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A Critique of Neoclassical Economics

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A Critique of Neoclassical Economics

There are three types of assumptions that economics theorists make which are

negligibility assumptions, domain assumptions as well as heuristic assumptions. The negligibility

assumption holds that a specific factor has a negligible implication on the subject that is being

investigated. On the other hand, Domain assumptions usually stipulate areas of the applicability

for a respective theory. If the conditions identified are not applicable this means that the theory

cannot be applied as well (Keen, 2011). The domain is an important assumption based on the

likely impact it has on the subject of investigation. Heuristic assumptions refer to the ways of

streamlining the rational development of a given theory.

Neoclassical assumptions support the argument that theories out to be judged based on

their abilities to foresee events instead of focusing on the practicality of their assumption. The

author’s critical take on neoclassical assumptions is only partially true to the three classes of

economic assumptions and therefore it is unrealistic (Keen, 2011). The area of applicability

based on domain assumptions is not achieved in this context, hence making the assumption

unrealistic based on the inability to successfully predict the likely situation.

Neoclassical economics assumes that people possess reasonable preferences between the

outcomes that they can identify and their associated values. Therefore, individuals are focused on

maximizing utility and profit generation meaning that they act as independent bodies on the

grounds of having comprehensive and relevant information. However, this argument is not

entirely true because past business trends cannot be assertively used to predict the likely

performance of a business investment in the future, but the approach is necessary for evaluating

potential risks (Keen, 2011).

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In conclusion, the ceteris paribus assumption helps in the isolation of factors that are

likely to affect the effectiveness of the dependent variable. The assumption falls under domain

assumptions, which is involved in specifying the conditions in which a theory is applicable. Its

isolation leads to adverse effects on the applicability of a specific theory due to unrealistic theory

development. Holding the assumption under the strict condition might affect the balance between

supply and demand.

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Reference

Keen, S. (2011). Debunking economics: The naked emperor dethroned? London: Zed.