Abstract
The article seeks to focus attention on Neoclassical price theory, as one of the two problematic foundations of modern mainstream economics—the other being the theory of distribution. After outlining what is understood to be Neoclassical price theory and noting the various criticisms which it has been subject to from both within and without the school, the article proceeds to argue that its major flaws need to be understood as stemming from how it conceives of the formation of prices in the first instance. Specifically, the article argues that the basic problem with the Neoclassical theory of price is that it abstracts from both production and money in the first instance, such that when these are eventually brought back into the explanation of price it is done so in an inessential manner; one where production and money have no bearing on the findings of the analysis of price which excluded them.
Highlights
The simple answer to the question posed by the title of this article is its starting point; how Neoclassicals conceive of the formation of prices
Why Neoclassical price theory? Because the Neoclassical approach can be argued to represent the dominant view of how market economies work, and any consideration of the foundations of current economic thinking needs to begin with those underpinning this approach
A few criticisms of the Neoclassical theory of price which have come from those within the school appear to be directed at certain of its shared principles, including: the impossibility of constructing market demand curves by aggregating individual demand curves without a number of highly restrictive assumptions about the behavior of individuals—in effect assuming only one individual in the economy;14 assuming away the existence of economies of scale notwithstanding the considerable evidence pointing to their existence,15 and; the circuitous reasoning relating to the real balance mechanism in explanations of the value of money and aggregate money price level
Summary
The simple answer to the question posed by the title of this article is its starting point; how Neoclassicals conceive of the formation of prices. Walrasians are criticized by other Neoclassicals for denying exchange and money any role in the formation of prices,11 Austrians for the abstract nature of their theoretical foundations,12 and the New Keynesians for their partial equilibrium methodology.13 a few criticisms of the Neoclassical theory of price which have come from those within the school appear to be directed at certain of its shared principles, including: the impossibility of constructing market demand curves by aggregating individual demand curves without a number of highly restrictive assumptions about the behavior of individuals—in effect assuming only one individual in the economy;14 assuming away the existence of economies of scale notwithstanding the considerable evidence pointing to their existence,15 and; the circuitous reasoning relating to the real balance mechanism in explanations of the value of money and aggregate money price level.16
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