The Neoclassical Economy is the mainstream of economic theory that starts from the classics of the mid-nineteenth century, which had a common body of knowledge in which emphasized value theory and distribution theory. Each productive activity generated a good with a cost that was distributed in the society in function of the costs borne to produce that good. The classics we refer to are Adam Smith, Thomas Malthus, and John Stuart Mill.
NEO Classical Theory of Economics
The concept of value had a later revision, since the market does not reflect this concept of value in the same way; each good has no immutable value, but is related to one’s own good and the people who have or want the good. This change occurs at the end of the nineteenth century (between the 1970s and 1980s) at the urging of authors who initially established the value in the correlation between production costs and other subjective elements, which was later called supply and demand. This new theory was called Marginal Revolution which is included in the theory of neoclassical economics.
In this way, a buyer seeks to maximize the benefit of the goods that he buys, in such a way that they increase their purchases of a good to a point of balance. The same thing happens with the work factor, the people offer their work to the companies that want that work for a salary, while the worker loses the availability of leisure. Thus they develop a theory of the demand for goods and the supply of productive factors.
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Producers, likewise, increase their production of units of a good until it is balanced with the yields it generates. This maximizes profit. Companies in their contracting policy have their equilibrium between contracting cost and production value.
In sum, it is part of the unlimited desires of goods that people have and the scarcity of production that converges in the value of what is produced. The market settles both and sets the price.
The neoclassical theory establishes fundamental premises:
In the first place, the individual acts rationally. Second, people seek their optimum – and maximize profit – and businesses profit. Third, individuals act on the basis of sufficient information.
Neoclassical theory analyzes profit, employment, growth, and money; Considers that both consumers and companies are rational, optimizing in such a way that they constitute the best possible option when establishing the balance, which is the best possible solution, and thus avoid irresolvable conflicts.
The social system is a concept created by neoclassical economics, and is a very flexible, rational system, where consumers and producers act independently and where utility drives their economic actions (even made the simile with the atom and energy).
Neoclassical economics is associated with scientific economics and developed with a high incorporation of mathematics in the twentieth century. Examples of this are William Stanley Jevons, Edgeworth, Leon Walras and Irvin Fisher and a perfect example of this is the quantitative theory of money of the latter: PT = MV.
The neoclassical theory began using a precise and explanatory language of the phenomena that it tried to describe; from elasticities of demand and minimization of costs to marginal costs and yields, strongly boosting Economic Theory.
The Neoclassic theory of Monetaryism
From Azpilcueta to Cantillon, Thornton, Ricardo, and Mill, he was well aware of the relationship between quantity of money and the prices of goods, the process of adjustment to obtain equilibrium was not sufficiently clarified, nor were conditions of stability analyzed. Neoclassical authors such as Irving Fisher and Knut Wicksell had to wait for a more complete explanation of them.
In 1911, Fisher established a simple equation that represented a high contribution to economic theory: MV = PT (M-monetary rate, V-velocity of money, P-prices, and T-physical volume of transactions). This equation establishes the proportionality between M and P, that is to say, the correlation that exists between both variables. Fisher adds the speed of circulation of money, which directly affects prices, because at higher speed higher prices. The same thing happens with the transactions, and the important thing is that both transactions and the speed of circulation are independent of the money supply, that is to say that with V and T it is possible to pick up the complex reality of the real factors (for example incorporate Business, technology, institutional inputs, etc.).
Another advance initiated by Fisher has to do with real and expected inflation, and is developed with AC Pigou and Milton Friedman. The latter proposes a new equation: m d = α (Y p , W, i, P * , P, u), where the demand for money is α, permanent income ‘And p -, the ratio of human wealth and no human W-, the nominal interest rate -i-, estimated the rate of change of the price level variations -P * -, the actual price level -P- and preference function -OR-.
With this formula Milton Friedman develops a theory of the demand for money and explains what we know as Permanent Rent Theory.