The term was originally introduced by Thorstein Veblen in his 1900 article "Preconceptions of Economic Science", in which he related marginalists in the tradition of Alfred Marshall et al. to those in the Austrian School.
Given, a certain population, with various needs and powers of production, in possession of certain lands and other sources of material: required, the mode of employing their labor which will maximize the utility of their produce.
[10] Market analysis is typically the neoclassical answer to price questions, such as why does an apple cost less than an automobile, why does the performance of work command a wage, or how to account for interest as a reward for saving.
In reaching agreed outcomes of their interactions, the market behaviors of buyers and sellers are driven by their preferences (= wants, utilities, tastes, choices) and productive abilities (= technologies, resources).
[17] The partial definition of the neoclassical theory of value states that the value of an object of market exchange is determined by human interaction between the preferences and productive abilities of individuals.
However, the neoclassical theory also asks what exactly is causing the supply and demand behaviors of buyers and sellers, and how exactly the preferences and productive abilities of people determine the market prices.
As a result, many neoclassical economists favor a relatively laissez-faire approach to government intervention in markets, since it is very difficult to make a change where no one will be worse off.
(In England, economists tended to conceptualize utility in keeping with the utilitarianism of Jeremy Bentham and later of John Stuart Mill.)
This differs from the aggregate decision-making of classical political economy in that it explains how vital goods such as water can be cheap, while luxuries can be expensive.
[24] Jevons built on the hedonic conception of Bentham or of Mill, while Walras was more interested in the interaction of markets than in explaining the individual psyche.
Marshall thought that "We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as to whether the value is governed by utility or cost of production".
[25] The thinking of the Cambridge school continued in the steps of classical political economics and its traditions but was based on the new approach that originated from the marginalist revolution.
Its founder was Alfred Marshall, and among the main representatives were Arthur Cecil Pigou, Ralph George Hawtrey and Dennis Holme Robertson.
[26] The main representatives of the Lausanne school of economic thought were Léon Walras, Vilfredo Pareto and Enrico Barone.
During this era, Keynesian economics was in crisis, which encouraged the creation of new neoclassical lines of thoughts such as Monetarism and New classical macroeconomics.
Despite the diverse focus and approach of these theories, they are all based on the theoretic and methodologic principles of traditional neoclassical economics.
The conclusions of her work for welfare economics were worrying: they were implying that the market mechanism operates in a way that the workers are not paid according to the full value of their marginal productivity of labor and that also the principle of consumer sovereignty is impaired.
[28] Joan Robinson's work on imperfect competition, at least, was a response to certain problems of Marshallian partial equilibrium theory highlighted by Piero Sraffa.
Anglo-American economists also responded to these problems by turning towards general equilibrium theory, developed on the European continent by Walras and Vilfredo Pareto.
But this increase in mathematics was accompanied by greater dominance of neoclassical economics in Anglo-American universities after World War II.
Some[29] argue that outside political interventions, such as McCarthyism, and internal ideological bullying played an important role in this rise to dominance.
Many of these developments were against the backdrop of improvements in both econometrics, that is the ability to measure prices and changes in goods and services, as well as their aggregate quantities, and in the creation of macroeconomics, or the study of whole economies.
The attempt to combine neo-classical microeconomics and Keynesian macroeconomics would lead to the neoclassical synthesis[30] which was the dominant paradigm of economic reasoning in English-speaking countries from the 1950s till the 1970s.
[33][34] Problems exist with making the neoclassical general equilibrium theory compatible with an economy that develops over time and includes capital goods.
[40] Critics such as Tony Lawson contend that neoclassical economics' reliance on functional relations is inadequate for social phenomena in which knowledge of one variable does not reliably predict another.
Lawson proposes an alternative approach called the contrast explanation which he says is better suited for determining causes of events in social sciences.
[49] The economist and critic of capitalism Thorstein Veblen claimed that neoclassical economics assumes a person to be "a lightning calculator of pleasures and pains, who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift about the area, but leave him intact.
"[50] Veblen's characterization references a number of commonly criticized rationality assumptions: that people make decisions using a rigid utilitarian framework, have perfect information available about their options, have perfect information processing ability allowing them to immediately calculate utility for all possible options, and are independent decision-makers whose choices are unaffected by their surroundings or by other people.
The two papers offer separate justifications for the use of neoclassical methodology for supply and demand analysis without relying on assumptions otherwise criticised as implausible.
In the case of the former claim, neoclassical economics is often used for analysis in support of policies reducing economic inequality—in particular through determining the diminishing marginal utility of income, whereby poorer individuals gain greater net benefits from a given increase in income than comparable richer individuals,[60][61] but more generally by being the primary means by which the impact on inequality of any given policy is assessed.