mythology), called Ajax the Greater

Notes

Category:Monarchs Great, List of people known as The Category:Greatest Nationals Category:Epithets

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name	Steve Keen
school tradition	Post-Keynesian economics
color	lightsteelblue
birth date
nationality
influences	Hyman MinskyPiero SraffaJoseph Alois SchumpeterFrancois Quesnay
opposed	Neoclassical economics
contributions	Mathematical models of financial crises and debt-deflation }}

Steve Keen is an Associate Professor in economics and finance at the University of Western Sydney. He classes himself as a post-Keynesian, criticizing both modern neoclassical economics and (some of) Marxian economics as inconsistent, unscientific and empirically unsupported. The major influences on Keen's thinking about economics include Hyman Minsky, Piero Sraffa, Joseph Alois Schumpeter, and Francois Quesnay. His recent work mostly concentrates on mathematical modeling and simulation of financial instability. He is a Fellow at the Centre for Policy Development.

Financial instability and debt deflation

Most of Steve Keen's recent work focuses on modeling Hyman Minsky's Financial Instability Hypothesis and Irving Fisher's debt deflation. The hypothesis predicts that an overly large debt to GDP ratio can cause deflation and depression. Here, the falling of the price level results in a continually rising real quantity of outstanding debt. Moreover, the continued deleveraging of outstanding debts increases the rate of deflation. Thus, debt and deflation act on and react to one another, resulting in a debt-deflation spiral. The outcome is a depression. Steve Keen argues that the current global economic crisis is the result of too much debt.

''Debunking Economics''

Keen's full-range critique of neoclassical economics is contained in his book ''Debunking Economics''. Keen presents a wide variety of critiques on neoclassical economic theory, and argues that they show neoclassical assumptions are fundamentally flawed. Keen points out that several neoclassical assumptions are empirically unsupported (that is, they are unsupported by observable and repeatable phenomena) nor are they desirable for society at large (that is, they do not necessarily produce either efficiency or equity for the majority). He argues that economists' overall conclusions are very sensitive to small changes in these assumptions.

Keen's book closes with a survey of various schools of heterodox economics, concluding "None of these is at present strong enough or complete enough to declare itself a contender for the title of ‘the’ economic theory of the 21st century." However, he argues that neoclassical economics is a degenerative research program, not generating new knowledge but growing a belt of protective auxiliary hypotheses to shield its core beliefs from critique. There is an accompanying web site which provides more detailed mathematical expositions.

Critique of neoclassical theory of the firm

Keen's work (as opposed to his popularization) has also focused on refuting the neoclassical theory of the firm, which argues that firms will set marginal revenue equal to marginal cost. Keen notes that empirical research finds real firms set price well above marginal cost: they charge a markup, often cost-plus pricing; compare fellow Post-Keynesian Alfred Eichner, who also argued for markup pricing.

He cites Eiteman & Guthrie, finding 89% of firms set prices above the level where marginal revenue is equal to marginal cost, as well as more recent work by Alan Blinder.

Keen's article on "profit maximization, industry structure, and competition" has had counter-arguments by Paul Anglin.

Criticisms

Some reviewers contend that Keen has not shown what he claims and that he misrepresents economic theory. Keen agrees that some more nuanced and qualified versions of neoclassical economics exist at very high levels. However he claims that his critique is aimed at the core neoclassical ideas that are taught in universities at undergraduate and postgraduate level and which are often used as the basis for policy prescriptions. As a cover blurb from Alan Isaac states, Keen's book is "A wide-ranging yet accessible critique of the staples of neoclassical pedagogy."

Firms setting price to marginal cost is consistent with the neoclassical theory of the firm if those firms have some ''market power''. However, Keen argues" that economic theory neglects the effect on price of increasing or reducing supply by a single item and finds that charging a markup is actually a more stable, profitable equilibrium. In neoclassical theory, a firm would also charge a markup above marginal cost. In fact, part of the purpose of the work by Eiteman & Guthrie and by Blinder that Keen cites as evidence, was to show that real life firms have some monopoly power, within the standard context of a neoclassical model.

Other publications

Lee, Frederic S. and Steve Keen (2004): "The Incoherent Emperor: A Heterodox Critique of Neoclassical Microeconomic Theory", ''Review of Social Economy'', V. 62, Iss. 2: 169-199

Co-editor of: ''Commerce, Complexity and Evolution: Topics in Economics, Finance, Marketing, and Management: Proceedings of the Twelfth International Symposium in Economic Theory and Econometrics.'' New York: Cambridge University Press. ISBN 0-521-62030-9.

See also

Paul Ormerod

References

External links

Website of "Debunking Economics" and Steve Keen's personal web site

Steve Keen's Debtwatch blog

List of Steve Keen's publications

There is madness in their method A sample chapter from Debunking Economics.

A more detailed presentation of the contents in the Physica A article.

A news feature on an Econophysics paper co-written by Prof. Keen appeared in the journal Nature, accompanied by an editorial.

Interview conducted on the 13th of Dec 2009 by Dominic Frisby about Steve Keen's predictions for 2010

Steven Keen 04 February 2010 (video from Switzer TV)

Category:Australian economists Category:Australian academics Category:University of Western Sydney faculty Category:Post-Keynesian economists Category:Living people Category:Year of birth missing (living people)

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