MainstreamFrom 1871
Neoclassical economics
How do individuals and firms allocate scarce resources, and how do markets reach equilibrium?
The 30-second version
The grammar of modern economics. People and firms are modelled as making the best choice they can, and markets as finding a balance between supply and demand. It is precise and powerful. Critics say its assumptions about rationality and information often don't hold.
Big questions it works on
Go deeperKey ideas, thinkers, evidence and where it stands today
Key ideas
- Value comes from usefulness at the margin, not from labour (the “marginal revolution” of the 1870s).
- Rational agents optimise: consumers maximise utility, firms maximise profit.
- Supply and demand settle at an equilibrium price.
- Welfare theorems: competitive markets are efficient under strict conditions (Arrow and Debreu, 1954).
Key thinkers
William Stanley Jevons, Carl Menger, Léon Walras, Alfred Marshall (Principles, 1890), Paul Samuelson, Kenneth Arrow, Gérard Debreu
What it got right
A precise, testable toolkit: opportunity cost, elasticity, incentives, marginal thinking. It is the grammar most economists use.
Main criticisms
Its assumptions (full information, rational agents, complete markets) often fail. Efficiency says nothing about whether the distribution is fair. The Sonnenschein–Mantel–Debreu results (1970s) showed that nice individual behaviour does not guarantee nice market-wide behaviour.
Evidence worth knowing
Efficient-markets theory (Eugene Fama) is its finance branch. Fama shared the 2013 Nobel with Robert Shiller, who argues the opposite about bubbles.
Where it stands today
The core of every microeconomics course.
Family line
Reacting against the classical labour theory of value.