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CHAPTER THREE
The Neoclassical Conception of the Economy

URING THE past two centuries, professional economists have
D studied the economy as a market system; economists from David
Ricardo (1772–1823) to the present have formulated theories to ex-
plain economic affairs. These theories have hada significant influence
on the trade, monetary, and other policies of national governments.
Because the foundation provided by the discipline of economics is
essential to comprehension of the economy as a “market,” this chap-
ter will discuss the science of economics, its strengths, and its limita-
tions.

The Discipline of Neoclassical Economics
In the 1955 edition of his influential textbook, Economics, Nobel
Laureate Paul Samuelson coinedthe term “neoclassical synthesis” to
characterize the theoretical consensus of professional economists.
Samuelson was referring to the consensus that economists had
achievedthrough integration of microeconomics (associated with Al-
fredMarshall andother leading economists of the late nineteenth cen-
tury) with the new macroeconomics set forth by John Maynard
Keynes in his General Theory of Employment, Interest, and Money
1
(1936). Even though this consensus later broke down in the 1970s
when the economics profession fragmentedinto a number of compet-
ing schools of macroeconomic thought, the term neoclassical econom-
ics is still usedto refer to mainstream, orthodox, or conventional
economics. It is appliedto the economics of the Keynesian, moneta-
rist, or other divergent schools of contemporary economic thought
because they all are basedon similar assumptions regarding the na-
ture of the market. Perhaps one couldsay simply that neoclassical
economics can be defined as the body of methods and theories ac-
ceptedand utilizedby most members of the economics profession. In
this book, I use the term “neoclassical economics” (or simply “eco-
nomics”) in this general sense.

1
John MaynardKeynes, The General Theory of Employment, Interest, and Money
(New York: Harcourt, Brace, 1936).
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