of income to society is controlled by a natural law,
and that this law, if it worked without friction,
would give to every agent of production the
amount of wealth which that agent creates."
---John Bates Clark
Neoclassical economic theory (which is also associated with neoliberal political policies) is grounded in the rejection of the Marxian notion of exploitation and the promotion of the idea that the distribution of social resources produced by market exchanges is innately fair and just (when it is allowed to work "without friction.") Although neoclassical theory dominates the economics discipline it is actually a psychological theory: at the core of the theory is a specific reductionist theory of human decision making and rationality that is then applied to economic (and other) phenomena. All human decision making is assumed to be driven by the pursuit of individual pleasure/happiness. This pleasure is defined, within the theory, as utility. Thus, the economic man (homo economicus) is a utility maximizer. Market exchanges are defined as simple trades between equally powerless economic men trying to maximize their individual pleasure. The wage labor relationship is such a market exchange. The wage is defined as equal to the value of the contribution of workers to the overall value of the commodity produced, such that workers are not cheated out of any “surplus value,” as defined within Marxian theory. Thus, neoclassical theory provides a clear alternative to the Marxian contention that workers are exploited by being cheated out of value that should rightly belong to them.
theory dominates the teaching and practice of economics in the United
States and in many other countries, as well. It provides an analytical
framework from which to argue in favor of the existing distribution of
wealth: wealth is the result of the decisions that individuals make, not
the result of processes of coercion, theft, colonization, etc. In
neoclassical theory, those who become wealthy do so by hard work and
frugality, while those who become poor do so by profligacy and
laziness. Nevertheless, the best of all possible worlds
(Pareto Optimality) can only come about by unfettered market exchanges,
allowing individual decision-making to occur without governmental
interference (the primary cause of the "friction" that John Bates Clark
warned about). In many ways neoclassical (neoliberal) theory has become a
tool for the dissemination of public policies and international agreements
that reduce the role of government in shaping economic activities
(including transactions) and promote the power of transnational firms in
shaping these same economic activities. In this sense, neoclassical
economic theory is a weapon in the extension of a transnational firm-led
Neoclassical theory has maintained its dominant position despite attacks upon its underlying assumptions from a wide range of perspectives and analyses, from the Cambridge critique and the work of Pierro Sraffa to the work of behavioral psychologists (such as Kahneman and Tversky, who received Nobel Prizes in economics), economists (such as Robert Schiller, who also earned a Nobel Prize in economics), and others (such as the noted philosophy-hedge fund billionaire George Soros) who have demonstrated that human behavior and the behavior of markets is not in accordance with the neoclassical notion of rationality.