Neoclassical Theory

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Neoclassical Theory

Neoclassical Theory

Natural Resources and Neoclassical Theory


In our society today, there are great disparities between different groups of people. (Salah 1997)The gaps exist between those in every segment of the world, from those of different religions or nationalities, those of rich or poor families, to those who may or may not be educated. The ways in which economics and societies intermingle dictates virtually every part of our lives, from what we wear and eat, to what we do and think. To explain these phenomena, there are two main theories:

Neoclassical and Political Economy

The Neoclassical approach is based on how goods and services are exchanged, and that relationship with supply and demand. (United Nations Environmental Programme 2000), Neoclassicism defines a successful market as one with many buyers and sellers, thereby creating competition. The idea being that with sufficient competition the economy will be controlled by market forces, which in turn will disallow corporations or individuals from influencing it. This model does, however, rely on a number of inconsistent variables. For instance, one of the assumptions made by Neoclassicists is that economic actions are undertaken by rational individuals using all available information to maximize their personal utility.

The Neoclassical Approach Model

This model is also largely based on "laissez faire" philosophy, which is effected by adjustments or manipulations of economies by governments or other external factors. It holds that such intervention is inefficient, and thus disrupts the economy in such a way as to raise prices for individuals, thus lowering their utility.

This model also illustrates a classic split between the rich and poor, as some of its assumptions rely on the law of demand, substitute goods, and equilibrium. These are concepts which make sense in theory, but in terms of direct application to the economy and the actions of consumers, are slightly abstract. With the law of demand, it seems obvious that, when the price on a given good increases, that substitutes are sought. For instance, when the price of California wines increases, average consumers seek a substitute by purchasing French wine, whose price remains steady. Yet, this example applies to only some of society. The counter example of this is that, even though gas insurance prices have been climbing, the price of a new Ferrari continues to rise, and even though supply goes up, the demand remains the same. There are alternatives, such as a lowly Porsche, but because of the ability to ignore prices, the wealthy do not need to be rational, so their economic behavior is often highly irrational. Furthermore, under the neoclassical model, discrimination is supposed to be avoided because it raises costs for everyone. Yet as we saw in 'Rosie The Riveter', after World War II, even though women were less expensive to hire, and equally, if not more capable than men, they were denied employment, resulting in lower profits and higher prices for all. Though there remain other discriminatory issues regarding the wages and rights of these women, the Neoclassical view holds that they should have been ...
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