9. Neoclassical Economics - 24. Postwar Neoclassical...

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24. Postwar Neoclassical Microeconomics S. Abu Turab Rizvi Subject Economics » History of Thought , Microeconomics DOI: 10.1111/b.9780631225737.2003.00025.x 24.1 Introduction Postwar neoclassical microeconomic theory was a curious mixture of successes and problems. Its successes include widespread use, as both a basis for all areas of economics and a growing method in other social sciences. The ideas that constrained optimization is the embodiment of individual rationality and that individually rational behavior should be the building block of all social theory have proved very popular. This popularity is belied, however, by very serious churning in the underlying formal theory of neoclassical microeconomics in the postwar period. Indeed, the formal theory can be characterized as having a series of impossibility results that imply a demonstrable lack of progress on the main problems set for the theory. The theory had to be reinvented regularly in response to problems, and applications of the theory are often tenuous inasmuch as the theory is not firm. While this protean character has allowed the theory to survive and become widespread, many of the main interests of microeconomists have been sidestepped. The overall result is breadth of application and use combined with troubling lack of depth. The resulting dynamic is best seen historically. The topic is vast. In order to keep this presentation manageable, this chapter focuses on the main aspects of general equilibrium theory and the pluralist approaches that have come, increasingly, to replace it. 24.2 Samuelson'S Foundations and its Setting Postwar neoclassical microeconomics began confidently with Paul Samuelson's Foundations of Economic Analysis (1947) . The book arose from Samuelson's Harvard Ph.D. dissertation. As Samuelson's career advanced, the book's main mathematical device - the formulation of nearly every economic matter as a constrained optimization problem - became commonplace. Constrained optimization came to represent the economic problem, subsuming Lionel Robbins's formulation of economics as the allocation of scarce resources among competing ends. Scarcity was represented as constraint and the allocation process involved optimization. Constrained optimization had been a hallmark of neoclassical theory, at least since the work of Vilfredo Pareto, who stated: “The principal subject of our study is economic equilibrium. We shall see shortly that this equilibrium results from the opposition between men's tastes and the obstacles to satisfying them. Our study includes, then, three distinct parts: 1° the study of tastes; 2° the study of obstacles; 3° the study of the way in which these two elements combine to reach equilibrium” ( Pareto, 1971 [1906] , p. 106). Maximization (of something good or valuable) and minimization (of something bad or
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This note was uploaded on 03/31/2010 for the course ECONOMICS 321 taught by Professor H during the Spring '10 term at Kadir Has Üniversitesi.

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9. Neoclassical Economics - 24. Postwar Neoclassical...

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