Neoclassical economics is the most dominant contemporary global economic theory. Though components of the theory may still be operational worldwide, the term neoclassic suggests that the theory is a modern adaptation of classical economic theories that emerged after the Renaissance movement. The theory is also referenced in current academia as modern mainstream economics.
In order to understand neoclassical economics it is essential to understand classical economics. The term neo can be added to any historical academic concept. It is representative of the Greek word neos and suggests that the amended subject is a new version that maintains the primary tenets of the original. Neoclassical economics is a modern economic theory that emphasizes the concept of free markets and governmental non-intervention, termed politically as laissez faire, or "hands off."
The classical theorists, like 18th century economist Adam Smith, suggest that markets are self-correcting when allowed to operate unfettered. The three primary producing components were landlords, capitalists and the labor force. The relationships between these three are very effective at determining supply, demand and price of any particular product. Smith termed this interconnectedness the "invisible hand."
This particular concept is not as infallible as it may seem but is a primary component of neoclassical economics. The contemporary markets are different in the respect that transportation, or delivery, of goods and services are conducted very differently than during the classic time periods. The distribution of goods was problematic and affected the pricing mechanism. The most unpredictable impact would be from population growth, according to the classical economists.
The classical economists also did not agree on the determination of controlling aspects. The logical concept was that demand would spur supply, as producers would realize a climate for profit and economic growth with microeconomics and individual consumption. Economist Jean Baptiste Say suggested that "supply creates its own demand," ushering in the supply-side idea. This concept is more applicable contemporarily with the demand from international markets. This adaptation also establishes the Quantity Theory of Money, which has been a major part of the Keynesianism that dominated economic theory for most of the 20th century and into the 21st.
The contemporary application of neoclassical economic theory is directed at microeconomics, or individual consumption. There are primary assumptions involved in the theory and the impacts are argumentative. The assumptions may not be narrowly or evenly applied and are generally incomplete.
The initial assumption is that individuals make purchasing decisions rationally. It is important to note that "rationally" does not necessarily mean "prudently"; individual consumers have particular preferences and values. The second assumption is that every consumer is a utility maximizer and, in addition, every producer is a profit maximizer. This assumption also contains considerable variance, as profit and utility may not necessarily be the priority of the acting agents. It is also assumed that the independent agents are making rational decisions based on equal and full information.
Criticisms of neoclassical economic theory revolve around the variables associated with the three basic concepts. Any measurable study can be altered by misrepresentation based on a pre-conceived conclusion because they are reached on weak assumptions. The charge of normative bias suggests that neoclassical economic theory does very little to explain current economic issues because it bases expectations on perfect circumstances and focuses on microeconomics, or relationships between production entities and consuming households. Macroeconomics, and monetary economics in particular, are generally not included in establishment of Pareto optimality, or a utopian economic marketplace.