Business & Investments

Write-up by Albert Frank

The origin of a classical method to economics goes back to the 18th century. Adam Smith’s book on Economics, “An enquiry into the nature and causes of wealth of nations” was published in the year 1776. Neoclassical theory proposes or assumes that the market as an abstract thought. And all the players in the market, i.e. the buyers and sellers as well are ‘actors’ who are playing their part. It also proposes that markets will reach equilibrium, if all the sellers who want to sell at or below a given cost will sell to buyers who are willing to get at or above a given price, the cost is worked out in the market.

Neoclassical theory is an method to economics that relates supply and demand to an individual’s rationality and his or her capability to maximize utility or profits. The concept utilized mathematical equations to study the numerous aspects of economy. This approach was developed in the late-nineteenth century, based on books by William Stanley Jevons, Carl Menger and Leon Walrus.

It provides an analytical framework from which to argue in favor of the existing distribution of wealth: wealth is the result of the decisions that people make, not the result of processes of coercion, theft, colonization, etc. In neoclassical theory, those who turn into wealthy do so by challenging work and frugality, whilst those who grow to be poor do so by profligacy and laziness. It must be noted that the economy will attain equilibrium only when there are unrestrained market exchanges, allowing individuals to take decisions without the interference from the government.

Adam Smith proposed the concept of an ‘Invisible Hand’. The idea of the invisible hand was that, in a no cost marketplace, people conduct their economic affairs in their own very best interest and the overall economy will function well. As Smith put in, “in a marketplace economy individuals, whilst pursuing their own self-interests, seem to be led by an ‘invisible hand’ to maximize the general welfare of everybody in the economy.”

Given that its inception, the neoclassical approach has grown to turn out to be the main take on the modern-day economics. It is 1 of the widely taught form of economics.

Neoclassical concept of economics is criticized by Keynesian Idea of economists. They do not think in the abstract assumptions taken by the classical economists.

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