Editor’s Introduction: The Growing Failure of the Neoclassical Paradigm in Economics

• Date: 01 January 2019
• Published date: 01 January 2019
• DOI: http://doi.org/10.1111/ajes.12265
• Author: Alberto Ruiz‐Villaverde

Editor’s Introduction:

The Growing Failure of the

Neoclassical Paradigm in Economics

By Alberto ruiz-VillAVerde*

As López-Castella no (2012) explains, in the last thi rd of the 19th

century, a new approach to economic analysis arose in several

European countries that focused on the notion of equ ilibrium

and the problems of optimal allocation of sca rce resources while

avoiding historical and institutiona l aspects. Instead of focusing

on social relations, which originate in the pro duction process, the

behavior of the individual was analyzed wit h respect to the goods

and services that satisf y his or her needs. Thereby, the “objective”

conception of value, built on costs of production, was abandoned

in favor of an explanation that started from ind ividual psychology,

and, in particul ar, from the “subjective” perception of consumers.

Prices, reflecting t he relative difficulty of product ion in the clas-

sical approach, became indicators of scarcity in t he new orienta-

tion. Income distribution, an issue that i n classical thought referred

to the social relations of production, the role of dif ferent social

classes, and their power relations, was reduced to a specific case

of the theory of prices. In short, political economy ceased to be a

social science and became a science of individual behavior.

This new approach, which was known as marginalism, offered

an alternative to Marx’s extension of classical political economy. It

contributed effectively to the interested forgetfulness regarding the

conflict of social classes. This was very visible when economic anal-

ysis transformed social classes into factors of production associated

with a price, presumably in terms of their productivity. “Getting rid

of the classical theory of value and of the classical explanation of

American Jour nal of Economics and Sociology, Vol. 78, No. 1 (January, 2019).

DOI: 10 .1111/ajes.122 65

© 2019 American Journa l of Economics and Sociology, Inc.

*Associate professor in political economy at the University of Granada (Spain). Head

of project PID-16-34: “How to Improve the Way We Teach Economics in the University:

A Critical Approach from the Contents” (2014–2018). E-mail: albertorv@ugr.es

14 The American Journal of Economics and Sociology

the origin of profit by embarking on the path of marginalism was

the answer of the European bourgeoisie” (Lavoie 2014: 26). So at the

beginning of the 20th century, marginalism emerged as the dominant

economic paradigm. In those days, there was a clear convergence

between the new orthodoxy1 and the interests of the political and

industrial establishment.

With the depression of the 1930s, the inability of neoclassical eco-

nomics to understand and solve the problems of capitalist economies

became evident. The liberal recipes at this time—such as lowering

wages and eliminating labor insurance—were in direct contradiction

to reality and miles away from solving the problems. In fact, they

ended up aggravating them. Unemployment became widespread and

social unrest was increasingly unsustainable. Consequently, the social

situation forced the dissolution of traditional policies and spurred the

establishment of interventionist policies that began with the New Deal

program promoted by President Roosevelt in the early years of the

1930s. However, there was no theoretical framework that facilitated

the understanding of this performance and its legitimation. Keynes’s

General Theory, published in 1936, became that framework, revealing

the logic of these policies and legitimizing the need for them to be

applied.

At the end of the 1940s, there was intense academic concern ex-

pressed about the need for a textbook that could explain the Great

Depression as well as the economic policy measures that were used

to overcome it. Paul Samuelson came up with the key by introduc-

ing a chapter explaining the theory of national income determina-

tion, which later became known as “macroeconomics.” This allowed

Samuelson to initiate the message of the Keynesian revolution, a mes-

sage that in the 1940s was still quite novel and controversial. Basically,

the message held that capitalism was unstable, in particular due to the

volatility of investment spending, which had important repercussions

for income and employment levels. From this argument, based on the

cyclical behavior of economic activity, the concepts of the expendi-

ture multiplier and accelerator effects were introduced. This gave rise

to the study of economic policies, particularly fiscal policy, and the

discussion of their implications.