Philosophy of Society

Philosophy of Economics (Economic Theory)

Neoclassical Economic Theory

At the end of the 19th century, new trends emerged in economic theory that propelled the development of neoclassical economic thought. The founders of this theory preserved the core ideas of classical economists, particularly regarding the non-interference of the state in the economy, the free market, and the self-organization of economic processes; however, they shifted the focus of their inquiry: whereas classical economists concentrated on macroeconomics—studying the economy of states, peoples, and international economic relations—neoclassicals turned their attention to microeconomics, emphasizing the individual, personal interests, and economic management. To underscore their interest in microeconomics rather than large systems, they abandoned the term "political economy" in favor of simply "economics."

Neoclassical economic theory is characterized by the following features:

• Rejection of Ideology: Unlike classical economists, who sought to integrate their economic ideas with broader notions of the state and humanity, neoclassicals avoided employing grand philosophical systems to explain economic processes.
• Analysis of Limited Resources: Neoclassicals operate under the belief that natural resources are finite (regardless of economic growth or the pace of industrialization, the quantity of land, water, sunlight, etc., remains unchanged), and thus people must learn to allocate these resources wisely so that everyone can access essential goods. The task of economic science is to construct a rational and balanced system of distribution and economic relations to ensure that all can receive what they need.
• Utilitarian Assumption: Neoclassicals assume that individuals are inherently inclined to pursue their own interests and welfare. They tend to manage their economic activities rationally, aiming to satisfy their needs. No healthy individual works for their own detriment or that of others.
• Marginal Utility as Central Category: The principal category of neoclassical economic analysis is marginal utility. Neoclassicals abandoned the labor theory of value, positing instead that the price of a good is determined by the amount a buyer is willing to pay for it—that is, the value of the good to the buyer. For example, when a person is hungry, bread holds significant value, and they are willing to pay for it. However, after purchasing one piece of bread, the next one holds less value than the first. Thus, each subsequent unit of a good possesses less value for the buyer than the previous one. For a producer, it is advantageous to produce and sell a good when the buyer is willing to pay a sum that exceeds the cost of production. When the production cost equals the price a buyer is willing to pay, that price represents the marginal unit in the assessment of utility. This method of marginal utility has also led to the term "marginalism" as an alternative name for neoclassicism.

Several schools are distinguished within neoclassical economic theory. The first is the Austrian School, founded by Carl Menger (1840-1921), with notable figures such as Eugen von Böhm-Bawerk (1851-1914), Friedrich von Wieser (1851-1926), Ludwig von Mises (1881-1973), Joseph Schumpeter (1883-1950), and Friedrich von Hayek (1899-1992), among others. Proponents of this school believed that each person, in their economic activities, realizes their own selfish interests. To understand what drives the economy, it is necessary to explore the inner world of individuals, thus framing economics as applied psychology. Since all individuals seek their own welfare and base their economic activities on reason, their interests converge. Everyone desires quality state institutions and good laws, sufficient earnings, and a sense of security, among other things. As people’s interests align, they do not oppose one another but tend to collaborate and complement each other. On this basis, Austrian school theorists vehemently criticized the Marxist thesis of class struggle, asserting that representatives of different classes do not oppose each other but rather work together to satisfy their interests, as the gain of one is simultaneously the gain of all.

The foundations of the Cambridge School were laid by British economist Alfred Marshall (1842-1924). He is noted for attempting to distance himself from the psychological focus of the Austrian school, aiming to integrate principles of classical economic theory with marginalism while conducting significant research in the field of economics, thereby advancing microeconomic theory. In the realm of economic philosophy, he advocated a stance of moderate liberalism: there are areas of the economy where state intervention is unwarranted, yet there are also spheres where such non-interference is irresponsible and immoral.

British economist William Stanley Jevons (1835-1882) established the groundwork for the mathematical theory of political economy. Expanding upon the concept of marginal utility, Jevons defined it as the pursuit of pleasure and the avoidance of suffering. Therefore, that which is useful is what brings enjoyment and alleviates suffering. The task of economics is to study satisfaction and the means to enhance it. Jevons's contribution lies in the application of mathematical logic, developed by George Boole (1815-1864), to economic analysis.