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The Death of Neoclassical Economics

The fall of communism symbolized the triumph of capitalism and free market over protectionist economics. Resultantly, the world has experienced the concepts of free trade and free government pushed as the most effective means of combating and alleviating poverty, disease, and various plights suffered in greatest numbers in the least developed parts of the world. In terms of economic prosperity, the United Nations classifies the world into two categories: the developed world, which includes the industrialized countries of Western Europe, the United States, Japan, Canada etc. The rest, where four fifths of the world’s population resides, is known as the developing world. Neoclassical economics has become so institutionalized and embedded into our way of thinking that countries are defined as being either a ‘Least Developed Country’ (LDC) or a ‘Developed Country’ before it is viewed in terms of culture, components of its economy, or its existing political institutions. Among the loudest cheerleaders of the globalized system of capitalism are the neoclassical economists. In neoclassical economics, human nature is uniform whether you are speaking of Indonesians or Brazilians or Germans or Americans: humans are inherently rational by being utility maximizers and loss minimizers. However, this underpinning assumption carries a risk in that the failures of neoclassical economics may signify its death in popularity and support.

Neoclassical economics pushes the ideas of liberalization and absolute economic freedom. Institutions such as the International Monetary Fund (IMF) and World Trade Organization (WTO) were designed as a rejection of the overly protectionist policies that were commonly blamed for previous economic collapses, including the Great Depression which created the fertile environment for World War II. The WTO and IMF institutionalize conformity to a certain vision of development and prosperity, with their mission statement appealing to predominantly developing countries to increase their standards of living that accompanies expanding exchange of goods and services. Neoclassical economists’ stress that liberalization in the market was complementary of their characterization of human nature: if treated equally and free, individuals are the best deciders for understanding what they need and want to maximize their life satisfaction. Game theory of neoclassical economics suggests that individuals would be foolish to try to compromise this free market system because they had stake in this economic system. Economic interdependence creates incentives for cooperation and a desire to resolve conflicts with as little economic damage as possible. Naturally, among the critique of this economic theory is that cultural relativism. Perhaps humans are rational beings whose behavior is characterized by a self-interested pursuit of maximum utility. Still, the methodology and interpretations of constitutes ‘pleasure’ may vary drastically between and amongst cultures and beliefs. The neoclassical idea of supporting as much individualism as possible reflects Western values – read: the developed states – than values associated with developing countries that prioritize community obligation and being part of a whole greater than one self.

Furthermore, statistics suggest that by pushing for economic liberalization under the banner of neoclassical economics principles of individualism and free trade, the least developed countries are little equipped to compete with the architects of the neoclassical world order. Prominent neoclassical economists such as Alfred Marshall, John Hicks, and William Stanley Jevons represent an important, but small, segment of global society. Their perspective on human nature and the proper workings of the market was limited to wealthy neighborhoods by comparison to the immensity of daily human interactions across the world. The death of neoclassical economics may be rooted in its detachment from those who it wishes to expand on to. According to a UNDP Human Development Report, in 1965 (which predates the intensifications of tariff breakdowns and free market) the poorest 20% owned 2.3% of the world’s income whereas the richest 20% had 69.5%. In 2002, the richest 20% received 85% of the world’s wealth whereas the poorest 20% received only 1%. The standard of living has not improved in many areas of Asia, South America, and Africa. In economic sectors where least developed countries have a comparative advantage in, namely textiles, clothing, and agriculture, developed countries have not played the rules espoused by neoclassical economics. For example, Europe and America still pay high subsidies to their farmers and often place handicapping quotas to textile markets of the developing world. The threats of debt derived from “development loans” to the developing countries expose how institutionally and structurally inadequate the developing world is in benefiting from neoclassical principles.

On one hand, it is unfair to scold the developed countries to protect their own interest. After all, this self-interest is encoded in the principles of neoclassical economics. But, the death of neoclassical economics is its half-hearted and inconsistent implementation to directly undermine other participants. To be sure, free trade is not inherently “bad.”  The number of people in absolute poverty has declined and nowhere on Earth has life expectancy decline in the last half century.  One way to look at it is that neoclassical economics is a knife.  On one hand, it can perform miracles in healing the ill.  On the other, it can be the perpetrator of the worst suffering as a tool of murder.  The death of neoclassical economics is dependent on how it is applied.

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