What is really neoclassical economics?

So Noah Smith thinks that I, Lars Syll and Steve Keen, and other heterodox bloggers (in which he adds Austrians; you see why they should teach History of Thought?* For a discussion of the meaning of heterodox economics, including why Austrians are not so, go here) use the term neoclassical economics as a pejorative term. In fact, in the post he links to, in which I do criticize his views on Graber's work, I do say this on neoclassical economics: "mainstream (neoclassical) notions about debt are really problematic." So nothing derogatory or abusive is suggested. What is said there is that certain views of that particular school of thought are not necessarily free of problems. So no, neoclassical is not a slur.

But before I get back to what I think Noah is trying to get to, we need to address the actual meaning of neoclassical economics. For starters neoclassical is a bit of a misnomer. Veblen invented the term to suggest continuity between the old classical school and the new marginalist school of his time, fundamentally based on Laissez Faire providing an intellectual link between both groups. But the continuity between classical authors and marginalists is not defensible, once one goes beyond certain policy stances and concentrates on the main theoretical propositions of both schools [in this respect the book by Krishna Bharadwaj is still worth reading]. But we are to some extent stuck with the name. So be it.

The core propositions in neoclassical economics are associated to what Garegnani referred to as the data of the system, that is, the variables that are taken as exogenous and allow explaining the functioning of the system, namely: the endowments of factors of production, the preferences of the economic agents, and technology. On the basis of these variables the supply and demand functions of all goods, including the so-called factors of production (capital, labor and land), can be determined, and as a result the relative prices of all goods and the efficient allocation of resources is established. Central to the approach is that supply and demand for labor and capital determine the remuneration of these factors of production, and as a result, and in contrast to classical political economy and Marx, income distribution is endogenously determined [there are insurmountable problems with this theory, as Paul Samuelson accepted, subscription required; for more go here]. And there are differences between the old version of neoclassical models based on the notion of a long term equilibrium (which is what is still taught in undergrad courses) and the intertemporal version, but for our purposes we can just omit the differences.

Note that Noah says that neoclassical economics is: "Assumption of individual rationality, utility maximization, and supply/demand." But this is at best incomplete, and at worst simply incorrect. Yes they assume individual rationality, but that was also true of classical authors like Smith, Ricardo and Marx, who wouldn't assume that capitalists did not rationally pursue profits. And a more relevant discussion would be about types of rationality, substantive or bounded (like in Simon, but I'll leave that for another post). And also, social utility, not personal individual subjective utility, was essential for classical authors, since nothing that didn't have use value (utility) would be produced. Finally, market prices, but not long term natural or production prices, were determined by supply and demand, and disequilibrium played a role in gravitation towards normal prices. So the three characteristics are not enough to distinguish Ricardo and Marx from Marshall or Noah Smith. The essential thing is that supply and demand determine the long term normal prices of everything including factors of production (endogenous distribution).

Noah then points out that papers that deal with the issues in the core are almost not published. He says that publication of papers that deal with the theoretical core fell "from over half of top-journal econ papers in 1963 to less than 28% in 2011." As it should be, in particular with a core that has been revealed to be so full of problems since the capital debates. And yes, most developments like the Acemoglu et al. paper (discusses here in various places by Cesaratto and I, also here) are orthogonal to the core. But these are developments outside the core, but still within the so-called protective belt of the neoclassical paradigm or research program (for protective belts and paradigms go here and here). The problem is that they still presume that the neoclassical theory in the core holds. Note that they suggest that a minimal government that protects private property rights is enough for development, something that goes hand in hand with the neoclassical core. So a lot of the time what seems to be the use of neoclassical economics as an insult is just frustration about the inconsistencies that appear between the empirical research in the protective belt and the incoherence in the core.

Mind you, as students and newly minted PhDs like Noah have never heard or read on the capital debates, and have not been exposed to the authors of the surplus approach and Marx (besides reading less in other disciplines in the social sciences) it is not surprising that the term neoclassical is seen as an insult hurled at them by crazy and older heterodox economists. But it's not. Don't get me wrong, the core of neoclassical economics is not good or bad in itself, but it is logically flawed.

* By the way, it should be required at both the graduate and undergraduate level, since many graduate students come from other disciplines. A discipline that does not understand its own history is bound to move blindly rediscovering old truths, accepting already discarded myths, and forgetting useful ideas. And you might have, also, the paradoxical situation of a neoclassical economist that does not know what neoclassical economics is (like Dave Chappelle's black white supremacist).

PS: Note that Noah is not responsible for the definition of neoclassical economics he uses, which was lifted from Wikipedia. And yes Wikipedia is not the best source.