A Reflection on Postwar Neoclassical Economics: The Shift from General Equilibrium Theory to the New Microeconomic Theories

Abstract

The theoretical focus of neoclassical economics experienced a significant change in the 1970s–1980s. General equilibrium theory lost its dominant position in theoretical economic studies, with its role of setting the research agenda taken over by what this article calls the “new microeconomic theories,” principally decision theory, game theory, and mechanism design. Mainstream economists, post-Keynesians, and historians of economic thought each give a different explanation of the hows and whys of that change, but all miss some critical methodological implications. That change, as this article discusses, shows that neoclassical economics has turned from “grand theory” toward “small models” with empirically delimited utility and that the ideology of marketism lacks a valid scientific foundation. This interpretation can help illuminate the deeper dynamics of the postwar development of neoclassical economics and provide insights for a new political economy that can come to grips with political-economic practices that cannot be fully grasped by the neoclassical tradition.

From Dualistic Opposition to Dyadic Integration: Toward a New Political Economy of Chinese Practice

“…Thereafter, when the general equilibrium postulate came to be challenged by the realities of the Great Depression and stagflation, neoclassical economics set about to reestablish its postulate of optimal equilibrium by turning from macroeonomic analyses to microeconomic studies, principally of game theory, decision theory, and market design theory, attempting still to use mathematical models to support its claim to being scientific and absolute. But, in reality, neoclassical economics has already retreated from “macro theory” to “micro theories,” mainly in “market design” (dealing with such problems as designing auctions, matching patients to doctors and hospitals, matching organs to patients, and such, all of rather limited applicability) (Gao Yuan, 2022a). Even so, classical and neoclassical economics, as first the ruling ideology of Great Britain, which enjoyed hegemonic sea power, and then of the United States, with its hegemonic military and financial power, has remained predominant in textbook economics, not to speak of scientific and economic discourse.…”