Criticism on Neoclassical Firm Theory and Supply Theory Research

Abstract

Starting from the reality, this paper holds that there are three relations among production factors, namely complementary relation, part function and functional substitution and efficiency substitution. There are no laws of diminishing marginal substitution and diminishing marginal products. Besides, at the premise of theoretical hypothesis that admits the laws of diminishing marginal substitution of production factors as well as diminishing marginal products, it analyzes the conclusion of neoclassical firm theory and holds that the diminishing marginal substitution and diminishing marginal products are the equivalent proposition; the profit maximization production point determined by marginal cost equivalent with marginal revenue is not the optimal decision as it does not consider the opportunity cost of production factors and it may destruct the optimal solution of cost minimization; the long-term maximum profit has no optimal solution under the diminishing marginal substitution and the conclusion that scale returns are zero is also false; based on admitting the neoclassical firm theory, it concludes that these assumptions are false by logical analysis and proclaims that the neoclassical firm theory has irreconcilable internal conflicts. At last, this paper holds that in the commodity exchange field, the hypothesis of rational man, proposed by Adam Smith, can be taken as the axiom. The supply curve rising upper right is the necessary inference of this assumption and the supply law is the axiom that needs no proving. Under the axiom of Adam Smith’s rational man, the market cannot realize Pareto Optimality.