The creators of neoclassical economics differentiated from other schools of economics in their understanding of what determines the utility of a commodity in the market. At the height of the Industrial Revolution, the market place was understood in terms of classical economic theory. In his text The Wealth of Nations, Adam Smith explained that the labour theory of value ruled that the value of a product was linked to the “the toil and trouble of acquiring it.” The value of an item was determined by the costs and effort invested in producing it. As the intensification of industrialization started settling down, a new breed of economists began to interpret what influenced value from a different perspective. Neoclassical economists started moving away from classical economists views of the market from the macro-level, and diverted more attention to the micro-level. For the creators of neoclassical economics, the most important determiner of utility of a product was not in any concrete value in and of itself, but value was mainly determined by consumer’s own perception.
Neoclassical Economics
Believing that people were utility maximizers, neoclassical economics assumed people would behave rationally and know best for themselves what commodities they value and which they do not. As a result, the creators of neoclassical economics viewed value of a product to be an issue of subjectivity because every individual in the marketplace places different value on different objects for different reasons. Neoclassical economists introduced an important concept to understand value of a commodity: marginal utility. What this means is that additional units of a certain product can profoundly influence the overall value of a commodity to an individual.
Marginal utility a product’s value dependent on certain conditions that make it that much more precious. If a magazine publisher decides to shift the focus to photography, a good photographer becomes that much more valuable. If you eat a hotdog and you remain hungry, every additional hotdog that you eat afterwards may increase the total utility you enjoy, but it lessens the marginal utility of every additional hotdog because each one yields less satisfaction as you become full or ill from consuming too many. Neoclassical economics stresses that valuables are only valuable because the conditions are ripe for the consumer to enjoy it for producing high utility.
The creators of neoclassical economics saw their models as a direct challenge to the inflexible classical economics school. In his 1871 book The Theory of the Political Economy, English economist and logician Wiliam Stanley Jevon was among the most influential neoclassical economists by expounding on the theory of utility. Jevons provided mathematical models illustrating the idea of diminishing utility with additional units of a commodity in an attempt to ground economics as a “real science.” Another creator of neoclassical economics that studied the idea of utility independently but concurrently with Jevons included Austrian economist, Carl Menger. Menger spent most of his efforts refuting the theories of classical economists such as Adam Smith. His 1871 study The Principles of Economics directly challenged the cost-of-production theories developed by traditional economists by shifting the focus from their views of cost-based value towards greater attention being paid to the myriad of other influences on value, including individual perception.
Although these early neoclassical economists laid the foundation for conventional economic wisdom to be challenged, other creators of neoclassical economics subsequently elevated neoclassical economics to be embraced by the mainstream. Influenced by early neoclassicists such as Jevons and French neoclassical economist Leon Walras, English economist Alfred Marshall modeled ideas such as supply and demand and marginal utility. These mathematical models introduced economics to the world of academia by grounding it in numbers, while incorporating dimensions of sociology, politics, and science into the study of economics.
Shortly thereafter, the acceptance of neoclassical economics as the definitive understanding of political economy spread across the Atlantic as American neoclassical thinkers began to enjoy greater influence. American neoclassical economist John Bates Clark was among the first to challenge the institutional oriented classical economics that reigned in American attitudes at the time. Part of his appeal may have been his dread of the influence of communism in repressing individuals in the market by depriving them of the capacity to maximize profits and utility in their daily life which can best be achieved in a free market. Another influential American neoclassical economist was John Hicks who revolutionized neoclassical economics by taking elements of its micro-level characteristics and introducing the macro-level attention given by Keynesian economics. By doing this, Hicks was among the creators in formulating neoclassical synthesis. Neoclassical synthesis shares theories from both neoclassical and Keynesian economics in order to insure maximum equilibrium and stability in the market place.
