Neoclassical Economics: The Importance Of Mathematical Models

Introduction

Neoclassical economics is an economic school on thought initially developed around the late 1800s, where concepts such as making choices at the margin and utility began to develop. Several definitions exist, but the most basic assumption of this school of thought is that participants in markets make choices rationally. Additionally, it is also assumed that mathematical models may be used to make predictions about the economy. In contrast, bounded rationality asserts that constraints of time, information, and general limitations of the mind prevent people from behaving rationally in a market. If the latter theory is true, this presents serious implications regarding how relevant neoclassical economics is at predicting or even describing

At the most basic level, mathematical models have been used across several disciplines to describe phenomena, predict outcomes in addition to several other important types of applications. Without questioning the importance of mathematical models generally, in the context of economics and by extension neoclassical economics where mathematical models would be built based on the theory of consumer-supplier rationality, there is a very important question about how relevant mathematical models are to the discipline. In Levinovitz’s essay, “The New Astrology”, the author underlines the troubling dependence of the Economics discipline on Mathematics to justify itself as a true science, despite proof of the impotence in its predictive power. Of note is a quote from the

For instance, in Keen’s 2009 essay, “Mad, bad, and dangerous to know”, he makes this very claim. Keen’s general argument against Neoclassical theory is that the faith in the rationality of markets encourages deregulation of markets. It is important to note here that financial crises are almost always preceded by the deregulation of financial markets. To further develop this argument, consider the following two quotes from Herb Thompson’s article “Ignorance and ideological hegemony: A critique of neoclassical economics”

“Neoclassical economists normally treat economic instability as the effect of exogenous, stochastic factors even though nonlinear economics suggests that what may previously have been considered exogenous, or random, may more likely be endogenous to capitalist social formations. As such, economic fluctuations are seen as created by the processes of capitalism itself”

“Generally speaking, a nonlinear system must be understood in its totality, which means taking into account a variety of constraints, boundary conditions and initial conditions. These supplementary aspects of the problem must be included in the study of linear systems, too; but (in neoclassical economics) they enter in a rather trivially assumed and incidental