The Neoclassical Theory of Price

The origins of what, following Veblen (1900), has come to be referred to as the Neoclassical school of thought can be traced to the writings of Jevons, Menger and Walras in the latter part of the 19th century.1 These writings, and those of their disciples, constituted a break with the hitherto dominant Classical school of economic thought as represented by Smith, Ricardo and Marx.2 The focus on income distribution gave way to one on the allocation of scarce resources, and the attempt to understand the economic system in terms of objective laws relating to class- based production gave way to an attempt to understand it in terms of the subjective (marginal) decision making of individuals in the process of exchange and consumption. Not that income distribution was ignored by the new approach. Instead, it was ‘explained’ in the course of explaining the allocation of scarce resources and the maximisation of satisfaction by individuals. During the course of the 20th century the Neoclassical approach came to hold sway over the economics fraternity such that today, at the beginning of the second decade of the 21st century, in spite of the innumerable attacks on its methodological foundations, logical coherence, empirical validity and policy relevance, it is far and away the dominant approach to the study of the economic system.