The neoclassical method and the maximisation principle

This process was encouraged by great changes in productive techniques and the organizational form of the limited company became the privileged instrument for the mobilisation and control of the huge amounts of capital. Inside the firms, the relations among individuals assumed a hierarchical and bureaucratised form (appearance of the management science). In society as a whole, class conflict sharpened and began to assume the form of a direct battle between powerful political and union groups. In the following 30 years, the neoclassical system had imposed itself. In the analysis of the conditions ensuring the optimal allocation of given resources among alternative uses, the neoclassical economists identified a universally valid principle. The neoclassical method is based on the principle of the variation of proportions: the substitution principle. In the theory of consumption, the substitutability of one basket of goods for another is assumed; in the theory of production, the substitutability of one combination of factors of production for another. The objective is to search the conditions under which the optimal alternative is chosen. This method presupposes that the alternatives at stake are open and that the decisions taken are reversible. Therefore, the main economic problem becomes the allocation of a fixed income among a number of consumer goods or the allocation of a fixed outlay among a number of productive factors or a given amount of time between work and leisure, the principle always remains the same. In each case, the allocation problem has a maximum solution if and only if the process of transferring a unit of the dividend to a single use among all the possible uses is subject to diminishing results. In the theory of the household, an optimum situation is obtained when the consumer has distributed his given income in such a way that the marginal utility of each unit of income spent in purchase is equal; the law of diminishing marginal utility insures that such an optimum exists. In the theory of the firm, an optimum result is obtained when the marginal physical product of each outlay’s worth of factor purchases is equalised. The standard demonstration is given assuming that perfect competition does, under certain conditions, produce equimarginal allocations of expenditures and resources.

Another distinctive element of the neoclassical system is in the substitution for the objective theory of value of a subjective one. The principle of subjective value means that all values are individual and subjective. Values are considered always as the ends of particular individuals. Values are subjective because they are assumed to arise only from a process of choice: an object has value if it is desired by a subject (an individual). This principle implies that a value is such because somebody has chosen it as an end (in the opposite conception –objective value’s one- values exist independently of individual choices). An important consequence of this approach is that the theory of the distribution of income becomes a special case of the theory of utility-value: Factors are rewarded because they are scarce relative to consumers’ wants for the products that the factors could produce. The process of production and distribution has significance only insofar as it modifies the possibility of consumers’ choice. The demand for factors is a derived demand; given the supply of factors and their technical rates of transformation, the prices of productive services and the prices of consumer goods alike are determined by consumers’ wants. Hence, there is no room for a special analysis of the value of each factor of production as it was the case in the classical theory.

Date: 2016-01-14; view: 507