Observations on the Frontiers and Fringes of the Neoclassical Paradigm

Abstract

The neoclassical paradigm is viewed by most economists as broadly based in that a wide range of political and ethical views can be incorporated within it. The political spectrum captured by the neoclassical framework includes the socialist writings of Lerner as well as the libertarian views of Friedman. Similarly, the elitist ethical viewpoint of Edgeworth and the egalitarian leanings of Pigou both fit comfortably within neoclassical analysis. Even more fundamental to the long-term robust survival of neoclassical thought is the spirit of nineteenth century optimism, which is embodied within it. The notion that rational thought, applied through use of the method, will result in genuine social progress is at the core of the neoclassical approach, which models each and every consumer as a rational utility maximizer bent on applying these scientific principles to achieving greater personal and social wellbeing. One, if not the principal, policy manifestation of neoclassical thought is use of benefit-cost analysis. It is here where optimism is most clearly defined. An implicit assumption in benefit-cost analysis is that the income distribution has already been adjusted to some ideal. This, in the view of many economists, serves to remove most normative aspects from any decision. The job of the economist is then simply to see that marginal benefits are set equal to marginal costs to achieve efficiency. Another implicit assumption in benefit-cost analysis is that all values including, for example, the value of preserving the blue whale, can be measured in dollar terms for inclusion in benefit-cost analysis. Both of these implicit assumptions have created real practical difficulties for the application and acceptance of benefit-cost analysis and have resulted in challenges to use of the neoclassical paradigm for policy purposes from both philosophers and psychologists. For example, philosophers object that benefit-cost analysis focuses only on consequences and ignores process. Psychologists note that values placed on avoiding disasters, such as might arise from failure of a dam or an airline accident, are inconsistent with expected utility theory. Further, people may simply be unable to value commodities with which they have no learning and experience. Sections two and three of this paper document the historical difficulties in applying benefit-cost analysis, while the fourth section focuses on the formal theoretical objections to the neoclassical paradigm arising from philosophy and psychology and speculates on the implications of these challenges.