What Is Neoclassical Economics?

Neoclassical economics, corresponding to the early, commonly known as: the first generation of Neoclassical Economics (NeoclassicalEconomics); corresponding to the popular name beginning in the 1970s: NewClassicalEconomics, the second generation; A new genre that has developed since the 1980s is NewClassical Economics; and the fourth synthesis since the end of the 20th century.

Neoclassical economics

The first generation of neoclassical economics

The systematic development of economics originates from

As the crisis of classical economics was approaching, some people suddenly realized that the previous economic theory only emphasized production and cost, but ignored utility and demand. Therefore, the big tree of economics has branches: one branch is based on Marx as an outstanding representative, and continues along

Analysis framework

Neoclassical economic meaning

First, it discards the concept of neoclassical economies of scale and uses specialized economies to characterize production conditions.

Second, it does not have an absolute separation between pure consumers and enterprises, while the neo-classical framework is that pure consumers and producers are absolutely divisive.

Third, in emerging classical economics, transaction costs have a decisive significance for the topological nature of economic organizations.

If you are new to emerging classical economics for the first time, it is difficult to understand the meaning of this new analytical framework to economics, and it is difficult to feel its charm. Let's start with the question: Why propose this new analytical framework? The answer is simple. Some shortcomings of the neoclassical analytical framework limit the development of economics. If we discuss the shortcomings of the neoclassical analysis framework in a vague manner, I am afraid it will be unconvincing. 1977), Krugman (1979), and Fujita and Krugman (1995) and other models as examples to see what are the shortcomings of the neo-classical analysis framework, and how the new classical analysis framework is Overcoming these shortcomings.

Characteristics of neoclassical economics

Emerging classical economics has a very analytic framework, which can integrate all the schools of modern economics into a new mainstream school of economics. Compared with neoclassical economics, the emerging classical analytical framework has the following characteristics.

The role of neoclassical economics

It is widely acknowledged that the theories of Dickett, Stiglitz, Krugman and others have played a pioneering role in the formation of new trade and new growth theories. Their model changed the assumptions about diminishing returns to scale or unchanged total returns to scale in the past growth models, and introduced the assumption of increasing returns to scale, which greatly improved the explanatory power of growth theory. It is under their impetus that economies of scale have become a hot topic in the international economics community since the 1970s.

Neoclassical economic dilemma

Nevertheless, their theory faces the following dilemmas.

First, their predictions about economic growth and other phenomena if and only if the average size of the manufacturers expands are inconsistent with reality.

In their view, the reason why the scale of manufacturers is enlarged is because of the endless economy of scale, and the scale of manufacturers is never smaller, because it means that the scale is not economical. However, empirical evidence from OECD countries, Asian newly industrialized countries (regions), and China (see Zhang Yongsheng, 2000: "Independent Theory of Manufacturer Size: Theoretical and Empirical Evidence") shows that the average size of manufacturers is not increasing, but increasing. It is smaller and smaller, and the overall trend is U-shaped. Undoubtedly, the phenomenon of increasing returns is the most exciting plot in the history of economic growth, but as Allen Younger pointed out in his famous paper (1928), the mechanism for achieving increasing returns is division of labor and specialization, and economies of scale are the division of labor and specialization. A false description of the economics.

Second, in their model, the enterprise is just a "black box". Why the enterprise appears and the economic meaning of the enterprise system itself cannot be explained. It is an interesting "new development phenomenon" in modern business society, such as the size of the enterprise is becoming smaller. , Production outsourcing, contract transfer, improving the core competitiveness of enterprises, franchise chain operation, OEM production, e-commerce, etc., it is even more difficult to explain. Their framework cannot endogenize the enterprise system. If they want an endogenous enterprise system, all their conclusions will change accordingly; and if there is no innate enterprise, all the stories in their model will not happen.

Third, transaction costs have no substantive meaning in their models, and there is no transaction cost for phenomena such as enterprise expansion. One of the important reasons why economics has improved its explanatory power after the 1970s is the introduction of transaction costs into economic analysis by the new institutional economists represented by Coase.

New Classical Economics Correction

So, can we amend these theories without changing the analysis framework to get out of the above dilemma? The approach of Jones, Dasgupt et al. And the National Research Council (see C. Jones, 1995a, b, 1996; Dasgupta, 1995; National Research Council, 1986) may give us some inspiration. After discovering empirical evidence that negates new endogenous growth models such as R & D, they proposed an improvement plan within the original framework. Jones (C. Jones, 1995), Young (AlwynYoung, 1998) and Segerstrom (1998) suggested several methods to avoid the type V (research and development investment) scale effect in the R & D model. However, Jones himself acknowledged that "this improved model is also imperfect because it also produces a population (type I) scale effect." If the scale effect is missing in the neoclassical endogenous growth model, endogenous growth will not occur again. These empirical studies show that the neoclassical endogenous growth model does not provide a convincing explanation of the driving mechanisms behind economic growth (Jones, 1995a, pp. 508-509). The neoclassical growth theory attributes increasing returns to economies of scale, and the source of economies of scale is a mystery to it.

If you have read the classics such as Smith's The Wealth of Nations, Younger's "Incremental Reward and Economic Progress" published in TheEconomicJournal in 1928, and Stigler's "Market Capacity Limiting Division of Labor" published in 1951, we will Understand why the Smith-Younger theorem is called the most important theorem in economics. The incremental returns in economic growth do not come from economies of scale, but from the division of labor and specialized economies. Specialized economy is a much more appropriate concept than economies of scale. The shortcomings of the models of Dickett, Stiglitz, Krugman, and others are the analysis framework. Only by improving the analysis framework can we fundamentally overcome its limitations. Unfortunately, the concept of economies of scale is more misleading for economists because it is closer to people's intuition and is in line with people's determination to transform the world. If we replace the economies of scale with specialized economies, we no longer need to resort to the flawed concept of economies of scale to generate incremental returns.

Combination of neoclassical economic theory and practice

It can be seen that the classical economic thought represented by Smith's division of labor theory can better explain the economic reality around us. However, the theory of division of labor alone is not enough. There is no enterprise theory in Smith's theory of division of labor. If we are unfortunately living in a self-sufficient society, how can we evolve into a highly divided modern society characterized by enterprise systems? Neoclassical economics cannot solve this problem. So Kos appeared. He said that division of labor is not enough to generate enterprises because the function of the market is to organize division of labor; aversion to risk is not enough to generate enterprises because the insurance market can solve this problem.

The fundamental reason for the enterprise system is to save transaction costs. Zhang Wuchang (1983) further pointed out that the emergence of enterprises was the result of labor transaction costs being lower than product transaction costs. However, there is no direct meaning of economic growth in the transaction cost theory of Coase et al. And what penetrated the theories of Smith, Yange, Coase, and Zhang Wuchang, was Yang Xiaokai and others. They built the analysis framework on the basis of personal self-interest decision-making interactions, introduced transaction costs into the model, and at the same time endogenously generated corporate systems, economic growth, incremental returns, and the size of manufacturers, thereby completely overcoming neoclassical growth theory The above flaws. Their model endogenizes the enterprise system in the division of labor, and directly injects the meaning of economic growth into the enterprise theory. In this way, a new theoretical path was opened up.