Sunday, March 30, 2014

What is Wrong with Neoclassical Economics?

The list is a long one and includes practically every major theory:
(1) classical loanable funds theory, with time preference explaining the interest rate;

(2) Wicksell’s natural rate of interest;

(3) neutral rates of interest;

(4) rational expectations;

(5) the belief that real world market economies can be modelled with single representative agent models where agents maximise utility;

(6) Ricardian equivalence;

(7) belief in a real world tendency to general equilibrium;

(8) belief that money is neutral (whether in the short or long run, or in the long run);

(9) the quantity theory of money;

(10) the law of demand as a universal law;

(11) the law of diminishing marginal utility as a universal law;

(12) the law of diminishing marginal productivity;

(13) the belief that firms equate price with marginal cost or move price towards marginal cost;

(14) the belief that agents maximise utility in the neoclassical sense;

(15) the belief that involuntary unemployment is fundamentally caused by inflexible wages.

(16) the idea that macroeconomics needs rigorous microfoundations.
After all these have been thrown aside, there is not much left of mainstream economics.


  1. Nice list.

    I'll also add the neoclassical production function.

  2. This list should really be called "things that some (but not all) economists who I characterize as neo-classical believe and that I disagree with".

    I very much doubt if there is an economist alive who believes in all 16 of those things.

    1. Yeah, but the major problem with neoclassical economics is that a majority of mainstream economists believe in most of those articles (perhaps because they learned it in colledge). Just because some neoclassical economists work against some of those things, the whole consensus is unchallenged. That makes the whole neoclassical doctrine invincible and self-perpetuating.

  3. (17) The belief that wages are determined by the marginal productivity of labour, and that profit is determined by the marginal productivity of capital.

    See this:

  4. Should Rational Choice Theory be added too?

    1. Well, yes, but I think it comes under (4) and (14) above.

  5. I don't know if you saw this, LK:

    Marc Lavoie

    1. Thanks for this link.

      A great talk, and I have linked to it here:

  6. Hello LK,

    I would like to ask your permission to translate some of your excellent posts into Polsih and publish it on my webpage(with indication of the source of course)

    Would it be possible?

    Please let me know if you have some questions about the nature of our project:

    Kind regards,