Neoclassical School - 1: The Increasing Scientificness of Economics

In the third article of the series of articles aimed at searching for the roots of the economic problems experienced globally today in the historical process, I will discuss the Neoclassical School. The aim of the series of articles is to search for the intellectual infrastructure of the damages inflicted on the global economy by the neoliberal policies that were intensively implemented in the 1980s in economic history. Because, the effect of the Neoclassical School, which is the subject of this article, on neoliberal policies is great and important.

The science of economics, which is considered to have been born in 1776 with A. Smith's work titled The Wealth of Nations, began scientifically with an economic movement called the Classics. While addressing the issue of distribution, the Classics defined the factors of production. They expressed their ideas on how the value of labor, entrepreneur, capital and natural resources were determined within the framework of their own theories (Classical Theory).

A. Smith had discussed the free market environment that developed under the conditions of the first industrial revolution and defined the invisible hand. As I mentioned in the first article, the free market environment that developed hand in hand with the 1st Industrial Revolution brought about a process in which the rights of the working class were taken away. Thereupon, Marx and Engels published the Communist Manifesto in 1848, addressing the rights of the working class. However, there was no significant change in the situation of the working class.

Classical Economics had explained that the wage, which is the price of labor among the factors of production, could only be determined at a subsistence level. The wage was only at a level that would meet basic needs. Neoclassicals - also known as marginalists - explained that value could be determined within the framework of the concept of marginal utility and that distribution would be proportional to the added value provided by marginal utility. Neoclassicals made their contributions to economics between 1870-1920.

Neoclassical Economics derived its basic philosophical view from the Classical School. It was committed to the concept of the free market. The basic philosophy of the route it charted for itself was no different from that of Classical Economics. However, due to the economic conditions that emerged towards the end of the 19th century, it was necessary to address new developments and perspectives on a theoretical basis. The developments and their effects, especially in England, fed the ideas of the Neoclassical School.

In the last quarter of the 19th century, economics began to become an independent science from other sciences. Some publications that were specialized in certain subjects and included research results began to appear. The Quarterly Journal of Economics began to be published in 1866, The Economic Journal in 1890, and The Journal of Political Economy in 1892.

In the 19th century, not only economics but also concepts related to science in general were changing. Until the 1830s, science was called natural philosophy, but now it was called "science". Now, despite its strong foundations in philosophy, it was becoming a title in its own right. The term scientist was first used by William Whewell in 1833.

The work of Newton had a significant impact on the work of Smith and Malthus. Physics had witnessed major revolutions in itself and had inspired the methods of analysis of economics as a science. Darwin's work "The Origin of Species (1859)," in which he explained evolution, had also influenced economists. Towards 1900, economics began to be called "economics" and was stripped of the term "political economy" as it had been known until then.

We can summarize the basic economic characteristics of the years in which Neoclassical Economics contributed to economic theory in the following items:

1. There was an international economic environment created by the spread of industrialized and industrializing sectors over an expanded geographic base. With the effects of the 2nd Industrial Revolution, the international trade volume of commodity products in particular tripled between 1880 and 1913. In other words, a globalization movement was taking place.

2. As a result of the international economic environment spreading to a wider base, the number of countries participating in international trade increased, and England lost its distinction as the only industrialized country. The shares of the four countries that led the industrialization in the industry, mining (including the construction sector) sectors in total production as of 1913 were as follows: USA (46%), Germany (23.5%), England (19.5%) and France (11%). As of 1860, almost 50% of the exports from Asia, Africa and Latin America were made to England alone, while by 1900 the rate had fallen to around 25%. While England's share in trade volume decreased with industrial developments, it rose to the leading position in trade financing and logistics. In other words, it had seized the opportunity to meet new service needs that emerged due to international trade spreading to a wider base.

3. Technological developments were taking big steps. Important inventions were made in sectors such as telephone, telegraph, phonograph, cinema, automotive, aviation, and medicine. For example, aspirin was discovered in 1899, and the vacuum cleaner in 1908. The 2nd Industrial Revolution was not replacing the first, but strengthening the findings of the first. Thus, a situation was created where mass production could be done.

4. Industrialization, an expanding international trade base, and mass production required a revision of business organizations. Therefore, the concept of using scientific methods in business management was developing and finding application.

5. With the opportunities provided by industrialization and mass production, the increasing population, the increasing rate of urbanization and the increasing real incomes, a period began in which the consumer goods market developed in terms of quantity and quality. In particular, there was a major change and transformation in the food and clothing sectors. For example, the sale of tea in packages of a certain size began in England in 1884. The number of stores selling tea by Sir Thomas Lipton increased from zero to five hundred between 1870 and 1899.

6. As a result of the developments described in the above articles, a complete transformation took place in the service sector after agriculture and industry. In other words, a rapidly growing white-collar working class emerged. For example, in England, the number of people working in the commercial sector was 91,000 in 1851, 360,000 in 1881 and 900,000 in 1911.

7. Politics and economics were getting closer to each other than in the past. The weight and influence of the state in economic policies was increasing. This situation started to cause the validity of A. Smith's invisible hand and free market conditions to be questioned from the 1870s onwards. Capitalism was under heavy criticism. In short, behind this great change and transformation were state policies and the management of international relations. However, everything was done in line with the philosophy of making the free market economy dominant.

It should also be noted that the industrialization process, led by England in particular, was largely based on the policy of creating cheap resources through colonies. In addition, from the 1860s onwards, workers' unions were banned from organizing in England, thus preventing wage increases. However, there were oligopolistic and monopolistic tendencies in determining the prices of goods and services. The labor market was at a point where it could not create opportunities that would work in its favor. In other words, the free market application, as described by the Classics, was not in practice.

The theoretical point where the members of the Neoclassical School meet is the creation of the marginalist theory of value and distribution. Instead of the social class understanding of Classical Economics, society is seen as a community consisting of many firms and individuals. The objective social class analysis of Classical Economics turns into a subjective class analysis based on human-human relations in the Neoclassical School. The concept of benefit is brought to the forefront. Therefore, psychological effects are also included in the analysis. Value is determined not by labor and labor-time, but by marginal contribution.

Between 1870 and 1914, there was an imperialist expansion and the free market system was accused of being an imperialist theory. Even under these conditions, the Neoclassicals defended free foreign trade. Because the capitalist development they defended was fed to a significant extent by free foreign trade.

The Neoclassical School made important efforts to bring mathematics into economics. They made detailed analyses on narrower topics and more specific issues than the long-term developments of the Classics. Individual behavior models gained importance.

Among the neoclassicals, especially the Englishman William Stanley Jevons (1835-1882) and the Frenchman Walras (1834-1910) focused on statistics and mathematics in the scientificization of economics. Their studies contributed to economics becoming a branch independent of politics in the scientific sense. However, Classical Economics did not position economics at a point separate from politics in the sense of scientific research. The increasing and decreasing relations between economics and politics should not be confused with the fact that Neoclassical Economics brought economics to a point independent of politics in the scientific sense. What is meant in the above determination is the distance economics has covered on its way to becoming an independent science.

Jevons was a meteorologist. In 1874, he wrote a work called "The Principles of Science" in which he explained the principles of science. He thought that mathematics was in the heritage that economics focused on because it was interested in the concept of "quantity". He also stated that there was no problem of insufficient data for economics, but that economists did not know how to use mathematical data. With his studies, he attempted to define the concept of "utility". Since the concepts of satisfaction and dissatisfaction would come into play for the definition of utility, he also had to benefit from psychology. In his work called "The Theory of Political Economy", he explained the concept of utility within the framework of behavioral reactions. Bentham's utility theory was an important foundation in Jevons's intellectual structure.

Walras was also trying to increase the scientific features of economics. Like Jevons, Walras was trying to explain consumer behavior and how prices are determined in free market conditions. However, he did not adopt a "utilitarian" approach like Jevons. Inspired by Say and Condillac instead of Bentham, Walras thought that the basic element that created "value" in the market was "the state of scarcity."

While Jevons explained his contributions to the theory of value with the utility approach within the framework of exchange between two individuals, Walras approached the subject from the perspective of an organized market structure. Under free market conditions, it was determined in what quantity and at what price everyone would buy and sell their goods. Thus, the amount of purchase and sale for each good was equalized at a certain price level. This point of equality was called equilibrium. Walras's studies led to the emergence of the supply-demand curve. In other words, Walras was the inventor of the supply-demand curves that were started to be used in the first courses of economics education and taught to students.

Source: https://en.wikipedia.org/wiki/Neoclassical_economics

Walras demonstrated with mathematical methods that separate balances formed in many goods markets simultaneously expressed a general balance and expressed that the balance formed in one market also affected other markets. Thus, he focused on the concept of a sustainable balance and formed the basis of many studies to be carried out in the following years. From here, he explained that the entrepreneur would continue this search until the point where the profit was zero by turning to the use of new resources within the framework of the continuous search for profit for production. Within the framework of the concept of general balance, he also addressed the issue of credit and analyzed how the interest rate was determined, thus revealing the contributions of the Neoclassicals to monetary theory.

One of Walras' most important theories was his proposal to tax increasing rent incomes. He thought that the share of rent incomes in national income would increase and that this income should be taxed, with an approach similar to Ricardo's theory of rent. He discussed this proposal within the framework of the concept of economic justice. He did not find it fair to tax the worker's wages.

In 1865, Jevons wrote "The Coal Question", saying that growth would stop due to England's depleting coal beds. He used statistical series to reach this conclusion. His conclusions about coal were not correct. In 1860, he analyzed the effects of gold deposits found in California on prices, again using statistical methods. The important contribution of these studies was to the theory of cyclical fluctuations thanks to the price fluctuation analyses.

Jevons and Walras were unaware of each other during their work on marginal utility and the determination of prices. They had not attracted anyone's attention. They discovered each other in the mid-1870s. They decided to collaborate on mathematical contributions to economics. They were both social reformists. Walras even called himself a socialist, especially with his views on the rent tax. Jevons was closer to JS Mill than Walras with his utilitarian approach.

Neoclassical Economics was developing outside of England and France, especially in Austria with Carl Menger. Menger did not have the aim of making economics scientific like Jevons and Walras. In 1871, he wrote his work "Grundsaetze der Volkswirtschafslehre (Principles of Economics)" under the influence of Rau, Hermann and Roscher from the German school. The German school made progress with Wilhelm Roscher, who was the leader of the old historical school, and Gustav Schmoller, who was the leader of the new historical school. The German school was also greatly inspired by the French Condillac.

Menger claimed that value was determined by marginality. In other words, he claimed that value emerged with the level of satisfaction that each additional commercial good created on its consumer. Menger stated that in order for any product to have the characteristics of a commercial good, there must first be a need. Then, he explained that the product's features must be in a position to establish a connection with the need and that people must be aware of this connection. Finally, he stated that the product must have the condition that will lead to the satisfaction of the need. If all of these conditions are met simultaneously, a commercial good emerges.

Menger drew a hierarchy of commercial goods. He imagined basic products that directly satisfied human needs at the bottom of the list. For example, bread was in this category. It directly served to satisfy a need. Iron, on the other hand, was in the non-basic products category of the list and was at the top of the list. Because it had very indirect benefits in satisfying a need. With this categorization, Menger arrived at the concept of diminishing marginal utility. As a product was consumed, the utility of each additional consumed unit in satisfying a need decreased. According to Menger, value was not determined by exchange or price. Price emerged during exchange and was a result of the value created depending on the need.

Jevons, Walras and Menger agreed that price was determined by marginal utility and opposed Ricardo's and Marx's theories on the value of labor. Menger, unlike Walras, did not believe that markets formed by individuals trying to maximize utility were at an equilibrium point. Because individuals were not aware of the alternatives they had in the market. However, they were in search of alternatives and therefore competition was a dynamic concept. However, in Jevons and Walras, competition was a static concept as in Smith.

One of Menger's important findings was about economic institutions. The emergence of institutions was not planned. In market conditions, different patterns of behavior exhibited by individuals in search of satisfaction of needs shaped the formation of different institutions.

During the emergence of Neoclassical Economics, the concepts of historical and theoretical economics also came to life. Menger made this distinction very sharply. Menger also opposed the concept of mathematical economics. Because he stated that mathematics could explain the relationships between quantities and that mathematical economics could not address the crucial points of the economy within the framework of the social concepts of the economy.

I have discussed the foundations of Neoclassical Economics and the process of its emergence in this article. I will leave the rest to the next article. Neoclassical Economics is the process of scientificating economics and making the process that started with Smith and continued much more sophisticated. Economics broke away from the studies that the Classics dealt with economics together with politics and became a science in its own right with the Neoclassics. The use of mathematics in economics has been in question. It has also been questioned over time whether some concepts that Neoclassical Economics has revealed are useful in economic analysis, and in my opinion, some analyses do not really serve any need. However, it should be considered natural that studies that are brain exercises may emerge in the development process of a science.

The degree of use of mathematics in economics has also been questioned decades later. Keynes would have to put an end to the process that began with the neoclassicals with World War I and then the 1929 Depression, but from the 1960s onwards, mathematics would occupy economics in a way that deviated from its purpose in my opinion. Some people would object to this method and describe this new economics as "autistic" with comments similar to Menger's above, due to the intensive use of mathematics.

In the next article I will continue with Alfred Marshall and from there I will reach the USA, Irving Fisher, John Bates Clark and Veblen.