Chapter 64: Economic Ideas (The Neoclassics)

**Dave Broker** (0:06)
Back in Chapter 28, we talked about the classical school of economics. One of the topics covered in that episode was the philosophy of utilitarianism, developed by Jeremy Bentham and promoted by his disciples, James and John Stuart Mill. According to a strict utilitarian, individuals and societies should make their decisions based on what will produce the greatest good for the greatest number of people. At the foundation of this principle is the concept of utility. Now, Bentham used this word as a catch-all for everything good in the world. So to increase utility, you want to try to maximize pleasure, benefit, happiness, etc. while minimizing pain, disadvantage, misery, etc. This concept lay at the core of John Stuart Mill's work, including his economic theories, notably his 1848 treatise Principles of Political Economy. By the 1860s, that book was considered the hallmark of economic thought across much of the world, the starting point for any conversation of liberal economics.
And then, beginning in the 1870s, a few scholars would pick up where Mill left off. Not only were they interested in the study of political economy, but also in disciplines like mathematics, physics, and other natural sciences. And it was the mathematical field of calculus in particular where they saw great promise. Among other things, calculus looks at topics like optimization. It does not assume that one can reach an ideal function, only an optimal point. And to discover the optimal point of a function, that tippy top of a bell curve, one needs to apply something called marginal analysis. Using marginal analysis, the mathematician can discover the rate at which one variable shifts along with another. Charting it out then, we can see what that optimal point is. By using marginal analysis to find optimal rates of utility, these new economists were putting forth theories of what we call marginal utility. Thus, this moment became known as the marginal revolution, or the marginalist revolution, depending on the historian you're reading. And these marginalists, as they're called, had a few goals in mind for their work. First, they were generally opposed to socialism and very opposed to Marxism in particular. They were writing at a time when Marx was becoming the dominant thinker in socialist circles, and they were ideologically horrified by his writings. Far from accepting that industrial capitalism had created an entrenched bourgeoisie and an entrenched proletariat, diametrically opposed to one another, they believed the system was increasing everyone's utility. At a minimum, they sought to explain how industrial capitalism had been generally good for the working classes, and they even went so far as to suggest that, in true economic liberalism, one would see a class-free system. To them, socialism was a heretical divergence from the true religion of classical economics, and they traced this divergence back to a few culprits. As one marginalist put it, that able but wrong-headed man, David Ricardo, shunted the car of economic science onto a wrong line. A line, however, on which it was further urged toward confusion by his equally able and wrong-headed admirer, John Stuart Mill.
And yet, the marginalists, too, would shunt the car of economic sciences onto a new line. A line that diverged from the classical school of Smith and Say and Malthus. Their neoclassical school would be much more libertarian, much more laissez-faire. And second, by taking ideas from calculus and applying them to the topic of political economy, these scholars wildly transformed the discipline. From here on out, it would not be referred to as political economy anymore. These scholars wanted to call it simply economics. Though they were opposed to Marx's substantive conclusions, they, like him, believed that political economy was too caught up in abstract theories. They wanted to bring scientific rigor to economics. And they chose this name, economics, because it not only removed the word political, which suggested there was a collective angle to the economy, an angle that most of them were deliberately trying to avoid, but also because it sounded more like the word mathematics.
Now, to be sure, the ideas of these marginalists were revised and fine-tuned in the years to come. But it was the dominant school of liberal economic thought throughout the Second Industrial Revolution. And the theories that the marginalists developed still serve as the foundation of how economics is taught across much of the world to this very day.
This is The Industrial Revolutions. Chapter 64 Economic Ideas. The Neoclassics.
Okay, before we get into it, let's cover a little admin. First of all, note about the title today. Way back when, I had this idea to gradually sprinkle episodes about the history of economic thought throughout the podcast, naming them all Economic Ideas, and then adding a part number and subtitle. Chapter 9 was Economic Ideas, Part 1, The Oldies. Chapter 10 was Economic Ideas, Part 2, Adam Smith. And Chapter 28 was Economic Ideas, Part 3, The Classics. But then I got to the dawn of socialism, and it all went haywire, because those chapters didn't only focus on economic ideas. But we can say that Part 4 of Economic Ideas was covered in Chapter 42, when we discussed the Utopian Socialists, and Part 5 was, of course, Chapter 49, when we discussed Marx. So, if you want to know what part of Economic Ideas were on, it's Part 6, and Part 7 will be next time.