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Neoclassical Economics Concepts and Theories Essay

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Updated: Mar 18th, 2020

Stanley Jevons was a neoclassical economist who, among others, advanced the economic theory of marginal revolution. He explained labor and consumption in terms of marginal utility. Classical theorists held the view that the value of a product is directly proportional to the labor used in production.

Jevons, on the other hand, argued that the value of “each additional unit of a commodity-the marginal utility-is less and less to the consumer” (Swedberg 12). He gave an example of a thirsty man and a glass of water. The first glass has more value, but as thirst disappears, subsequent glasses diminish in utility.

Value is, therefore, directly proportional to the utility. This paper will integrate various economics concepts and theories and connect them to the realities of modern society.

Jevons uses his book, ‘The Coal Question,’ to extrapolate how labor relates to consumption. He argues that with increased efficiency in coal mining methods, Britain and America will experience rapid growth (Bentham 5). Fast production increases rates of consumption. This, he argues, will lead to depletion of coal resources in the two nations. America will, however, have an upper hand because it has more coal deposits than Britain.

Jevons also argues that with technology, there will be labor efficiency, which will translate to higher rates of employment. Increased efficiency leads to more consumption and higher profitability. Jevons acknowledges the classical theorists’ assertion that technology brings about unemployment.

However, he advocates for a holistic perspective on the issue. High efficiency leads to increased production. This lowers products’ prices leading to more demand. The high demand widens the employment sphere, thus putting more jobs into the economy.

Jevons’ arguments differ from Veblen’s concepts of conspicuous leisure and conspicuous consumption to a substantial extent. The gist of Jevons’ postulate is that efficiency triggers consumption with a spiral effect on profitability and employment. Veblen argues that people engage in leisure activities to display social status. He traced conspicuous leisure to the early ages when the nobility was exempted from manual labor.

With social stratification, conspicuous leisure and consumption have taken different forms. Rich people in society engage in conspicuous social activities like visiting exquisite destinations and idling all day. They also consume expensive products to show off to the public.

They thus do little work and consume more. Rodrick avers that leisure is nothing but “non-productive consumption of time” (978). Because of their dislike for working, the wealthy spend most of their time consuming what others have produced.

In modern society, Veblen’s concepts of conspicuous leisure and conspicuous consumption can be equated to materialism. This marks the divergence of his concepts from Jevons’ arguments (Chomsky 2). Jevons believed in increasing efficiency to spur consumption, profits, and growth. According to him, high production leads to a price reduction. Cheapened products widen the scope of employment.

Conversely, Veblen argues that consumption stimulates production. The wealthy are preoccupied with lavish spending and unproductive use of time. They devise etiquettes and mannerisms that consume time. Additionally, the house and cloth their servants in spacious spaces and unique attires (uniforms). These unnecessary and lavish desires escalate demand and consumption.

In summary, Jevons had high regard for marginal utility. He argues that labor should contribute to the higher utility for consumers. Veblen, on the other hand, paid little regard to marginal utility and more on the cost of production (Jones 23). Jevons has been criticized for failing to integrate production cost concepts in his elucidation.

Veblen’s concepts have formed templates for studies into modern day materialism. This is because his concepts considered the social and cultural contexts as components in understanding economics.

In the last parts of the 19th century, marginalist writers disregarded political economy in favor of pure economy. The mathematical analysis became common as the place of political and social considerations diminished. Neoclassical writers such as Leon Walras and Stanley Jevons discarded the classical era thought on economics by adopting empirical research.

Walras had the most revolutionary view on the application of mathematics in economics. In a letter to his mentor, Charles Gide, Walras argued that economics should expunge the inherent “phraseology and charlatanism” that was a common feature of classical economics (Geisst 3). This section will elucidate on thoughts in favor of applying mathematics in pure economics.

One of the things that perturbed Walras was the common phenomena in which business existed without making a profit or a loss. In a free market, the prices of commodities rise or fall according to dictates of the law of demand and supply (Bentham 2). In the absence of government regulation, there is no set criterion for price determination. Walras sought an empirical way of determining the theory of equilibrium.

This theory underscored the significance of utilizing capital goods optimally. By applying mathematics logic, Walras was able to determine the price in a market system. This sparked a lot of controversies, especially from classical economists who found the approach inadequate in explaining industrial competition.

Stanley Jevons was also among the early pioneers to use mathematics in economics. As mentioned earlier, the economist is most famous for his expositions on marginal utility. When he delved into the economy, he brought with him a logic and statistics acumen that was lacking in this field for a long time. He introduced a mathematical and empirical plane in the studies of political economy.

He also introduced to economics the mathematical concepts of probability and statistics. His philosophical orientation stems from early interactions with Boole, a man reputed for prioritizing mathematics over logic (Altman 2). However, Jevons broke from his mentor by giving logic priority over mathematics.

Jevons’ biggest contribution to mathematics in economics was limited to the pedagogical sphere. As a statistician, he introduced “statistics and econometrics in the social sciences and the use of empirical data” (Drucker 23). Jevons’ prowess in recording and interpreting data would not have been noticed was it not for the 1851 gold discovery in Australia.

Eager to put his theory into practice, he used index numbers and probability to establish the probable duration of the mineral deposit. He applied inverse induction and graphical representation to reduce the errors inherent in similar studies.

Economists have tried to unravel the key to macroeconomic stability for a long time. Wicksell and Fisher, both neoclassical economists, advocated for increases in money supply as a way of establishing macroeconomic stability. According to Chomsky, Wicksell’s argument on micro-stability is tantamount to “urging banks to reduce the rate of interest below the real rate of return on capital” (23).

This would make investments attractive and escalate the overall spending. Inevitably, high spending leads to high inflation. Inflation reduces when banks are left with the legal amount of money. The cumulative process sets the stage for stability at the macro-economic level.

This supposition is self-contradictory. The inherent confusion led Bentham to the conclusion that Wicksell and Fisher theory was an “intellectual witch’s brew: many ingredients, some of them exotic, many insights, but also a great deal of confusion” (23). Precipitating artificial inflation leads to a financial crisis, not macroeconomic stability.

The Keynesian general theory provides plausible measures for attaining macroeconomic stability. His suppositions were multidimensional, and he was cognizant of the different factors that come into play within an economic setup. Three different factors must play out to attain macroeconomic stability.

Altman itemizes these factors as “goods, the financial, and the labor markets” (4). These three factors interact and cause shifts between individual and national savings on one side and investment on the other side. The exchange between input and output leads to a natural interest rate. Because the interest rates are natural, it is easier for different stakeholders to operate in openness and trust.

Keynes’ position is in contrast to Wicksell and Fisher, who advocated for artificial interest rates. To attain macro-economic stability, prices of commodities must be stable. Employment opportunities must be available, and growth must be rapid. With Wicksell and Fisher’s model, it is hard to realize stable prices.

On expectations, Keynes model offers the best tool for predicting the future with accuracy. Because the interest rates are natural, it is easy to know when to be optimistic or pessimistic. An increase in efficiency of capital is a pointer of better results and more stability.

When the marginal efficiency of capital falls, investors can lower their expectations. Wicksell and Fisher’s model is capricious and hence, impossible to predict. Interest rates are at the whims of one institution rather than a result of the interplay of various factors.

Keynes also differs with Wicksell and Fisher on money and monetary policy. Wicksell and Fisher believed in the quantity theory of money. The more money there is the economy, the more people will spend. The high expenditure will lead to a high return. In essence, therefore, Wicksell and Fisher advocated for a monetary policy that leads to artificial inflation. It is for this reason that Fisher came up with the infamous compensated dollar plan.

The plan sought to increase the amount of money in the economy. Keynes, on the other hand, proposed a total spending monetary policy.

The major division among Keynesian economists is the influence of monetary and fiscal policy. However, they agree that monetary policy can “produce real effects on output and employment only if some prices are rigid” (Bentham 23). The economy runs on a multiplier effect that incorporates many monetary outputs and inputs.

In conclusion, the paper has discussed several economic concepts and theories. The common school of thought during the classical era was pegged on the cost of production. In the neoclassical era, marginalist thinkers introduced mathematics concept in economics.

This made it possible to use empirical data in analyzing the political economy. By the turn of the 20th century, the Keynesian model had emerged as the best tool for economic analysis. This paper has traced all these developments and discussed their implications to political economy.

Additionally, the paper has reviewed Wicksell and Fisher’s economic models and contrasted them with the Keynesian model. Political economy does not exist in a vacuum. It is thus open to influences from social and cultural changes.

Works Cited

Altman, Daniel. “Joseph Stiglitz Q & A.” 11 Oct. 2006. The Economists View. Web. 3 Oct. 2013 <http://economistsview.typepad.com/economistsview/2006/10/joseph_stiglitz.html>

Bentham, Jeremy. Defence of Usury. New York: Theodore, Foster, 1787. Print.

Chomsky, Noam. “Notes of NAFTA: “The Masters of Man”. Chomsky. 3 Sept. Web. 3 Oct. 2013 <http://www.chomsky.info/articles/199303–.htm>.

Drucker, Peter F. Innovation and Entrepreneurship. London: Routledge, 2012. Print.

Geisst, Charles R. Beggar Thy Neighbor: A History of Usury and Debt. Philadelphia, PA: University of Pennsylvania Press, 2013. Print.

Jones, David Wayne. Reforming the Morality of Usury: A Study of Differences that Separated the Protestant Reformers. Lanham, MD: University Press of America, 2003. Print.

Rodrick, Dani. “Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform.” Journal of Economic Literature 11.4 (2006): 973-987. Print.

Swedberg, Richard. “Social Entrepreneurship: The View of the Young Schumpeter.”. New Movements in Entrepreneurship Book. Ed. Chris Steyaert and Daniel Hjorth. New York, NY: Edward Elgar Publishing, 2008. 21-31. Print.

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