Neoclassical school of economics

This school of thought, which appeared around 1870 in what is known as the marginal revolution, can be considered a development of the classical school of economics’ main ideas. Supporting the concept of marginalism, and being more scientific in its work than its predecessors, the neoclassical school left aside classical economics’ matters such as wealth distribution and value theory, to study thoroughly the mechanisms that allow the allocation of scarce resources in different markets. This is, understanding how agents, such as consumers and producers, will try to maximize its objective function, utility and production, considering some given constraints, such as budget and input constraints. Indeed, it was the neoclassical school that initiated the study of optimisation problems including utility maximisation and, its dual problem, cost minimisation.

Although the boundaries of this school are quite diffuse, a number of common characteristics can be found in its adherents’ work. They will work supporting methodological individualism, and extensively using mathematics in order to support their conclusions. There will usually appear analysis studying the relations between both supply and demand, instead of studying them separately. They will use throughout their studies the Latin phrase ceteris paribus, as well as the term homo economicus. Finally, it was in the work of neoclassical economists that a distinction between positive economics and normative economics started to shape.

As the neoclassical school includes many renowned doctrines and schools, a mention to some of these schools is in order. The Austrian school included one of the most important marginalist economist, Carl Menger, as well as other renowned neoclassical economists such as Eugen von Böhm-Bawerk, Ludwig H. E. von Mises and Friedrich A. von Hayek. The Lausanne school included economists such as Léon Walras and Vilfredo Pareto. Finally, the Cambridge school included Alfred Marshall, considered the “father of modern economics”, as well as Arthur C. Pigou and Francis Ysidro Edgeworth.